China_as_a_Global_Power

The economic history of China is a fluctuation based greatly around trials and errors. It is important to note these tribulations to have a concrete overview of how China ended up where they are at today. There are many unique aspects in which the country attempted to grow over the past eight or so decades. Through different shades of government, philosophies of leaders and motivations, China has managed to emerge as a global power. China developed a heavy industry, socialist development strategy around 1949. This strategy came to be known as the “Big Push” strategy. Emphasis was put on accelerated industrialization while consumption took a seat on the back burner (Bozheng). Government overtook the economy in large part and conducted a resource re-direct to the construction of new factories. New industries rose up along with economic growth. Previous inflation was minimized by the end of the decade through tight budget and money supply control. At the outset of the Communist party rule in China, the leaders agreed that it was necessary to take advantage of capitalist perspectives to help the construction of “New China” and merge it into communism (Bozhong). Greater chances took place in the 1950s-60s within China’s economic priorities and policies. Under Mao Zedong, the First Five-Year Plan (1953-57), instituted a policy of continued industrial progress but included a falling out of other economic sectors. The state invested funds directly into the industrial sectors. Agriculture, making up 78.6% of the labor force at the time, was forced to attempt to utilize its own minimal capital resources for the majority of its funding needs (Watkins). Coal, iron and steel, electric power, building materials, engineering, and chemicals were where the priorities were dedicated to. Using the Soviet model of industry, China hoped to set up technologically advanced, large capital-intensive plants (Watkins). The Soviets offered technical and financial assistance at this time to help with Chinas lack of full domestic resourced. In the first plan, fast growth in heavy industry was achieved and led to the Second Five-Year Plan (1958-62). During this time, the Great Leap Forward policy was also announced. The Great Leap Forward involved changes in several agricultural factors. People’s communes were formed, while the freedoms of private plots were abolished, dedicated to increasing output through collective cooperation and physical effort. The pace of factory construction was made sure to continue, while introducing a gigantic network of smaller-scale industries and plants to be built and managed locally in auxiliary form (Xiaofan). This communal system left Chinese peasants in an unprepared state, and a heavy agricultural plunge in output was soon to follow. Also, low quality goods were now being produced at expensive prices. These issues led to the Sino-Soviet split which gave way to the cancellation of Soviet assistance which had been providing China with both blueprints and technicians (Xiaofan). Consequentially, humanitarian and economic disaster was upon the country by the late 1960’s. Zedong self-exiled himself from his place in Chinese politics at this time giving lead to Liu Shaoqi who wanted to completely turn around the policies of the country. Shaoqi emphatically criticized the problems caused by Zedong’s policies saying that the issues were, “30% fault of nature, 70% human error (Pye),” fault of nature meaning plague and agricultural environmental issues. Shaoqi ordered the restoration of private plots and reduction of commune size as well as greater production team independence. The industrial unemployed were transferred to the country side. Industrial investment was also temporarily decreased to free up resources for farm production. The new policy resulted in immediate upgrades in the agricultural situation, and things were remained steady until it 1963, when it would once again become possible to start some resource flow back to the capital goods industry (Minqi). Momentum was building in the industrial and construction sectors, while attempting to learn from the mistakes of the past and not allow such issues to occur again. All of this progress was halted in 1966 during the “Great Proletarian Cultural Revolution.” Initially the revolution was a campaign for Mao Zedong to take the power back from Shaoqi as well as to “eliminate the liberal bourgeoisie” from the Party (Minqi). The revolution had no real economic motivation or rationale. The effect on industrial product was massive with strife and confusion ensuing. Hundreds of millions suddenly stopped working while notable politicians, factory owners, and even teachers fell victim to uprisings. The Cultural Revolution would leave a lasting negative imprint on the economy. Wages had been frozen and bonuses were cancelled throughout industry. When combined with the policies of employing more workers to absorb the blows of unemployment and hiring workers on a more permanent basis, this had eliminated incentives to work hard for the most part. Moreover, technicians and managers were losing their authority and had difficulty playing an effective role in production. While overall output managed to grow, capital-output ratios declined. Per capita output for agricultural was no higher in 1977 than it had been twenty years earlier. From 1979 moving forward, China made major economic reforms. A pragmatic perspective was adopted toward many political and socioeconomic problems which sharply reduced the rule of the long standing ideological perspective the Chinese had in economic policy. Economic productivity, political and social stability, and public/consumer welfare considered intertwined and all