How The Inflow And Outflow Of FDI In China Changed Their Economy - Global Economy - Essay

2150 words - 9 pages

As one of the great world leaders economically, China has proven itself to be not only a very diverse country, but also that it is well adapted to the changes seen in the 21st century. With a population of over 1.36 billion people and a population density of 141 people per sq. km (China, 2012), China must continue to expand upon the economic and political developments that have been a contributor to their wealth and success as a country. However, with an aging population and median age of 36.3 years’ old that’s still rising (China, 2012), the political decision to remove the one child policy allows China to increase its percentage of the younger generation. As an aging population, if left to increase, would effect China’s growth economically as they would find themselves running out of young innovative educated people who are a contributing factor to any country wanting to grow. A growth that could hinder China’s aim to increase the percentage of population who through globalisation now live in urban areas, as the current percentage of China’s population who still live in rural areas is 46.8% (China, 2012).
1949 proved to be a very important year in China’s political history, as the civil war broke out the emergence of the Peoples Republic of China was introduced. China was now politically stable and was no longer under the ruling of the military and free from the Soviet Union alliance. Though China, through Mao’s ruling has gained a Marxist ideology, according to Joseph (2014: 151-156) Marxists view the world through socioeconomic classes and that Mao Zedong believed that Marxism was the ‘true meaning’ of ‘practical ideology’. Nonetheless, China today still carries this ideology even after the Mao era ended, using the ideology to revolutionise the way that China thinks about the proletarian population in the rural areas.
Though following the ideology and being politically stable allowed China to move its focus to trading internationally and rebuilding their poor economy, the only way to successfully do this would be to open up China to world trade. A move that was finally successful as ‘1978 marked a watershed in Chinese economic policy.’ (Breslin, 2013:84) Chinese leaders had made the decision in 1984, to open up fourteen selected provinces along the coast and begin international trade, mainly with the United States who at the time were one of the front leaders among the trading countries. However, Breslin (2013) noted that it was in fact 1992 that China truly became a contender for the leading trading power, with 1993 being the year that China had been able to negotiate deals with the USA to become one of the major inflows of FDI to China.
Nevertheless, China’s recent economic growth in the 21st has been due to changes and alliances made not only with new international connections but also majorly from joining the World Trade Organisation (WTO). Becoming a member in 2001 (China - member information, 2001) meant that China now had the ability to make agreements with other WTO members easily, increasing their imports further with 60% of them being tariff free (Breslin, 2013). However, this did come alongside a change in the policy and tariffs that China had set up, as in order to become a member, China had to make sure that they complied with the WTO rules. Which at the time was a major strategic choice for China to make, though it meant that they had to reconsider and reduce over 7000 tariffs to alien with the WTO regulations, meaning that China could not charge as much as what its competitors margins were allowing them to charge (All change, 2011).
As defined by Hill et al., (2013) economic growth is measured by the growth of the countries gross national development, and the rate of growth of gross domestic product. With GDP being the value of all output from the country, and growth being measured by the percentage change in output. Chinas GNI growth per capita in 2010 was only $4,270 (Hill et al., 2013) though this may seem low for such an economically advanced country, GNI doesn’t take the cost of living into consideration and therefore the figures for GNI may portray as being weak. Though in China’s case, as they are such a large country with a vast percentage of a rural population the GNI figures are also decreased by this factor as the rural areas wouldn’t add much GNI value to China’s overall growth. However, in 2014, China’s GDP saw an increase of $869.5 billion standing at a total of $10360.1 at the end of the 2014 financial year (China | economic indicators, 2009). This growth is due to China’s company’s ability to reduce its labor costs from its large population, therefore their cost of production is decreased, allowing for a greater profit margin to be made on exports. Subsequently, China’s growth has also been down to technological developments within the 21st century, where the younger educated population are making technological advances within the machinery product sector. Therefore, Chinas total exporting value of machines in 2013 was $1.07 trillion (Photo et al., 2013), with their top exporting destinations being the USA, Hong Kong, Japan and Germany.
In addition, SOE’s post reform have also contributed to economic growth, as SOE’s were heavily controlled by the Chinese government with ‘nearly three-quarters of China’s industrial production was produced by SOE’s’ (Alon and McIntyre, 2007) it restricted them in many ways, allowing private sector competitors to make advances that they couldn’t. As Huang (2003:108) stated SOE’s are ‘asset-rich but inefficient’, this quote supports the idea that SOE’s pre reform were unproductive and could be one of the contributing factors to China not advancing economically when all the other large countries were. Nevertheless, post reform many SOE’s have been shut down as they were becoming weak runners in the competitive market, allowing Chinese entrepreneurs to start up in the private sector. With less involvement from the government, the private companies have been able to aggressively compete with other international firms, bringing greater economic growth to the country.
As defined by Hill et al. (2013:6), globalization is the ‘trend away from distinct national economic units and towards one huge global market’. Whereas it could be argued that globalization is the shift to a more interlinked global economy, where free trade allows the global economy to expand but at the same time allows countries to use each others strengths and weaknesses in order to expand their own personal economies.
