Overview of China’s Economy

China is identified to have a remarkable period of significant growth shifting from a centrally organised to a market based financial system. In recent times China is considered as an appointment income country comprising multifaceted developmental needs whereby bank or other financial organisations continue to serve a major developmental role. Reports by Allen and Gu (2015) have revealed China’s rapid economic growth in 7 years with its Gross Domestic Product GDP to have risen by around 7% in 2017. Furthermore, it is recorded to be the first time since 2010 that the pace of China’s economic growth raised rather than facing reductions (Allen & Qian, 2014). As a result China’s financial system is recognised to be the second largest in the world. According to Allen and Gu (2015) the growth of China’s GDP has brought the country’s economy to around two-third of the dimension of the United States economy last year along with the current rate which has the propensity to overtake it within the next decade. The purpose of the following report is to provide an inclusive assessment of China’s potential and opportunity for Foreign Direct Investment (FDI).

Overview of China’s Economy 

With a population of around 1.5 billion, China is identified as the second largest financial system and thus is increasingly playing a decisive role in development as well as in the global economy (Allen & Qian, 2014). This has led China to be the largest single contributor to world economy growth since the international financial crisis occurred in 2008. In the view of Wang et al. (2018), China’s current poverty standard reveals a populace of over 55 billion financially marginalised section in the rural areas in 2015. However rapid economic ascendance has created certain challenges which include high level of inequality along with rapid urbanization with criticality related to environmental sustainability as well as external financial imbalances. Furthermore according to Brunnermeier, Sockin and Xiong (2017), the country has been encountering certain demographic demands concerning an ageing population along with the internal migration of labour. These factors result to an increase in the need of important policy adjustments for a sustainable growth of China’s economy.

China Financial Overview

Source: (Allen & Qian, 2014)

Chen and Zha (2018) have further revealed that China’s 13th five year plan from 2016 to 2020 forcefully seeks these areas of challenges. Furthermore it accentuate the growth of services and measures in order to attain environmental as well as social imbalances and establishing targets in order to successfully reduce population level and further to raise the efficiency level of energy and other forms of resources and to expand the social protection (den Elzen et al., 2016). Thus the annual growth target in the 13thfive year plan is around 7% further signifying the rebalancing of the financial system along with a significant focus on the quality of growth, while still preserving the objective of attaining a moderately prosperous society by the next 2 years (Allen & Qian, 2014).

China’s 13th Five Year Plan from 2016 To 2020

China’s 13th Five Year Plan from 2016 To 2020

Source: (Brødsgaard, 2016)

It has been noted by several reports that China is an economic and political influence and over the years it has employed a number of initiatives of change and created spectacular development in various fields. Thus in terms of nominal GDP China attains a second largest economic position in the world. The purpose of this article is to evaluate some of China’s political economic social technological environment as well as legal factors which have been benefited as well as impacting the country.

• Political- China is identified as a permanent member of the security council of the United Nations and thus developed as the fourth largest nation in the world by land area. However Long, Yang and Zhang (2015) has stated that with a consistent political setting, cost effective labour along with enhanced infrastructure China attains the position as a vital destination for FDI (Foreign Direct Investment). Such a position has led the country to achieve a significant record of US$ 139 billion of FDI in 2016 resulting to become the third largest FDI destination in the world (Wang et al., 2018).
• Economic factors- Chen and Zha (2018) have indicated substantial number of reforms initiated in the late 1970’s which facilitated China to attain rapid economic expansion. Furthermore, several global organizations prefer to manufacture their products in China because of its availability of cheap labour. Though, economical labour is recognized as a vital source of competitive advantage for the country, Brunnermeier, Sockin and Xiong (2017) have argued that the rapid economic development has led to a rapid increase in wages in China. Chen and Zha (2018) have revealed China’s standard wage level tripled between 2005 and 2016 and currently is recorded to be higher in comparison to Mexico, Argentina, and Brazil. The average corporate income tax rate is estimated to be around 25%, though the Chinese government has lessened the rate to around 17% for competent businesses which execute its operations in sectors aided by government (Brødsgaard, 2016).
• Social factors- Long, Yang and Zhang (2015) have mentioned that China has been proficiently aiming to eradicate complete poverty or other forms of economic deprivations by 2020. However, there can be identified certain social challenges which the country has been encountering currently related to rise in ageing population. Thus, studies of Brødsgaard (2016) have suggested China to raise their percentage of birth rate and most importantly invite greater number of foreign workers and improve overseas business relations.
• Technological Factors-Wan, Williamson and Yin (2015) have revealed that China, to establish a vision of being global leader in the domain of science and technology aiming to upgrade its mass entrepreneurship and innovation programme to amplify employment level and further promote technological innovation and further motivate industrial expansion. According to Anderson and Sutherland (2015), government of China since 2015 has initiated a range of incentives to raise the mass entrepreneurship and innovation programme to an increased level along with a wider area of opportunity.  
• Environmental Factors-Cai et al. (2016) have stated that high rate of industrial waste; climate change along with biodiversity loss due to the country’s rapid economic growth has affected its natural environment. Meanwhile, Long, Yang and Zhang (2015) have highlighted certain initiatives which Chinese government has introduced to engage public in environmental protection programmes.
• Legal Factors- Chen and Zha (2018) have identified several laws to regulate employment practice and international business in China related to labour remuneration and benefits, employment disputes along with other issues which are efficiently regulated by the PRC Labour Law 1995, PRC Labour Contract Law 2007 along with other governmental regulations.