vital. Government emphasized the need to raise personal income and consumption and introducing new systems of management to accelerate productivity. In the 1980’s, reforms began in the agricultural, industrial, fiscal, banking, financial, price setting, and labor systems. Authorities began to pick apart collectively farmed land and through the household responsibility system these fields were contracted out to private families to work. Greater agricultural decision making options were dealt to peasants. Agricultural free market selling restrictions were also lifted. In the mid 1980’s the government started to encourage non-agricultural paths like village enterprise development in rural areas as well as self-management for state-owned enterprises aimed towards increasing competition in the marketplace. China began to rely upon foreign financing and imports to a greater degree and thus foreign trade restraints were relaxed and joint ventures were encouraged. Urban economic reform aimed at helping to guide China into the international economy. The progression of the private sector was permitted to compete with state firms in a number of service sectors. Citizens were given state jobs for which they were given specialized training and skills with material incentives for individual efforts. Consumer Ethos was created alongside these incentives to reward hard work and become more productive. During the 1980’s, reforms led to an average annual rate of growth of 10% in both the industrial and agricultural outputs (Pye) .Industry posted major advances in profit especially in areas surrounding Hong Kong and across from Taiwan where foreign investment increased 100%, spurring domestic and export good output. Red tape was minimized to allow more areas to accept foreign investment. This allowed fourteen coastal cities and three costal regions to become “open areas” toward foreign investors. Favored tax treatment and other incentives were creating to motivate foreign companies to enter into the marketplace. During this time, several swings occurred between a concentration on market-oriented reforms and a partial return to centralized planning. The government periodically went back a step or two to re-tighten central controls. China’s economy regained momentum in the early 1990’s. New Chinese leader Deng Xiaoping made new pronouncements toward further economic reform and reinvigoration. He stated that China’s ultimate goal was to create a “socialist market economy” (Xiaofan). By 1993, output and prices were rising and investment outside of that which the state allotted was also accelerating. State enterprises would continue to dominate many aspects of key industry in the new economy. From 1996-1999 China was influenced by the Asian Financial Crisis, but these trends were reversed once it had ended and the economy made gains once again. By 1999, China had become the second largest economy in the world, behind the U.S. Despite impressive economic steps during the previous two decades, China was still forced with the test of reforming the state sector and modernizing the banking system. In September, 1997, the 15th National Communist Party Congress met during which President Jiang Zemin announced plans to merge, close, or sell most of the state owned enterprises in a demand to increase “non-public ownership.” The 9th National People’s Congress moved to endorse these plans in March of 199 and after three years of efforts towards their goal, China claimed that the vast majority SOE’s had become profitable. The economic history of China is a fluctuation based greatly around trials and errors. It is important to note these tribulations to have a concrete overview of how China ended up where they are at today. There are many unique aspects in which the country attempted to grow over the past eight or so decades. Through different shades of government, philosophies of leaders and motivations, China has managed to emerge as a global power. China developed a heavy industry, socialist development strategy around 1949. This strategy came to be known as the “Big Push” strategy. Emphasis was put on accelerated industrialization while consumption took a seat on the back burner (Bozheng). Government overtook the economy in large part and conducted a resource re-direct to the construction of new factories. New industries rose up along with economic growth. Previous inflation was minimized by the end of the decade through tight budget and money supply control. At the outset of the Communist party rule in China, the leaders agreed that it was necessary to take advantage of capitalist perspectives to help the construction of “New China” and merge it into communism (Bozhong). Greater chances took place in the 1950s-60s within China’s economic priorities and policies. Under Mao Zedong, the First Five-Year Plan (1953-57), instituted a policy of continued industrial progress but included a falling out of other economic sectors. The state invested funds directly into the industrial sectors. Agriculture, making up 78.6% of the labor force at the time, was forced to attempt to utilize its own minimal capital resources for the majority of its funding needs (Watkins). Coal, iron and steel, electric power, building materials, engineering, and chemicals are where the priorities were dedicated. Using the Soviet model of industry, China hoped to set up technologically advanced, large capital-intensive plants (Watkins). The Soviets offered technical and financial assistance at this time to help with Chinas lack of full domestic resourced. In the first plan, fast growth in heavy industry was achieved and led to the Second Five-Year Plan (1958-62). During this time, the Great Leap Forward policy was also