Development and Potential of China in the Global Market

The Chinese economy has been showing rapid growth in the past decade and there seems to be a potential for strong growth into the foreseeable future.  China has undergone a great transformation from a nation that was one of the world’s greatest opponents of globalization into a committed advocate of globalization. The transformation set in after 1978, when Deng Xiaoping and other leaders began to focus on market-oriented economic development. The Chinese economy is today far more open than Japan and this has been made possible largely due to adoption of the rule of law, of commitment to competition, of widespread use of English, of foreign education, and of many foreign laws and institutions (Overholt, 2006).

With respect to liberalization and globalization, China has effectively become an ally of U.S. and Southeast Asian, supporting freer trade and investment than is acceptable to Japan, India and Brazil. Global marketing is becoming more and more important along the years with the increasing trend in internationalization. In the early 1980s it dismantled collective farming and allowed private enterprise again.

Now it is one of the world’s top exporters and is attracting record amounts of foreign investment. However, China’s transformation is not matched by political change. Having gained admission to the World Trade Organisation, China is benefiting from increased access to foreign markets, but in return it is under an obligation to expose itself to competition from abroad. Relations with trading partners have been strained over China’s huge trade surplus and the piracy of goods (BBC, 2006).

China’s large and rapidly growing market has attracted large volumes of FDI in recent years (US$54 billion in 2004) as transnational corporations have invested heavily in order to benefit from the country’s emerging middle class and its higher purchasing power (GlobalEdge, 2006). However, there are some hurdles to be crossed if China is to develop to its full potential in the global market. According to Zhang Lichuan, a Director with the Statistical Department of General Administration of Customs of China, there are four major obstacles to Chinese foreign trade (People’s Daily Online, 2006):

·  China should deal with pressure from international markets that are gradually becoming saturated.

·  The cost of Chinese exports is increasing, partly because of the higher cost of labor and environmental protection.

·  Increasing international trade protection has caused China to stumble into difficult territory. In fact, China has been involved in the world’s largest number of anti-dumping cases in recent years.

· The trade imbalance between China and other countries is getting worse. As the Renminbi appreciates, Chinese enterprises will face greater exchange risks in import-export trade. Increasing pressures from the appreciating Renminbi will create new requirements and challenges for Chinese enterprises engaged in import-export trade.

Analysis of the country’s global competitiveness:

According to the CIA World Fact Book, China’s economy grew at an average rate of 10% per year during the period 1990-2004, the highest growth rate in the world. China’s gross domestic product (GDP) grew 10.0% in 2003, and even faster, 10.1%, in 2004, and 9.9% in 2005 despite attempts by the government to cool the economy. China’s total trade in 2005 surpassed $1.4 trillion, making China the world’s third-largest trading nation after the U.S. and Germany (CIA Factbook, 2005).

Export-Import figures: China’s merchandise exports totaled $762.3 billion and imports totaled $660.2 billion in 2004. Its global trade surplus surged from $32 billion in 2004 to $102 billion in 2005. China’s primary trading partners include Japan, the EU, the United States, South Korea, Hong Kong, and Taiwan. According to U.S. statistics, China had a trade surplus with the U.S. of $201.6 billion in 2005 (CIA Factbook, 2005).

China and WTO: China has taken important steps to open its foreign trading system and integrate itself into the world trading system. In November 1991, China joined the Asia-Pacific Economic Cooperation (APEC) group, which promotes free trade and cooperation in the economic, trade, investment, and technology spheres. China formally joined the WTO in December 2001. As part of this far-reaching trade liberalization agreement, China agreed to lower tariffs and abolish market impediments (NTE Report, 2005). By 2005, average tariff rates on key U.S. agricultural exports dropped from 31% to 14% and on industrial products from 25% to 9%.

The agreement also opens up new opportunities for U.S. providers of services like banking, insurance, and telecommunications. China has made significant progress implementing its WTO commitments, but serious concerns remain, particularly in the realm of intellectual property rights protection. China is now one of the most important markets for U.S. exports: in 2005, U.S. exports to China totaled $41.8 billion. U.S. agricultural exports have increased dramatically, making China the fourth-largest agricultural export market (after Canada, Japan, and Mexico). Over the same period (2001-1005), U.S. imports from China have risen from $102 billion to $243.5 billion.

Export growth continues to be a major driver of China’s rapid economic growth. To increase exports, China has pursued policies such as fostering the rapid development of foreign-invested factories, which assemble imported components into consumer goods for export, and liberalizing trading rights. In its eleventh Five-Year Program, adopted in 2005, China placed greater emphasis on developing a consumer demand-driven economy to sustain economic growth and address global imbalances. The April 11, 2006 U.S.-China Joint Commission on Commerce and Trade (JCCT) has produced agreements on key U.S. trade concerns ranging from market access to U.S. beef, medical devices, and telecommunications; to the enforcement of intellectual property rights, including, significantly, software (CIA Factbook, 2006).