China’s Mass Entrepreneurship And Innovation Programme

Source: (Gosens et al., 2018)

Shu, He and Cheng (2015) have noted that the incomprehensible trade trend by predictable trade theory with the increasingly immediate need for government intervention that requires an advanced theory of international trade. Fratzscher and Mehl (2014) have speculated that the strategic trade policy based on the framework of monopolistic competition tends to attract global interdependency of governmental policy as a vital variable into the framework of strategic trade policy. Shu, He and Cheng (2015) at this stage have noted that the external environment for China’s export has undergone significant changes whereby the buyer fundamentally attains greater degree of market power.  Furthermore, Cheung and Rime (2014) have evaluated the influence of strategic trade policy present in the automobile sector of China and revealed that the optimal tariff has the tendency to raise the national welfare in comparison to a zero tariff. McKinnon and Schnabl (2014) further posited that although the non-tariff limitation could decline gradually, the import quota along with import channel management would have safety effect on the automobile sector. In addition to this, Gosens et al. (2018) have asserted that a R&D subsidy would be superior to an export subsidy in the automobile sector; however the financial support received from government has been estimated to be lower in comparison to the optimal subsidy. Furthermore, the moderate intervention of the government in trade can be viewed in varied sectors of China and thus will successfully enhance the level of national welfare. Fratzscher and Mehl, (2014) have noted that while the calibration method has been widely approved in assessing the impact of strategic trade policy in China, it does not necessarily signify real world implications in market. Reports of Wang et al. (2018) have revealed that China has raised its R&D investment significantly and developed as the second-highest R&D investment country in the world. In 2017, the rate of electronic information products exportation has augmented by 32% further estimating for 45% of the foreign trade along with the level of contribution of R&D to the export growth which was estimated to be 38% (Brødsgaard, 2016).

Comprehensive research of Gosens et al. (2018) has indicated that since development, China financial system along with foreign trade has attained substantial trade surplus along with foreign exchange reserves. The constant appreciation of the RMB (Renminbi) has created a significant impact on China’s economy. Nevertheless the currency approval has served contributory role for the import and an adverse impact on exportation, yet the RMB appreciation (Yuan currency exchange) on China’s financial system has been considered to be advantageous for its overseas trade market (Wan, Williamson & Yin, 2015). Shu, He and Cheng (2015) have revealed that with the inclined shift of sectors in order to promote developments in China, certain adjustments of industrial structure along with the up gradation of its products are created. However the appreciation of the RMB tend to stimulate technological advancement and further augment the added value of products export enterprises instead of encouraging low prices to attain the market (McKinnon & Schnabl, 2014). It has been noted that the appreciation of the RMB has destabilized the price advantage of domestic products in the large-scale market to productively improve the product in the international market share in which the domestic manufacturers must change the developmental method of trade and depend on selling cost effective transfer to superior quality, advanced technology in order to sustain China’s significant shift from trading influence to trade power (Fratzscher & Mehl, 2014). However, on the other hand McKinnon and Schnabl (2014) are of the opinion that the approval of the RMB to raise China’s exportation commodity prices in foreign currencies critically destabilize China’s export price competition benefits also creates challenges for the nation to develop a successful overseas trade alliance. Furthermore, appreciation of the RMB results to the increase of China’s export product price resulting product backlog along with the decrease in new overseas investment Cheung & Rime, 2014). In addition to this, Shu, He and Cheng  (2015) have speculated that the approval of the RMB will not only increase threats of the outbreak of economic crisis in China but will further drive the country to face profit decline and pose adverse impact on the global export markets competitive ability.