announced. The Great Leap Forward involved changes in several agricultural factors. People’s communes were formed, while the freedoms of private plots were abolished, dedicated to increasing output through collective cooperation and physical effort. The pace of factory construction was made sure to continue, while introducing a gigantic network of smaller-scale industries and plants to be built and managed locally in auxiliary form (Xiaofan). This communal system left Chinese peasants in an unprepared state, and a heavy agricultural plunge in output was soon to follow. Also, low quality goods were now being produced at expensive prices. These issues led to the Sino-Soviet split which gave way to the cancellation of Soviet assistance which had been providing China with both blueprints and technicians (Xiaofan). Consequentially, humanitarian and economic disaster was upon the country by the late 1960’s. Zedong self-exiled himself from his place in Chinese politics at this time giving lead to Liu Shaoqi who wanted to completely turn around the policies of the country. Shaoqi emphatically criticized the problems caused by Zedong’s policies saying that the issues were, “30% fault of nature, 70% human error (Pye),” fault of nature meaning plague and agricultural environmental issues. Shaoqi ordered the restoration of private plots and reduction of commune size as well as greater production team independence. The industrial unemployed were transferred to the countryside. Industrial investment was also temporarily decreased to free up resources for farm production. The new policy resulted in immediate upgrades in the agricultural situation, and things were remained steady until it 1963, when it would once again become possible to start some resource flow back to the capital goods industry (Minqi). Momentum was building in the industrial and construction sectors, while attempting to learn from the mistakes of the past and not allow such issues to occur again. All of this progress was halted in 1966 during the “Great Proletarian Cultural Revolution.” Initially the revolution was a campaign for Mao Zedong to take the power back from Shaoqi as well as to “eliminate the liberal bourgeoisie” from the Party (Minqi). The revolution had no real economic motivation or rationale. The effect on industrial product was massive with strife and confusion ensuing. Hundreds of millions suddenly stopped working while notable politicians, factory owners, and even teachers fell victim to uprisings. The Cultural Revolution would leave a lasting negative imprint on the economy. Wages had been frozen and bonuses were cancelled throughout industry. When combined with the policies of employing more workers to absorb the blows of unemployment and hiring workers on a more permanent basis, this had eliminated incentives to work hard for the most part. Moreover, technicians and managers were losing their authority and had difficulty playing an effective role in production. While overall output managed to grow, capital-output ratios declined. Per capita output for agricultural was no higher in 1977 than it had been twenty years earlier. From 1979 moving forward, China made major economic reforms. A pragmatic perspective was adopted toward many political and socioeconomic problems which sharply reduced the rule of the long standing ideological perspective the Chinese had in economic policy. Economic productivity, political and social stability, and public/consumer welfare considered intertwined and all vital. Government emphasized the need to raise personal income and consumption and introducing new systems of management to accelerate productivity. In the 1980’s, reforms began in the agricultural, industrial, fiscal, banking, financial, price setting, and labor systems. Authorities began to pick apart collectively farmed land and through the household responsibility system these fields were contracted out to private families to work. Greater agricultural decision making options were dealt to peasants. Agricultural free market selling restrictions were also lifted. In the mid 1980’s the government started to encourage non-agricultural paths like village enterprise development in rural areas as well as self-management for state-owned enterprises aimed towards increasing competition in the marketplace. China began to rely upon foreign financing and imports to a greater degree and thus foreign trade restraints were relaxed and joint ventures were encouraged. Urban economic reform aimed at helping to guide China into the international economy. The progression of the private sector was permitted to compete with state firms in a number of service sectors. Citizens were given state jobs for which they were given specialized training and skills with material incentives for individual efforts. Consumer Ethos was created alongside these incentives to reward hard work and become more productive. During the 1980’s, reforms led to an average annual rate of growth of 10% in both the industrial and agricultural outputs (Pye) .Industry posted major advances in profit especially in areas surrounding Hong Kong and across from Taiwan where foreign investment increased 100%, spurring domestic and export good output. Red tape was minimized to allow more areas to accept foreign investment. This allowed fourteen coastal cities and three costal regions to become “open areas” toward foreign investors. Favored tax treatment and other incentives were creating to motivate foreign companies to enter into the marketplace. During this time, several swings occurred between a concentration on market-oriented reforms and a partial return to centralized planning. The government periodically went back a step or two to re-tighten central