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The Chinese economy has undergone a rapid growth at an annual rate of around 9% for the past three decades. As a result, China is emerging as a new economic superpower. According to the statistics published by the World Bank, China’s total GDP is on the way to replace that of Germany and is becoming the third largest economy in the world in 2008, after overtaking the United Kingdom in 2006. Some economists further suggest that if current trends continue, China may replace the United States as the largest economy in the world at some time in the middle of the century. Present your view on the possibility of this scenario. Discuss the possible implications for such a development for: a) the world trading system, b) the world monetary system, c) the business strategy of today’s New Zealand firms, and d) global commodity prices.
Over the past few decades, the importance of international trade and investment has been increased major matter for growth of country’s economy. According to Hodgetts and Luthans, that international trade and investment rates have been growing significantly larger and larger than domestic trade and investment (2003). Additionally, Czinkota, Ronkainen & Moffett’s believes international business has provided more opportunities ever before (2002). During the last decades, Asian business market place is developing dynamically and economic growth is increasing significantly. Especially, China has become as major role in a growth of the world economy. The reason of this is china has finally opened their door of economy to other countries for international trade and investment. As the result of that, China has become as one of the world’s fastest growing economies and it still grows dramatically because of their totalitarian system which the Chinese government based on (Hill, 2007). Since China has joined into the World Trade Organization in 2001, many Western firms have been attracted to enter into Chinese market as their investment and trading partners. China has been considered as the ideal destination by them (International Monetary Fund, 2004). Even more, many economists forecast, China can be the world biggest economy by 2050 if current trend continue (Hill, 2007). According to this, It shows a possibility that China would play a major role in world trade and monetary system in the future.
This essay will examine the possible implications of China’s growth in the world trade system and monetary system. Also it will briefly suggest the business strategy for today’s New Zealand firms. Finally, this essay will discuss on global commodity price.
The world trading system
According to many economists, China has been expected to be the world biggest economic country in the future and ranks in international trade market are essential to be indentified where China is positioned. WTO says that China merchandise trade in world has ranked as 3rd position and commercial services trade in world has ranked as export 9th position and import 7th position in 2005 (World Trade Organization, 2007). Furthermore, trade amount of china with the world market has been increased remarkably from year 2001 to year 2006. Chinese trading increased 245% more in this period. Foreign direct investment also has been jumped up about 60% in this period too (China’s Economy”, 2007). The main reason for this change of Chinese economy in the world market is believed by economists due to their agreement with WTO in 2001. Ministry of Foreign Affairs and Trade stated, “Many of the expected benefits of China’s WTO membership relate to the modernization into the world system” (Ministry of Foreign Affairs and Trade, 2001). Subsequently, China has successfully adapted in world economy and trading system. Additionally, their successful achievement towards international competition and global business opportunities will drive China to chase to more widely opened market economy system and to enter the world market for national products (Yuntin, 2004). During the past decades, Chinese exports have tended to reallocate its market system from traditional manufacturing sectors to value-added sectors. This has been resulted from their role of trading with major economies of other countries. For example, electrical machinery manufactured in china has become their largest export area at 34% of Chinese total export in 2003. It shows that a possibility of China can be greater its part in the international export market. And now, this competitive change of China is threatening other countries for their export market shares. A number of economists cautiously say that Chinese market power for skill-and-technology products would increase rapidly while competition against Chinese market for unskilled-labour-intensive manufactures is dropping.
Recently, China has one third of global petroleum demand as world second largest oil consumer. And their petroleum demand is still increasing fast. This will be caused as increase in importing petroleum into China. However, the prices of petroleum and raw materials have been increasing and this has made some countries to be rich from benefit of containing/trading petroleum and raw materials in their land such as countries in Middle East and North Africa region. Those countries are large suppliers of oil and raw materials to the world, and they are predicting that China would be increased in further oil demand (International Monetary Fund, 2004). Furthermore, not only Middle East and North Africa, but also the most regions are likely to gain benefit from Chinese economic activities. However, some countries in Asia which run their economy similar to China seems to have huge disadvantage from compete with China, due to their low costs for labour intensive products. For example, the world market going to be tougher to South East Asian countries from Chinese development of manufacturing and trading. In contrast, countries such as South Korea, Japan, Hong Kong, Singapore and Taiwan will get advantages from trade with China due to their market for export and import is relied heavily by China.
Foreign direct investment into China is another reason for its huge economic growth. Since China became a member of WTO in 2001, foreign direct investment has in-flowed at a rate of roughly $1 billion every week. In 2002, as the result, China has become the world largest foreign direct investment in-flowed with ranked at the top by foreign investors. Chinese 1.5 billion population helped to attract foreign investors too. This fact obviously made foreign investors to concern China as more interesting and more promising market (Hill, 2007). However, this need to be concerned as serious problem to other country located in Asia. The reason of this is possibly the meaning of reduce in foreign direct investment flowing into their countries because of increasing foreign direct investment in China. At the moment, the Chinese government tries to emphasize its market attraction to foreign investors and this would be promoting Chinese market to boost foreign direct investment inflow into there. China is still rarely doubted about their country will be the most attractive and tasty target for foreign investors and this will be remain same for next few decades (Kotabe & Helsen, 2004).
