Sonia Cialicu Macroeconomics Research paper

China - During the last few years, China has become one of the most fascinating countries in the world, not only because of the fast growing economy that made them the second power of the world, but because of facts like the following: Chinas economy grew 7 times as fast as the USA economy over the past decade (316% growth vs. 43%), by 2025, China will build enough skyscrapers to fill TEN New York-sized cities, the Chinese GDP could overtake the U.S. in less than 15 years (14 Jan 2011), the Chinese currency did not experience even one quarter of negative growth during the recession and the following image is selfexplanatory:

Sonia Cialicu Macroeconomics Research paper

I chose China as the country for my research because I consider it very interesting as a paradox in the global economy, as a communist country which apparently could never ever have economic growth or could do well (personal experience of my parents can certify that) is actually doing better than most democratic countries in the world and China is supposed to still follow this trend.

Demographics China consists of the Peoples Republic of China: Mainland China, Hong Kong and Macau and the Republic of China (Taiwan). I will focus on the mainland China (the Peoples Republic of China). It is an enormously populated country (1.3 billion) in Eastern Asia, with 0.494% population growth rate (2010) and life expectancy of 74.51 years. In 1979, a one-child policy was introduced to reduce Chinas burgeoning population that prevented 300 million births, the equivalent of the population of Europe. The reduction of population has helped pull people out of poverty and been a factor in Chinas phenomenal economic growth. China is a communist state divided into 23 provinces 5 autonomous regions and 4 municipalities and consists of three main branches: the executive, the judicial and the legislative. The executive branch consists of the chief of state, President HU Jintao, since 15 of March 2003 and as the head of government the Premier WEN Jiabao. The legislative branch consists of unicameral National People's Congress (members elected by municipal, regional, and provincial people's congresses, and People's Liberation Army to serve five-year terms). The judicial branch consists of the Supreme People's Court (judges appointed by the National People's Congress), Local People's Courts (comprise higher, intermediate, and basic courts) and Special People's Courts (primarily military, maritime, railway transportation, and forestry courts). The sole political party is the Chinese Communist Party with the President HU Jintao as leader. The Chinese government still controls a significant portion of scarce resources, such as land, bank loans, subsidies and tax breaks (Faccio 2006; Khwaja and Mian 2005); however, due to the fact that China became a socialist country, in 1949, the governments role in the economy has fallen greatly, while the role of private enterprise has grown. The government used to be responsible for planning and managing the national economy, monopolizing foreign trade, being the owner of all the domestic enterprises, setting the price for all commodities and controlling distribution of investment funds, output targets and more. This caused the economy of China to be stagnant and slow.

Sonia Cialicu Macroeconomics Research paper

Major changes in the Chinese market, starting with late 1970s, have brought a huge impact not only on their own economy, but also on the global one. They have moved from a closed, centrally planned economic system to a more market-oriented. Reforms began with the phasing out of collectivized agriculture, and expanded to include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, creation of a diversified banking system, development of stock markets, rapid growth of the private sector, and opening to foreign trade and investment. Everything has been done in a gradual manner. One major change in the Chinese market was the revaluation of the currency by 2.1% against the US dollar in July 2005 and as a result, they moved to an exchange rate system that references a basket of currencies. From mid-2005 to late 2008, cumulative appreciation of the renminbi against the US dollar was more than 20%. Since China initiated the reform and opened to the outside world, the economy advanced healthily and has achieved a sustained annual growth of 9.42%. In 2005, the GDP of China was more than US$ 2200 billion and the average percapita GDP was US$ 1703. Nowadays, China's GDP comes fourth in the world. Its share of the world economy is 5% and it is only next to America, Japan, and Germany.