controls. China’s economy regained momentum in the early 1990’s. New Chinese leader Deng Xiaoping made new pronouncements toward further economic reform and reinvigoration. He stated that China’s ultimate goal was to create a “socialist market economy” (Xiaofan). By 1993, output and prices were rising and investment outside of that which the state allotted was also accelerating. State enterprises would continue to dominate many aspects of key industry in the new economy. From 1996-1999 China was influenced by the Asian Financial Crisis, but these trends were reversed once it had ended and the economy made gains once again. By 1999, China had become the second largest economy in the world, behind the U.S. As history shows, Chinas transition from a central economy to a market economy has been very successful compared to the economies in Eastern and Central Europe. For the most part China avoided recession, unemployment and high inflation when many other transitioning countries could not. Their successes can be attributed to the gradual economic reforms and the Chinese population’s almost instant acceptance and adoption of the changes. This section will focus on China’s fixed exchange rate policy, foreign exchange reserves, urbanization and enhanced labor productivity. A large part of China’s growth can be pinpointed to their massive amount of exports. When dealing with trade surplus a focus on exchange rates is important. The debate on whether to use fixed or flexible exchange rates is a long-standing topic in the international economic sector. Countries must decide which rout to take and, in turn, their selection will influence everything from their trade balances to monetary policies (Berger). This selection is not a permanent one because each country must let their policies grow and change just as the country is growing and changing. Because of China’s positive trade surplus, the single and managed floating exchange rate of 1994 allowed for the yuan to appreciate against the dollar because natural market forces were able to grab hold. With an appreciation in value, importers were not able to buy as much merchandise from China at that current rate. China was forced to lower their prices and deal with less of a trade surplus resulting in a loss. The government knew that the yuan would only continue to appreciate to the dollar unless the exchange rate was fixed. From 2005 on, the rate has been based on the supply and demand of currencies, including but not limited to, the US dollar, the euro, the yen and the South Korean won (Yan). Even though the yuan is no longer fixed on the dollar, China has been able to keep appreciation to a minimum. One of the ways China is able to keep the yuan from appreciating is by buying foreign-denominated securities, such as US treasury securities, and paying for them with the yuan. Simple supply and demand would make the yuan depreciate in value. For example, if there are fewer US dollars in circulation but more yuans, the dollars would be worth more and the yuans will be worth less. In the end the devalued currency means the cost of exports will be relatively lower and therefore more attractive to foreign buyers. The reserve is also used to serve as collateral for the Chinese financial system to prevent currency crisis like the 1997-1998 Asian financial crisis mentioned previously (Lardy). {draw:frame} Although there have been important internal factors, much of China’s economic success and growth can largely be attributed to the rest of the world. China is quickly becoming an economic powerhouse supported by their increasing amount of exports and inbound foreign direct investment. This ever growing country is able to produce at low cost and provide its products at a much more attractive price to its consumers than its competing countries. Over the past decade, exports from China to the United States have been on a rapid incline. In 1999 the United States imported $81.8 billion worth of products and only exported $13.1 billion. Nine years later in 2008 the United States imported $337.8 billion and exported $71.5 billion. Over the course of these years China had increased its exports by $256 billion (US-China 2008). Much of everyday American life depends on abundant and inexpensive goods from China. Products on the market would be much more expensive but possibly of consistent higher quality. Without debate, the average American’s Christmas would be much different without the mass importing of Chinese goods. {draw:frame} When comparing China to the rest of the world, the statistical percentage of imports-exports nearly stays the same. In 1999 exports were $194.9 billion and $1,428.5 billion in 2008. That accounts for more than a 700% increase over the nine yearspan (US-China 2008). This is an incredible feat for any country to achieve. However, this extraordinary growth is not confined to these ten years; their growth dates back to 1978. In 1997 an IMF research team was curious how China could have such a large steady increase in growth. “Chinese workers, a sharp, sustained increase in productivity (that is, increased worker efficiency) wasthe driving force behind the economic boom. During 1979-94 productivity gains accounted for more than 42 percent of China's growth and by the early 1990s had overtaken capital as the most significant source of that growth (Hu 1997).” {draw:frame} China is one of the most attractive targets to outside countries for investing. The developing country receives more foreign capital from foreign direct investment than other nation (A Wary 2009). Despite large amounts of criticism upon the quality of its government in the foreign media, especially from the alleged 200,000 lost jobs in the United States, many