The world monetary system
According to Hill, “International monetary system refers to the institutional arrangements that govern exchange rate” (2007, p.368). The world’s four major currencies – U.S dollar, the European Union’s euro, the Japanese yen, and the British pound – are all free to float against each other. Therefore, is can have an effect on swing of exchange rate. There are two main exchange rate systems exist in system, floating exchange rate and fixed exchange rate, are these. First of all, according to Kotabe and Helsen, floating exchange rate is the closest approximation to perfect competition because there is no government intervention and because billions of units of currency are being traded by buyers and sellers (2004). The currency in country also can become strong or weak depend on buyers and sellers sides change due to inflation, interest rate, rumor and income from international trade. If the country is shortage in international trades, and it is also not necessary to keep foreign currency for balance of country’ own currency globally, this regime gives benefit (International Monetary Fund, 2004). For example, when the foreign exchange market determines the relative of a currency, the country is regarded as adopt floating exchange rate regime (Hill, 2007). Second, fixed exchange rate is that “A managed float allows for a limited amount of government intervention to soften sudden swings in the value of a currency. This is for the purpose of maintaining an orderly, less volatile foreign exchange market” (Kotabe & Helsen, 2004, p. 2004). Hill has stated that ” under a pegged exchange rate regime, a country will peg the value of its currency to that of a major currency so that, for example, as the U.S. dollar rises in value, its own currency rises too (2007, p.380). China is using fixed exchange rate regime while the most of countries are using floating exchange rate. Fixed exchange rate regime gives advantage that government can manage its exchange rate easily when inflation rate increased, on the other hand, there is disadvantage of that economy can be depressed when their currency was overestimated. The difference between those two exchange rate regimes is whether the government has some degree of control over exchange rate in the foreign exchange market to hang on to the value of its own currency. Kotabe and Helsen believe that a country rather to adopt monetary system which has a large degree of exchange rate flexibility which best suits own economic circumstance (2004). During the past decade, China has maintained the value of Yuan at 8.3 of a U.S. dollar in order to make currency would fluctuate within a narrow band. However, recent issue for the China is necessary of reconsidering value of Yuan currency at a high level against U.S. dollar. Even China has this controversial issue, Chandler believes “China’s peg seems likely to remain status quo since the other Asian economies that are China’s trading partners and competitors also have their currency linkages to the dollar (2004, p.52). Asian Development bank suggested “China should consider a more flexible exchange rate, while its capital is under control, and it is best to loosen the reins on a currency when growth is strong and the external account is in surplus” (2004, p.10).
The business strategy of today’s New Zealand firms
In China, there are three main business strategies for foreign investment is existing, joint venture, cooperative venture, and wholly-owned enterprise (Beamaish & Spiess, 1993). Among of those business strategies in China, the most admired strategy is joint venture. More than majority, approximately 70% of venture business succeeded in Chinese market and made profit over the few years. More over, their profitability was relatively high compared to any figures from elsewhere (Asian Development Bank, 2004). Even if joint venture is the oldest fashioned way of business strategy for foreign investment, it seems that there is more chance to make profit with this strategy than other strategies. Thus, it would be suitable and safe strategy for New Zealand firms which want to enter into Chinese market.
The “nine Ps” required being aware as necessary factors by foreign investor in order to success in Chinese market. The “nine Ps” include planning, persistence on the part of the non-Chinese partner, Partner, Product which is really necessary in China and government could be allow in, patrons, patience, people, problem solving attitude, and public relations. All these factors play significant roles for success of foreign investment. On the other hand, Beamish and Spiess believe that patience is given a great deal of weight on foreign investment. Patience indicates that fully adapt to Chinese culture and history is required with patient (1993). Today’s New Zealand firms are required to consider China as the world largest economy and their big potential for investment in 21st century.
Global commodity prices
Due to demand from the big, rapidly growing economies of China, energy value is risen up significantly. Rising energy values mean more entries in the record books, as global commodity prices hit fresh highs. Meanwhile, China extends export duty on fertilizers to the global. Edward stated briefly about relationship with world commodity price and Chinese economy as “It’s not often that investors have cause to celebrate when their money goes up in smoke. But owners of commodity funds may feel differently. After all, many have acquired positions in the belief that commodities will act as a hedge against a fall in the stock market. That proved the case early this year. When global equities rallied in the week ended March 21, commodities gave back some of their gains, thus demonstrating their “negative beta” credentials. Yet for all the sophisticated spin about alternative assets, commodity investors are really making a big bet on China” (2008, p. 146). Therefore, an investment in a commodity index will increase overall price of all commodities. Nevertheless, the studied theory on the balance of supply and demand strongly suggests that the price of commodities should come down for production improvements and substitution efficiencies which designed to minimize impact on global economy while it wobbles brutally. It is not easy to predict the trend or effects of commodity inflation in the trading market. However, one thing is clear, the world commodity price is gradually increased and that is because the increase international demand, which means it could continue to rising in the future.
In conclusion, China could achieve the remarkable economic growth since the Chinese government had decided to shift on market-driven economy system. This is remarkable change impacted to global economy. Besides, being a member of the WTO has been motivation to China could be ranked in top five countries for international trade, foreign direct investment as well as economic growth. The eyes of world are focused on China’s economic growth. Therefore China has become significant trade partner to the global. However, some countries may suffer from rising of Chinese economy as its competitor in international trade market and some countries will compete harder with china. Nevertheless, China will still be the focus of attention by foreign investors as hot market. In addition, it probably is the time to New Zealand firms to consider about entering into Chinese market by using joint venture strategy. Finally, the price of global commodity seems continue to increase. However, solving the commodity price problem and resource shortcoming are the key issues of China to be successful in transition to the world market economy.
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