There are a number of expectations placed on China both from within its borders and from the world at large. Having established itself as an industrial economy in the early 1980’s, china has become an important source of goods for both its domestic and foreign markets. As a result china gross domestic product (GDP) grew by 10.6 percent between 1990 and 2000. In the same period, the country’s economy contributed 17.72 percent to the growth rate of the entire world economy.
Of this contribution, developing countries received a major boost with 62.54 percent growth having been a result of direct or indirect trade from china. In the period between 2000 and 2004, china had a 4.68 percent share in the global GDP, having registered a 9.4 economic growth. Its contribution to the growth of the worlds GDP stood at 17.60 percent, and a significant percentage of 45.06 percent of this contribution was effected in developing countries (World Bank, 2006a). According to this statistics, there is no denying that China has played and continues to play a major role in the world economy.
The Integration of China in the world economy is evidenced in the share of global trade that the country commands. In 2004, the importation and exploration of goods and services accounted for 65 percent of China’s GDP, in 2006, this figure went up to 70 percent (World Banks, 2006a). Demand alone accounts for 17.6 percent of the total global imports; the reason for this is the fact that China has in the last two decades shown tremendous growth and is now ranked fourth place among the countries with the largest economies in the world. Aptly put, china has dismayed both friends and foes with its high economic development. One only needs to look at the statistics of its outbound tourism to get a rough idea of the kind of effect that the country will have on the world economy.
China’s population grows at an estimated 13 million people per year (afe.easia.columbia.edu). Today, the total population stands at 1.25 billion people. By any standards, this is quite a large population that serves the global market both ways: as a consumer markets and as a source of products for the rest of the world. 10 percent of China’s population, which roughly translates to 100 million people, is in the middle income class. They are the main attraction of consumer marketing firms such as coke, Pepsi, Motorola, Chrysler and others. On the other hand, the same populations who are now investing in their own country have high energy, raw materials and labor demands that attracts companies like Boeing and Caterpillar to the country. What used to be an elusive market for the rest of the world is slowly becoming a reality.
The western countries are especially benefiting from a market that had the potential yet either lacked the money required to make profits for an investment in that country, or the people were too proud to buy anything associated to the western world. The road to China’s inclusion in the world market has been a long a affair especially because the administration of the country did not show much commitment to it. A trade embargo by the US to China was for example only lifted in 1971 and in the same year, the country joined the United Nations. Two years later in 1973, the US and China established diplomatic relations. In 1980, china joined the World Bank and the Asian development bank in 1986. It was only later in 2001 that the country gained admission to the World Trade Organization (Madison A. 2005).
Before the country started relating well with other countries, it had no foreign debt and also no direct investment from foreigners. However, on opening up, the country registered $3.5 billion inflow from foreigners who had invested in the country. This figure rose to $60 billion in 2005(Madison A. 2005). This was especially the case with the tax havens established by the government as special economic Zones.
Special economic zones in china
China has special laws governing the special economic zones, specifically set by the government as an initiative to encourage foreign direct investment into the country. Under these zones, investors are provided with outstanding infrastructure especially in electricity power and communication facilities. Investors are also exempted from some of the regulation used elsewhere in the country. Such include hiring and firing and laws relating to foreign ownership (Madison A. 2005). Overall, the zones presented both local and foreign investors with an important development vehicle that led to the rise of a capitalist class in the country. The zones also served as an important instrument for the transfer of technology hence strengthening China’s exports.
The growth in China’s economy can partially be attributed to the fact that her foreign domestic input is export oriented and also that the country has larger shares of private input flows in her GDP has contributed significantly to the integration of the country in the worlds capital base. This in turn contributes to China’s fast growth. Additionally, the export orientation and the country’s inclination towards exports increased her capacity to integrate with other market players effectively. Focus on the development of infrastructure.
Exports and imports
In 2004, China’s exports in manufacturing supplies accounted for 0.9 percent of the total world supply. Of this, textile exports from china accounted for the highest export level at 4 percent. The clothing exports accounted for 2.9 percent of the entire world supplies, iron and steel exports accounted for1.6 percent, while the pharmaceuticals export accounted for 1 percent of the world’s exports. The highest imports to the Chinese market was iron and steel which accounted for 1 percent of the total world imports, imports on telecommunication equipment and auto parts accounted for 0.5 and 0.3 percent respectively(WTO,2005). Overall, china emerged as an exporter of manufacturing supplies in the period between 1990 and 2004 and still holds this position to date.