After more than twenty years of reform, opening up and modernization, China has basically accomplished the change from planned economy to socialist market economy. This economic structure is established and improved step by step. Adapting to this, China's laws and regulations have been improved constantly, its market is opened wider constantly, its investment environment

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has been improved and reform of the financial system has progressed steadily. All of these improvements have furnished a reliable guarantee to the continuous development of China's economy. The economy appears set to remain on a strong growth trajectory in 2011, lending credibility to the stimulus policies the regime rolled out during the global financial crisis. The government vows to continue reforming the economy and emphasizes the need to increase domestic consumption in order to make the economy less dependent on exports for GDP growth in the future, but China likely will make only marginal progress toward these rebalancing goals in 2011.

Industries It is generally agreed that the process of economic development is strongly associated with changes in the structure of the economy. A growing economy is one that becomes more complex and sophisticated in terms of the creation of new sectors of economic activity and the entry of new, more knowledgeintensive forms of production organization. For more than two decades, China has introduced market-oriented structural reforms, opening up its domestic economy to foreign competition, deregulating markets, and privatizing economic activities. These reforms involved a major departure in policy regime from the one that prevailed before the 1980s. The new policies induced a major transformation of the social, economic and institutional environment for China. As a result, China has undergone undisputable changes in their production structure, international competitiveness and pattern of development. Undoubtedly, a large number of new economic activities have emerged in the Chinese economy since the early 1980s, while many of the former ones have gradually disappeared. Indeed, anyone who lived or worked in China for a longer period bears witness to the immense development in the recent years in all aspects of the service industry. A service industry of the type once found only in Western developed economies is today available in all the larger cities and in all corners of China. And as the economy grows and modernizes, the service industry grows with it. The reform of the industrial sector has mainly been done by enlarging the decision-making power of enterprises and practicing enterprise contract responsibility by letting them exercise independent operation and complete their operational mechanisms. The introduction of foreign capital and the practice of opening have quickened the process of China's industrialization. The establishment of large numbers of joint ventures has brought in capital,

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advanced equipment and modern management expertise, enhancing the technological and management level of China's enterprises. The reform has enabled the Chinese industry to get rid of the backward status characterized by a unitary variety of products and low technological level. The performance of China's auto industry, which was considered a strategic one and remains tightly regulated because of the government's desire to bring in technology and investment, is less clear-cut. The market has been opened up to foreign automakers, consumer demand has grown enormously, and prices have dropped. Yet the sector shows how government intervention can thwart the potential of foreign direct investment. Foreign automakers can invest only in joint ventures, they have to buy components from local suppliers, and tariffs shield the market from imports. Competition is beginning to increase as private companies grow stronger. But for the time being, the productivity of foreign joint ventures in China is low compared with that of plants in Japan or the United States, astounding given China's low labour costs. On the basis of the 2004 national economic census, Chinas International Bureau of Statistics announced that nominal GDP in 2004 was upward adjusted from 13.6 trillion Chinese Yuan to 15.99 trillion Chinese Yuan. That is, an increase by CNY 2.3 trillion or 16.8%. While there were only minor changes of agriculture and industry, the service industry increased by the astounding CNY 2.13 trillion, thus accounting for 93% of the total adjustment. Transport and communication, trade and catering, and real estate (which together make up close to 50% of tertiary sector output) accounted for 75% of the revision to tertiary sector value added.

Trade As a move to liberalize trade, China has continued to reduce administrative barriers to trade by increasingly switching to the use of tariffs and exchange rates adjustments and has gradually liberalized its foreign trading system. According to the amended Foreign Trade Law which went into effect from July 2004, all types of enterprises, including private enterprises, can register for the trading right. Individual Chinese are also allowed to conduct foreign trade under the amended Foreign Trade Law. In 2008, China's total external trade reached US $2,561 billion, ranked the third in the global economy. In 2008, exports grew by 17.2% to US $1,428 billion (ranked the second in the world) while imports increased by 18.5% to US $1,133 billion (ranked the third in the world), resulting in a trade surplus of US $295 billion. In the first quarter of 2008, exports declined by 19.7% while imports dropped by 30.9%.