Pestle Analysis

RMB Appreciation on China’s Financial System

Source: (Gosens et al., 2018)

Conclusion

On a concluding note, China should take into consideration the significance of regional trade agreements (RTA) that is an advanced and hidden form of strategic trade policy and further implement this crucial policy in the process of import and export trade. However if China intends to use the strategic policy, the method choice of the strategic trade policy along with the impact of strategy trade policy would further show their reliance on the ‘spillover’ impact as well as the on inclusion of worldwide R&D. Additionally as an emerging international market, China has a time-consuming method to institute a well-organised market system by connecting several industrial policies such as the strategic trade policy which would be decisive for the Chinese government. As RTA recently emerged as a chief strategic trade policy instrument, China must efficiently consider the importance of Regional Trade Agreements regarding who is taking strategic trade policy as it may be liable to generate the chain outcome. In addition to this, as several trade associates have been efficiently fixed in a range of regional trade agreements the country must emphasize on importance of strategic trade policy through a unilateral approach.

References

Allen, F., & Gu, X. (2015). China’s financial system: growth and risk. Foundations and Trends® in Finance, 9(3–4), 197-319.

Allen, F., & Qian, J. (2014). China’s financial system and the law. Cornell Int’l LJ, 47, 499.

Anderson, J., & Sutherland, D. (2015). Developed economy investment promotion agencies and emerging market foreign direct investment: The case of Chinese FDI in Canada. Journal of world business, 50(4), 815-825.

Brødsgaard, K. E. (2016). China’s 13th Five-Year Plan: A Draft Proposal. The Copenhagen Journal of Asian Studies, 33(2), 97-105.

Brunnermeier, M. K., Sockin, M., & Xiong, W. (2017). China’s gradualistic economic approach and financial markets. American Economic Review, 107(5), 608-13.

Cai, X., Lu, Y., Wu, M., & Yu, L. (2016). Does environmental regulation drive away inbound foreign direct investment? Evidence from a quasi-natural experiment in China. Journal of Development Economics, 123, 73-85.

Chen, K., & Zha, T. (2018). Macroeconomic Effects of China’s Financial Policies (No. w25222). National Bureau of Economic Research.

Cheung, Y. W., & Rime, D. (2014). The offshore renminbi exchange rate: Microstructure and links to the onshore market. Journal of International Money and Finance, 49, 170-189.

den Elzen, M., Fekete, H., Höhne, N., Admiraal, A., Forsell, N., Hof, A. F., … & van Soest, H. (2016). Greenhouse gas emissions from current and enhanced policies of China until 2030: can emissions peak before 2030?. Energy Policy, 89, 224-236.

Fratzscher, M., & Mehl, A. (2014). China’s dominance hypothesis and the emergence of a tri?polar global currency system. The Economic Journal, 124(581), 1343-1370.

Gosens, J., Hellsmark, H., Kåberger, T., Liu, L., Sandén, B. A., Wang, S., & Zhao, L. (2018). The limits of academic entrepreneurship: conflicting expectations about commercialization and innovation in China’s nascent sector for advanced bio-energy technologies. Energy Research & Social Science, 37, 1-11.

Long, C., Yang, J., & Zhang, J. (2015). Institutional impact of foreign direct investment in China. World Development, 66, 31-48.

McKinnon, R., & Schnabl, G. (2014). China’s exchange rate and financial repression: The conflicted emergence of the RMB as an international currency. China & World Economy, 22(3), 1-35.

Shu, C., He, D., & Cheng, X. (2015). One currency, two markets: the renminbi’s growing influence in Asia-Pacific. China Economic Review, 33, 163-178.

Wan, F., Williamson, P. J., & Yin, E. (2015). Antecedents and implications of disruptive innovation: Evidence from China. Technovation, 39, 94-104.

Wang, G. J., Jiang, Z. Q., Lin, M., Xie, C., & Stanley, H. E. (2018). Interconnectedness and systemic risk of China’s financial institutions. Emerging Markets Review, 35, 1-18.