Having been a late comer in the global trade, China has done exceedingly well as far as forecasting the market and adopting strategies that give it a competitive edge are concerned. Under the Multi fiber arrangement (MFA) for example, China was quicker than other countries like India to take advantage of the gradual quotas phase off to its advantage. From 1995, the country was able to rapidly increase its exports to the USA and European Union Markets.
When the MFA was completely scrapped off in 2006, the influx of Chinese commodities especially fabric and clothes was unprecedented. To guard their internal markets, both the US and EU markets had to put measures to safeguard the domestic markets (scid.stanford.edu/). A look at the textile markets in the US and EU markets reveal that China was able to capture almost half of the US textile market and just slightly lower than a third of the European Unions market (Nordas 2004).
A look into China’s auto component producers reveal that the country has advanced and embraced international best practices in both production and quality (Sutton, 2005). The study gathered that the auto industry in China would grow significantly and that China would sooner be in the league of car manufacturing countries. So far, the country has attracted major car manufacturing companies, which have their eyes on the potential held by the country’s growing population as well as its acquired economic significance in the world.
Accordingly, the car manufacturers drive the supply chain locally, component exports to the country was driven by both domestic firms and multinational companies. Some domestic firms in China have recorded major success in the export trade. In fact, 6 out of 10 exporting companies doing really well in terms of returns and profitably are from China (scid.stanford.edu)
Better economy means that the Chinese middle class has disposable incomes, and they can now afford services such as health care, automobiles and better education. This in turn has presented the providers of such services in the world market with an expanding platform to market their services. International insurance providers, financial advisers, banks and financial institutions, car manufacturers, investors in the education sector are just some of the people who have found a great in china. Regarding the tourism industry, Chinese outbound tourists are major contributors to the world tourism sector. In 2007 alone 40, 950, 000 Chinese traveled to destinations outside their country and contributed $1228.5 billion to the world economy. On average, Chinese tourists spend $3,000(news.xinhuanet.com).
Assuming that estimates made by some economic analysts are true, China will surpass the United States economy by 2015(Madison, 2005), and will probably account for quarter of the world s GDP by 2030. This can only mean that its impact on the global economy will be greater than it is today. Currently, china accounts for 6 percent of the total world trade and is acquiring the significance of a trade conduit that every developed countries from Asia, Europe and the Americas wants a share of (imf.org). There have been comments to the effect that countries trading with china will always experience bilateral trade deficits that favor china.
Analysts construe this to be a fact that countries in bilateral trade with China will have to contend with. This is because china produces goods and services for both the domestic and export market. Countries most likely to benefit by exporting to China are those that can serve the ever increasing demand for cereals in China, which is as a result of diminishing farm land in the country. The country’s fast industrialization has displaced many farmers, siphoned farm workers to the better paying industries (Madison A. 2005)
In 2005, the China exported goods worth $162.9 billion and only imported goods worth $48.7 billion from the United States of America. It also exported goods worthy $124.5 to Hong Kong. Due to Japans resources of industrial supply, the trade between the two countries favored Japan which exported goods worth $100.5 billion to china and only imported goods amounting to $84 billion. Countries like South Korea, Germany, Netherlands, United Kingdom, Singapore, Taiwan and Russia are among top consumers of the Chinese products.
Trade between these countries does not include many imbalances like in the case of the USA. Trade favoring China from the United states stood at $114.2 billion in 2006, while China had a surplus of $1.8 billion over Germany. Thailand was the only country which exports to china and does not consume much of China’s products. Countries that had surplus trade over China in 2006 are: Taiwan at $58.1 billion, South Korea at $41.7 billion, and Japan at $16.5 billion and Russia at $2.7 billion (Workman D, 2006).