Globalization is apparent in China as they have been successful in making economic and political advances over the years, but also by opening up the state to free trade. However, though globalization is perceived as beneficial to countries, in the case of China, Zheng (2003) argues that the formation of globalization in China may have advanced them economically, but as a result has weakened the people’s opinion of the states authority. It could be argued that this is because China used to be such a strict military ruled country, yet now it has relaxed some of the traditions and moving forward to improving not only peoples living standards but also moving towards improving the state as a whole.
In spite of this, as mentioned previously, China’s main driver of economic growth of exporting is also the key driver behind China’s globalization over the past 10 years. As one of the main exporting countries in the world with a total exporting value in 2013 being $2.25 trillion US dollars (Photo et al., 2013) China’s efficiency to produce goods is crucial if its depending exporting states are to survive economically. As, if China fails to produce the requested products then, for example, the US may struggle to keep those markets afloat whilst they source the goods elsewhere or wait for them. This might not be a significant problem for the US, however smaller economies could struggle dramatically if China were to decline globally.
Fortunately for China, they have benefited from Greenfield investment from through outside investors purchasing land and then building upon it, transforming the land into new manufacturing facilities. One successful example of this is in the province of Guangdong, where greenfield investment has meant they now have the highest GDP growth rate in the whole of China, which has grown by 15.2% from 1980-2012 (Di Tommaso et al., 2013). Furthermore, the western countries also took an interest into the cheap labor that China was offering, this allowed China to export more and the attractive low costs were favorable to expanding businesses. Though China may not be able to rely on this investment alone for much longer, as other developing countries such as India are moving into the production market with mass cheap labor costs. Cheaper than China are willing to drop to, as over the years’ globalization has provided the Chinese people with higher living standards and therefore they are no longer willing to work in sweat shops for little money.
Foreign direct investment, FDI, is the flow of money from one national border to another, through either investment in a current company or through greenfield investments that are set up as new businesses in the designated country. The main types of direct investment however, are inward or outward investments, this is defined by either a country receiving an inward investment into their country, or whether they are outward investing and giving another country money.
As mentioned earlier, China has been one of the largest receivers of FDI over the past 30 years, the main investor being the USA. Receiving a total FDI of $119.6 billion in 2014 (KPMG, 2015), with this money China is now moving towards changing its investment focus away from the machinery market and instead invest with in the service industry. As noted in (KPMG, 2015), most western countries are tertiary sector dominant within employment, yet China barely reaches around 40%. With many of their population still working in traditional heavy labor intensive jobs that pay little wages. Therefore, moving the FDI towards the service industry would mean that China could also make greater improvements to living standards of those in rural areas as the tertiary sector investments would create thousands of jobs for the Chinese population.
Though it could be argued, that in the beginning years FDI created a socioeconomic divide between the rural and urban areas, due to the FDI mainly being invested along the coastal areas of China where it was easy to export products, at the time of investment it greatly improved peoples lives in those provinces, however as those areas were able to grow and become wealthy it left behind the poor rural areas that still suffer today. Though in recent years China has set its focus on not only changing the way they invest but also where, focussing on Central China, in order to build up these areas as much as the costal provinces have been able to.
To conclude, this essay has enlightened China’s ever growing economy through struggling as a developing nation to becoming one of the world leaders economically. Although they are far from being a well rounded country that is self sufficient, China is clearly striving to improve themselves as a country further by investing through outward FDI across Asia and Europe, in order to branch out and increase the strength of their globalisation and power. Though if China are to truly succeed as a powerful country, they must look forward politically and change their strict Marxist views and become more democratic. A bold move which could work in China’s favour increasing other countries willingness to trade with them as they would be seen as taking care of their people and outside businesses may even be willing to carry on producing their goods in China for a higher cost, reducing the risk of India taking over through cheap sweat shops.
All change (2011). The Economist. [Online] [Accessed on 7th January 2016]
Alon, I. and McIntyre, J. R. (eds) (2007) Globalization of Chinese enterprises. Basingstoke: Palgrave Macmillan.
Breslin, S. (2013) China and the global political economy. Basingstoke: Palgrave Macmillan.
China (2012). [Online] [Accessed on 5th January 2016]
China | economic indicators (2009). [Online] [Accessed on 15th December 2015]
China - member information (2001). [Online] [Accessed on 7th January 2016]
Di Tommaso, M. R., Rubini, L. and Barbieri, E. (2013) Southern china: Industry, development and industrial policy. London: Routledge.
Hill, C. W. L., Udayasankar, K. and Wee, C.-H. (2013) Global business today. 8th ed., New York: McGraw Hill Higher Education.
Joseph, W. A. (ed.) (2014) Politics in china: An introduction. 2nd ed., United Kingdom: Oxford University Press.
KPMG (2015) China outlook 2015. [Online] [Accessed on 18th January 2016]
Photo, Behnken, M. and Simoes, A. (2013) China. [Online] [Accessed on 22nd December 2015]
Zheng, Y. (2003) Globalization and state transformation in china (Cambridge Asia-Pacific studies). Cambridge, UK: Cambridge University Press.

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