China's Free Market System

Introduction

A free-market system is an economic system in which the production and distribution of goods and services takes place through the mechanism of free markets guided by a free price system rather than by the state in a planned economy. In a free market economy, demand and supply are key determinants of price, and price is always an important contributor to any profit-driven organization. Hence, a successful industry analysis will have to identify the underlying factors driving demand and supply.

Since the Chinese economy underwent transition to a free-market economy in the late 1970s, it has become one of the largest economies in the world. China Petroleum & Chemical, China Mobile, and Aluminum Corporation of China are just a few of the top 100 Chinese companies that populate the Chinese business landscape listed in global publications (Business Week, 2005).

Critically analyze of the view

A nation can have a centrally planned economy where the government makes all the economical decisions or a free market economy where the government stays away from the economy and economical decisions are made by agreements between the producers and consumers. (http://en.wikipedia.org)

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For centuries, China was proud of its advanced agriculture. The country enjoyed slow but stable development. Its richness arose jealousy and scare among its neighbors, some were even quite far away. Though suffered many wars and invasions, this world famous old civilization nation had leaded the race of the competition of development in the world for more than a thousand years. However, the situation changed in the 18th century. When China still dedicated its development on an agriculture-based module, some European countries had shifted their development focuses from other sector elsewhere towards industry. Nations, which used the advantages of their industrialization output, soon dominated the world and changed the whole earth as well as the concept of development dramatically. China turned to be an underdeveloped country. Its rural areas became one of the poorest places in the world. (Wang Dewen, 2005) When the new China was founded in 1949, Chinese countryside was more or less the same as it was hundreds years ago, or even worse. Chinese government has attached extreme importance towards rural development and has always made it a key task to tackle with. Facing various problems, Chinese authorities has introduced many policies in different periods of time to boost Chinese economic development. These policies are not always coherent as a well-designed integrated strategy; some are even contrasted and conflicted with each other. But concerning the way of how production is organized, the economic development of the People’s Republic of China can be generally analyzed that: since from 1950 to late 1970s and the other segment refers to the time after late 1970s. In the former period of time, China conducted more collective production while in the latter part Chinese implemented a market-oriented individualized approaching. Both methods achieved some extents of success but also leave problems unsolved (Sun, Qixiang, 2001).

Free market economy, stressing that the Chinese Government will to interfere as little as possible of the business and economic development. This is different from a centrally planned system. Compared to the past, the economy of China is definite grown up by using the free market economy. But the basic of free market economy is let the rich become richer. This does not fundamentally solve the problem of inequality in China. The poor people became poorer without the protection of their government.

One more problem is that the free market society is set up so that production decisions are influenced entirely by consumer demand. (Fei, J., and Ranis, G., 1965) For example, if a person is in a car accident and needs medical attention they will receive it regardless of class and employment and when they are healed they will be sent on their way without a dime taken out of their pocket for medical costs. This is not always best because consumers do not always demand the highest quality products in favor of cheaper ones. Consumer safety should always be a priority for manufacturers however if the government, through safety standards, does not enforce it there is no guarantee that it is top priority.

The electricity people receive is always the same in quality so the government owns it as a monopoly. The consumer will buy a great deal of goods if they are very cheap and will not buy very much if they are very expensive. The price of goods is determined by an agreement between the producer and consumer. All of these services are provided by private businesses. Services such as health care, education, old age pensions, and day cares, maternity/paternity paid leave from work, unemployment insurance, disability insurance and many others are not provided by the government. For example if consumers in significant numbers would rather buy a cheaper car that does not have air bags than a car that does have air bags then the producers will produce cars without airbags. Government still needs to do something to protect customers’ safety.

General to say, there will be no nations in the world today that have wholly either free markets or centrally planned economies. China still needs a mixed economy system.

Explain the challenges facing China’s economy today

In the past few decades, China’s economic grown rapidly. Although China is still a developing country, its economic strength and growth potential should not be overlooked in Asia and even around the whole world. (Fei, J., and Ranis, G., 1965)

There still be many challenges facing China’s economy today:

1. Underdeveloped small and medium enterprises in central and western part of China, and the multi-ownership economic structure had not formed yet.
2. State economic layout adjustment and the reform of state-owned enterprises have not yet completed in place.
3. Massive surplus labor of rural need to be transferred. The farmers of poverty have not yet fundamentally changed.
4. Eastern and western economic development is very uneven.
5. Micro-economic activities of enterprises administrative intervention still widespread.
6. The idea to establish the primacy of law is not implemented.
7. Aggregate investment in some industries and regions is somewhat excessive.
8. Inflationary pressures are building up and much remains to be done in the areas of employment and social security.

The Chinese central bank governor stressed that solutions to these problems will require China to pay even closer attention to proper macroeconomic management and to the proper handling of the relationship between reform, development and stability.

To deal with the accelerating rise of the commodity prices index during the past six months, China employed a combination of monetary policy tools and strengthened preemptive adjustments and fine-tuning by controlling excessive growth of monetary credit. (Zhou Xiaochuan, 2004)

In order to solve these problems, the first step in the correction of these imbalances needs to be a further appreciation of the RMB. Simply adjusting the exchange rate is not sufficient to correct the imbalances in the Chinese economy, because China’s trade sector does not seem to be very sensitive to the relative price change. But it is a necessary first step.

Secondly, domestic expenditure on public goods should be increased. An increase in expenditure will lead to an increase in imports, and a decrease in the amount of domestic products available for export, thus contributing to getting trade into closer balance. Compared with other countries and even developing countries with the same income level, China’s expenditures on education and public health are far below average. (Liu, Jianjin, 2003)The public expenditure program could include building a well-functioning social safety net for both urban and rural populations; increasing investment in human capital by providing better health and education; internal transportation and communication infrastructure to help achieve a more integrated domestic economy; and a rural development program for the poorest regions.

Conclusion

China needs to combine the free market economy with the macro-control of government. So that it can establish a mixed market economy system. There are many supporting institutions that are equally important for successful and sustained growth. Up until now, China has been muddling through all the unpredictable and complex situations it has faced with remarkable success. However, the “cross the river by touching the stone” approach adopted by the first generation reformists cannot guarantee that China can sustain its vigor. The issues that the second-generation reformists now confront are quite different from those faced by their predecessors.

Reference:

• Batisse, Cecile, and Sandra Poncet. 2003. Protectionism and Industry Localization in Chinese Provinces, mimeo.
• Fei, J., and Ranis, G., 1965. A Theory of Economic Development, American Economic Review, Vol. 51, No.4: 76-106.
• Free market http://en.wikipedia.org/wiki/Free_market
• Industry Outlook 2005 – BusinessWeek Online http://www.businessweek.com/magazine/toc/05_02/B39150502industry.htm
• Liu, Jianjin, 2003. Rural employment, 2002 China’ Employment Report, edited by Mo Rong, China Labor and Social Security Press, Beijing.
• Sun, Qixiang, 2001. Empty account and transition cost: the effects of China’s pension system reform, Journal of Economic Research, No.5.
• Wang Dewen, China’s Urban and Rural Old Age Security System: Challenges and Options. October 2005.
• West, A. Loraine, 1997. Pension reform in China: preparing for the future, Eurasia Bulletin, summer 1997, pages 9-19.