Affective Issues on China Economy

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Description:

China’s economy grew 9.3% in 2004, showing a robust performance in output, investment and exports. The government’s policy of cooling the sizzling economy resulted in a slight decline in the growth rate in the second half of the year. China’s economy now looks poised for a soft-landing in 2005 thanks to the stabilization program, leading to a more stable growth but still at a relatively high level of plus 8% range. All this makes 2005 a watershed year for China, determining whether or not it can continually achieve stable growth in the years ahead.

Enablers:

  • Market Liberalization

China continues to lower tariffs and open up service markets following its accession to the World Trade Organization. The average rate of import tariff will fall from 15.3% in 2001 to 9.9% in 2005, ahead of its commitment to the WTO. Accordingly, multinationals are expected to change their strategies as China opens up service sectors such as distribution, telecommunications and finance.

  • Local Companies’ Competitiveness

After a period of rapid growth, some local Chinese companies are seeking to become multinationals. More and more such firms aspire to move abroad in response to fierce competition from an oversupply in China, and also as a way of reducing risk. Furthermore, local Chinese companies are shifting their sales strategy from price competitiveness to brand power. In line with this trend, they actively seek moving into the high-end brand markets overseas, looking for chances of making direct foreign investment or merger and acquisition. M&A cases between Chinese and foreign companies rose dramatically in 2004. China’s policy of encouraging direct foreign investment is expected to accelerate the trend of Chinese companies going global in the years ahead.

Inhibitors:

  • Yuan Revaluation

The trading band of the Chinese Yuan, whose exchange rate is pegged to the US dollar, is expected to widen by around 3 percentage points, rising from the current daily range of 0.3% to slightly over 3 percentage points. As a result, China’s currency is expected to appreciate slightly from 8.28 to about 8.0 Yuan against the US dollar by the end of 2005. The Yuan’s trading band is expected to widen further after 2006, moving closer to a form of a floating exchange rate system. But a fully floating system seems possible only after the 2008 Beijing Olympics.

  • Worsening Inequity

In the shadow of economic success and high growth, China suffers from a widening disparity in income and regional development. Thanks to robust exports and high consumption, development of China’s coastal region has vastly surpassed that of the inland region. Per capita income of people in Shenzhen is 15 times higher than that of people in Guizhou Province. In short, disparities in China’s society are becoming structural and deep-rooted, making it difficult to resolve these problems within the foreseeable future.

Paradigms:

China is rapidly emerging as the world’s second most powerful economy next only to the United States, expanding its global influence along with its economic size. That prompts the rest of the world to demand on China a role in the international community that commensurates with its economic power: a more appropriate value of its currency, greater respect for human rights, quicker progress on democratization, and increase in aid for developing countries. China is expected to gradually expand its global influence through cooperation with other countries and by minimizing frictions with its partners. The successful hosting of upcoming international events like the 2008 Beijing Olympics and 2010 World Expo in Shanghai will help expand China’s influence. As that happens, East Asia will serve as a strong footing for China’s expansion of global influence. China will try countering the spread of US influence through cooperation with the emerging economies of Brazil, Russia and India.

Experts:

WEFA, National Bureau of Statistics of China

Timing:

  • China's open-door policy was initiated in late 1978.
  • China and the U.S set the diplomatic relationship in 1979.
  • China set up Shenzhen special economic zone in 1980.
  • China joint into the WTO on Dec.11th,2001.
  • China will cancel the tariff for telecommunication equipments before 2005.
  • The 2008 Olympic Games will be held in Beijing.
  • The 2010 World Exposition will be held in Shanghai.

Web Resources:

http://www.xinhau.com/contents/complete40.php
World Bank Report