Sonia Cialicu Macroeconomics Research paper

Export-processing trade continued to be the major form of external trade. Export-processing trade accounted for 52.7% of China's total exports in 2006. The share dropped slightly to 51% in 2007 and further down to 47.3% in 2008. In 2008, exports and imports related to processing trade increased by 9.3% and 2.7% respectively. In 2008, exports of machinery, electrical and electronic products grew by 15.5% while garments and footwear increased by 3.8% and 17.2% respectively. In Jan-Mar 2009, exports of machinery, electrical and electronic products declined by 21.4%. While exports of garments dropped by 5.1% in Jan-Mar 2009, exports of footwear grew slightly by 0.8%. In 2008, China's top ten trading partners were the US, Japan, Hong Kong, Taiwan region, Germany, South Korea, Australia, Russia, Malaysia and Singapore. China's trade with these ten economies together accounted for 57% of China's total external trade in 2008. In 2008, the number of newly approved foreign-invested projects declined by 27.4% to 27,514, while utilized foreign direct investment increased by 23.6% to US$92.4 billion. By the end of 2008, China approved a cumulative of 659,862 foreign investment projects. The leading sources of investment included Hong Kong, Japan, the US, Taiwan, Singapore and South Korea. In addition, the central government has also introduced tariff-free and VAT-exemption imports of capital equipment for projects within the hi-tech and priority sectors such as energy, agriculture, transport, infrastructure, production of raw materials, and tertiary industries, as well as in the pillar industries. These moves are targeted to attract high-quality overseas investment, introduce high technologies and know-how to rationalize the country's industrial structure.

Problems One demographic consequence of the "one child" policy is that China is now one of the most rapidly aging countries in the world. This fact can be considered a major problem since it is going to affect the economy labour-wise. Not as many people are going to work in the future and this population control might destroy the balance that the Chinese might gain after the period of growth ends. Deterioration in the environment - notably air pollution, soil erosion, and the steady fall of the water table, especially in the north - is another long-term problem. China continues to lose arable land because of erosion and economic development. The Chinese government is seeking to add energy production capacity from sources other than coal and oil, focusing on nuclear and alternative energy development. In addition, China currently faces a problem of inflation that jumped 4.9% in February 2011 and, as a result, the central bank raised interest rates, its second increase in just over a month, intensifying its fight against stubbornly high inflation.

Sonia Cialicu Macroeconomics Research paper

The labour force is 813.5 million (2009) and urban unemployment rate in China was last reported at 4.10% in the fourth quarter of 2010.

Moreover, local government debt is a problem which swelled as a result of stimulus policies, and is largely off-the-books and potentially low-quality. On the 31 December 2009 it was estimated to be at $347.1 billion. The Chinese Yuan exchange rate specifies how much one currency, the USD, is currently worth in terms of the other, the CNY. The Chinese Yuan exchange rate depreciated 3.76% during the last 12 months.

Assessment The Chinese government faces numerous economic development challenges, including: reducing its high domestic savings rate and correspondingly low domestic demand, sustaining adequate job growth for tens of millions of migrants and new entrants to the work force, reducing corruption and other economic crimes and containing environmental damage and social strife related to the economy's rapid transformation. I personally think that it is incredible how this countrys economy, and not only, has developed during the last years and agree with the fact that in the near future it will or will come close to dethroning the USA. It has huge potential and taking into consideration the fact that it is highly advertised, that owns half of Africa and most of the world is in debt to China, it is really possible that one day they will become the greatest power. However, they still have long way to go, not only into the depth of the economic status, but also into the social one

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(population control policy, the prohibition of social networking, freedom of speech through blogs and websites).

As an advice to a potential investor I would say: go for it! It is a very good time to invest in China, as shown by the statistics regarding their economic behaviour; and I believe that it will give many advantages and satisfactions in the future. Conclusion This research paper explored Chinas economy for a client who is interested in investing there. It offers information about the demographics of the region, the governmental and economic structure with an insight into the historic background of China, how trade happens and influences the country and gives an image of the current status and problems that the country is facing: unemployment, inflation, exchange and interest rates, government debt.

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