In 2004 alone, out of the 5,041 product sold on the international level, 4,898 had originated in china. However Germany had a higher number at 4,932. Ideally, this would look like a contradiction, but the variation between the two is basically based on the quality of the goods traded. China has in the last three decades emerged as a source of cheap and a wide range of goods. However, the quality of Chinese made goods is always a matter for discussion. In our case for example, Products of German origin are more likely to get credibility as being of better quality than goods which has their origin in China.(Lynch D, 2007)
The savings Glut in China
The Chinese people save more than they spend on investments. Their conservative spending natures have always ensured that they have more in savings and that their spending habits are modest. To this end China has been suffering a saving glut as even the government itself has major savings reserves. Although the government argues that this saves the country from run away inflation, critics argue that this holds back the country potential contribution to the world market. Additionally, the government has always held that the savings are good for the country and serves as a precautionary measure to shield the country should anything happen to its economy.
Economic analysts however maintain that instead of staking away money, China would otherwise use it in both domestic and foreign investments in order to increase its ranking and contribution to the world market. The fact that China’s rural population is still affected by poverty due to outdated farming methods is another thing that convinces analysts that the Chinese saving trends are misguided.
The saving glut in China has however benefited other countries where the China directs the savings either as structural savings or cyclical savings. One such country is the United States, which finds equilibrium in its deficits from the Chinese savings. The US embraces the Chinese saving glut especially because it feeds its spending nature, fits well with its flexible economic system and the credibility of its financial systems (Pettis M, 2008).
In the event that the US, and other countries that eat into China’s saving glut are unable to consume the surplus savings from china- and this happens a lot- china intervenes in the market to ensure that the Yuan,-China’s currency denomination- is undervalued in the global market. In a typical setting, the reduction of the deficit in China’s saving surpluses would lead to either other countries taking up the role of consumption, or China’s domestic market opening up in order to accommodate the extra money in the country.
Presently, due to the economic crush in the US, Europe and other countries in the world are absorbing the surplus savings from China and in the USA’s place playing the role of the equilibrator (Pettis M, 2008). The main reason why china does this is because the only other alternative it has it opening its market to accommodate the extra money, which if not properly managed would end up causing inflation in the country.
What worries the world about China is whether it will be able to hold the economic status it has acquired in the market. While some says that China will overtake the US by 2015, others question whether the world can accommodate the output, consumption and the effect that China would have were it to develop to that stage. Observers have claimed that china has something to hide about its economic growth. In 2005 for example, a production census discovered that China’s GDP had been underestimated and that the growth in the services sector had been overlooked. In real reality, china had a 10 % GDP in that year. In 2007, the country recorded 11.4 % growth in its GDP.
Of concern however the rate at which environment degradation and pollution is is gaining prominence in the country. As a result, the workers are no longer assured of safety in the workplace, and some people do not have access to drinking water. Air pollution accounts for thousands of deaths annually and water that was used for irrigation has now been directed in to the industries. This is not a domestic problem for the Chinese people only. Apparently, the pollution in the country leads to acid rains in countries such a South Korea and Japan (nytimes.com) China is set to overtake the United States as the country which emits the most carbon dioxide into the atmosphere by 2009(npr.org)
Other concerns emanate from fact that China’s energy consumption is quite high. The Chinese government has been trying to secure energy sources from Asia and the developing countries in Africa. With it is current consumption rates, it is hard to tell if the country’s energy requirements will be sustained in the long run (chinability.com).
It is apparent that China now plays a major role in the world economy. The fact that many countries are trying to get favorable bilateral terms with the country is enough evidence that even the world appreciates the role the country has in stabilizing the supply and demand of products and services in the global markets. Whether China’s economy will hold to steady growth or whether what we are experiencing is just a bubble is a question that has no definite answers. However, judging by its position and the trade ties, boosted by the country’s resources, it is obvious that China will continue being a dominant player in the global market for much more time.
Workman, D. (2008) China’s Exports and Imports Soar. Web.
Pettis, M. The Savings Glut is Looking for a New Equilibrator. Web.
Transcript of an IMF Economic Forum. (2004) China in the Global Economy: Prospects and Challenges. Web.
Maddison, A. (2007) Chinese Economic Performance in the Long Run, OECD publishing.
Lynch, D, (2007) Do Cheap Goods Have to Mean Trade-off Quality? USA Today.