Foreign Investment: Since the early 1990s, China has allowed foreign investors to manufacture and sell a wide range of goods on the domestic market, and authorized the establishment of wholly foreign-owned enterprises, now the preferred form of FDI. China is now one of the leading recipients of FDI in the world, receiving $60 billion in 2005, for a cumulative total of $623.8 billion. As part of its WTO accession, China has undertaken to eliminate certain trade-related investment measures and to open up specified sectors that had previously been closed to foreign investment. Major remaining barriers to foreign investment include opaque and inconsistently enforced laws and regulations and the lack of a rules-based legal infrastructure. Foreign exchange reserves were $819 billion at the end of 2005, and have now surpassed those of Japan, making China’s foreign exchange reserves the largest in the world (NTE Report, 2005).

Competitive Advantage:

A study by GlobalEdgeTM titled, “Market Potential Indicators for Emerging Markets – 2005”, studies the market potential of 24 countries identified as “Emerging Markets” by The Economist. The Emerging Economies are countries that have very high growth rates which means enormous market potential. They can be distinguished by the recent progress they have made in economic liberalization. These countries are characterized by their increasing need for capital equipment, machinery, power transmission equipment, transportation equipment and high-technology products. An indexing study is made by MSU-CIBER to help the companies compare the Emerging Markets with each other on eight dimensions (Lopez-Claros et al, 2006):

Market Size:  With regard to market size, China stands first with India and Russia in the second and third places respectively.

Market growth rate, China is third after Venezuela and Malaysia.

Market Intensity: China is ranked last among all other emerging economies.

Market consumption capacity: China is 12th

Commercial infrastructure: China is 14th.

Economic freedom: China ranks 24th.

Market receptivity: China is 12th

Country risk: China is 11th

Overall market potential index: China is third after Hong Kong and Singapore.

Asia: Change in percentage of Annual disposable income 1999-2004 (WEF, 2006)

China                                 59.2

Hong Kong, China              3.3

India                                  35.4

Indonesia                           57.1

Japan                                   3.5

Malaysia                            43.6

Philippines                          8.2

Singapore                          37.8

South Korea                      46.8
Taiwan                           15.3

Thailand                         26.8

Vietnam                          36.2

(Source: Euromonitor International from national statistics)

The above table shows that of all competing economies in the global market, China has shown the greatest growth within the period 199-2004.

Since 2001, the World Economic Forum has been using the Growth Competitiveness Index (GCI) developed by Jeffrey Sachs and John McArthur. According to the GCI Index in “The Global Competitiveness Report 2006-2007: Country Highlights”, China’s ranking has fallen from 48 to 54 in the overall competitive ranking Consistent with the cautious macroeconomic management of its authorities and extremely high GDP growth rates, the macro economy pillar of the GCI shows a very high rank, 6th overall in the world.

This reflects China’s low inflation, one of the highest savings rates in the world, and manageable levels of public debt. China’s ranks in the GCI indicators regarding penetration rates for the latest technologies are actually falling behind. Secondary and tertiary school enrollment rates are better than they are in India, but still low by international standards. A number of indicators which capture the sophistication of the business community also show lower ranks in 2006 than last year.

By far the most worrisome development is a marked drop in the quality of the institutional environment, as shown by the sharp drop in ranks from 60 to 80 in 2006 in the institutions pillar of the GCI, with poor results across all 15 indicators, and involving both public and private institutions (Lopez-Claros, 2006).

Conclusion:

China has made a dramatic entry into the top position of the world’s economic stage. China’s robust economic performance can be seen as an inspiration for other developing countries. Within two years after its historic entry into the WTO, China is the world’s fourth largest trading nation after the United States, the European Union and Japan. However, it must be remembered that China is not only a major exporter but also a major importer, and its modernisation programme and export industries have required, and will continue to require, billions of dollars worth of equipment and raw materials.

During the first nine months of 2003, China’s exports rose by 32 percent while its imports surged ahead by 41 percent. China’s performance shows that developing countries can and do benefit from economic openness and integration. The reduction of tariffs has increased competition in the domestic market with the arrival of new suppliers. This has led to lower prices and larger choice for consumers, and has lowered the prices of essential inputs for many industries, thereby enhancing their competitiveness. In the first two decades of reform, the number of absolute poor in China dropped by about 200 million.

Per capita income has grown by sixfold, and farmers and city dwellers are able to live an enhanced lifestyle. However, to realize its goal of doubling its GDP by 2010, China will have to face up to a number of important challenges. As the Chinese economy shifts from being a rural economy to an urban one, the main challenge for the economy will be to create enough jobs in the industrial and services sector to absorb the surplus labor from agriculture, which generates 17 percent of China’s GDP and 50 percent of employment. Next, the benefits of rapid development should be spread out to avoid a widening of income differences between rural and urban areas.

To reach its full potential, growth in the private sector has to be matched by an equal development of a stable market-oriented legal framework. China has managed to handle these profound structural changes while ensuring that it sustains a stable social environment. China needs the opportunity of market access and the legal guarantee of consistent and non-discriminatory trade rules that are offered by the WTO. As a fully fledged member of WTO, China should use its position to realize the objectives set out in the Doha Development Agenda.