continue their interest in China (Scott 2007). However, this is a very curious case as foreign direct investment involves irreversible fixed investment which is quite sensitive to investors’ perceptions of public policies and property rights (Fan 2009). The figure below illustrates those that see a rapid increase in GDP generally begin with an extremely low starting point. “Before 1993, China’s FDI falls short of the global average, regardless of whether it is expressed per capita or as a fraction of GDP. But after a series of reforms begun in 1993, China’s FDI inflow surges. From 1990 through 2003, FDI inflow averaged 4.3% of GDP—double the world average of 2.1%. But, FDI inflow per capita remains low. Even the highest level it achieves in the data below, about US$ 40 _per _capita, is only about one-fifth of the world average. The world mean is heavily skewed by very high-income countries, such as Canada, the United Kingdom and the United States. Only when judged against other countries with comparably low starting points does China’s FDI inflow seem impressive. For example, for the period 1993 and beyond, China exceeds by almost 50% the average FDI per capita of the countries with comparable GDPs _per _capita (Fan 2009).” This is a very interesting but seemingly obvious concept. In 1990, there was nearly no interest in China nor foreign direct investment and years later it shot up nearly 40%. However, China’s recent emergence has been one of the most important new developments affecting the world’s economy. In recent years China has contributed more than a quarter of the growth of gross domestic product. In addition, China is the sixth largest trader supplying more than six percent of global exports (Eichengreen 2006). {draw:frame} The recent financial crisis has had a huge impact on trade with China as well. Many, including some of the upper-middle class are looking for less expensive products and shopping at stores such as Wal-Mart or Target. However the downturn has a negative effect on China’s economy as well. “Between January and November 2008, China sold abroad $8.04 billion worth of toys, up 2.5 percent on the same period of 2007. The growth rate was 17.8 percentage points below the year-earlier level. In November alone, the toy exports were valued at $700 million, down 8.6 percent (Xinhua 2009).” The current economic condition is not permanent nor is it economically threatening to the flourishing country; however China is seeing the need to take a ‘leap of faith’ within its ventures to see long termsuccess. Years ago China began attracting many companies by its low labor cost, but problems became apparent when they found corporate failure was from the cause of poor leadership. Recently these problems have been fixed and global interest is once again on the rapid rise. In 2005 Wal-Mart purchased more than $18 billion worth of goods from China (Didier 2005). Over the course of many years, China has become a dominant work-horseand global superpower. Through economic and labor reforms, China was able to create a less hostile environment among their workforce. Productivity is the key to success. Chinese businesses do not only benefit from high productivity but also lower labor costs than countries such as the United States or the United Kingdom. China will be playing a large role in the world economy for years to come. If China is able to continue increasing labor relations and improve workplace environments, their employees’ loyalty will remain. Zach Stanley Bibliography Pye, Lucian W. “China's Rise in Asia: Promises and Perils/China Rising: Power and Motivation in Chinese Foreign Polic y.” Foreign Affairs, Mar/Apr2006, Vol. 85 Issue 2, p203-204, 2p. Li, Xiaofan. Li, Xiaofan. “ENVIRONMENTAL CONCERNS IN CHINA: PROBLEMS, POLICIES, AND GLOBAL IMPLICATIONS. ” International Social Science Review, 2006, Vol. 81 Issue 1/2, p43-57, 15p. Watkins, Thayer. "Economic History and the Economy of China." San Jose State University Department of Economics. San Jose State University, n.d. Web. 7 Dec. 2009. http://www.sjsu.edu/faculty/watkins/china.htm. Ryan Gandell Bibliography Lardy, Nicholas R. "EXCHANGE RATE AND MONETARY POLICY IN CHINA." CATO Journal 25.1 (2005): 41-47. Academic Search Premier. EBSCO. Web. 2 Dec. 2009. Ren, Yuan "Migration, Changes of City-Region Structure and Implications for Planning Practices and Regional Development Policies in the Yangtze River Delta Area in China." International Planning Studies 13.4 (2008): 415-429. Academic Search Premier. EBSCO. Web. 2 Dec. 2009. Yan, Dai. "Composition of Currency Basket Revealed ." China Daily. N.p., 11 Aug. 2005. Web. 2 Dec. 2009. Yi, Gang "RENMINBI EXCHANGE RATES AND RELEVANT INSTITUTIONAL FACTORS." CATO Journal 28.2 (2008): 187-196. Academic Search Premier. EBSCO. Web. 2 Dec. 2009. Jeff Fairbrother Bibliography “A Wary Respect,” The Economist, Oct. 2009, Vol. 392, Issue 8654, p3-4. Eichengreen, Barry. “Is China's FDI coming at the expense of other countries'” Journal of the Japanese and International Economies, June 2007, Vol. 21, Issue 2, p153-172. Fan, Joseph P.H., Randall Morck, Lixin Colin Xu, Bernard Yeung, “Institutions and Foreign Direct Investment: China versus the Rest of the World,” World Development, April 2009, Vol. 37, Issue 4, p852-865. Hu, Zuliu, MohsinS. Khan, “Why Is China Growing So Fast'” Economic Issues, April 2007, Vol. 8, Issue 1, p1-10. Scott, Robert E. “The Wal-Mart effect: Its Chinese imports have displaced nearly 200,000 U.S. jobs” EconomicPolicy Institute. June 2007, Issue 235. http://www.epi.org/publications/entry/ib235/. Xinhua, “Growth of China's toy exports hit by financial crisis” China Daily. Jan. 2009. http://www.chinadaily.com.cn/bizchina/2009-01/17/content_7406488.htm.