6 Financial Markets: encompasses foreign exchange and derivatives markets, and equity and bond market development.
7 Financial Access: evaluates commercial and retail access.
Foreign direct investment (FDI)
Foreign Direct Investment can come in the form of foreign loans, portfolio investment and foreign direct investment. FDI acts as a long-term source of capital and brings advanced technologies and management best practices to an emerging market. Also, employment goes up and trade barriers tend to fall in recipient countries. The overall ranking is studied and the sub-rankings based on the seven pillars above are examined, with areas of strength and areas that need improvement being identified.
Chapter 4: China
Overview
China’s meteoric rise from the end of the 20th century into the 21st century will be recorded as one of the most remarkable transformations in the history of civilisation. During the last few decades China has lifted hundreds of millions of people out of poverty in an incredibly short period of time while becoming the world’s premier manufacturer. The story so far is nothing short of astonishing, but it is not over. China still has a long way to go before it can satisfy the aspirations of its people and bring their standard of living to the level now enjoyed by the developed world.
Quick history
Looking at China a mere 35 years ago, you would have found a very different economic environment to the one we see today. For one thing, you would not have viewed China as a major global, economic and trade power. In fact, things were just the opposite. At the beginning of the 1980s, China was a very poor, stagnant and centrally controlled nation, and essentially isolated from the economy of the rest of the world.
Since that time, when China’s leaders finally opened the country to worldwide trade, instituting a free market system as well, China has risen up the ranks of the world’s fastest-growing economies with an annual GDP averaging nearly 10% through 2012. Today it is the world’s second-largest economy, the largest manufacturer and merchandise exporter, the second-largest merchandise importer, and second-largest destination of foreign direct investment. Many economists today consider China’s rapid rise as one of the great economic success stories of modern history.
What brought China to this economic turning point after thousands of years of despotic imperial rule and insulated policies? Historically, much of the credit goes to Mao Zedong, the leader of the Chinese Communist Party (CCP), who declared the birth of the People’s Republic of China in 1949. After 4000 years of dynasties, emperors and imperial regimes, Zedong made the country a blank slate, heralding the dawning of a new era.
At this time, the Communists had just completed their victory over the Nationalists in the Chinese Civil War. The Japanese, who had occupied China throughout the second world war, fled quickly after the bombing of Hiroshima and Nagasaki. So Zedong and the CCP were left with control of almost the whole country.
Poverty and hyperinflation in the aftermath of decades of war made rebuilding the nation’s infrastructure (and morale) an imperative. Zedong and his CCP proclaimed a goal of “three years of recovery, then ten years of development,” then jumped to action to reform the country’s laws and establish new priorities.
With aid from the Soviet Union, by the late 1950s China had made tremendous economic and political progress toward these goals. This encouraged Zedong to move ahead with what he called “The Great Leap Forward,” an economic and social campaign aimed at increasing the outputs of China’s agriculture and industry. Ironically, however, this programme would undo all of the progress that had been made up to that point. Even so, Zedong’s legacy is as the “father of modern China.”
Zedong’s successor Deng Xiaoping took things farther, instituting ideas and economic reforms that set the stage for a dramatic economic rise. Assuming control of the CCP in 1978, Xiaoping managed to implement a series of reforms that broke with the past, such as competition between farmers and an agricultural pricing structure that better reflected a modern agricultural market system. As a result, over the next seven years, 98% of China’s farms transitioned to the new system, pushing China up the rank of worldwide exporters of grains, cotton, tobacco and soybeans, to name just a few.
Industrialisation proved more challenging to Xiaoping, causing him to opt for a more gradual approach via an “Economic Responsibility System.” This series of test run reforms granted certain enterprises the responsibility of managing profits, expenses and other practices associated with a free market system. Additional reforms gave enterprises and consumers even more financial freedom so that China’s combined totals of imports and exports began to rise from only 7% of its national income in 1978 to nearly 25% in 1990.
By the mid-1990s, after a major reform of China’s banking system, more than half of China’s state-run enterprises had adopted the Economic Responsibility System as the tenets of the new economic structures became gradually accepted nationwide as sound fiscal policy. Working within open domestic and international markets, state-run enterprises now averaged an annual growth rate of 14.6%, while China’s GNP rose from $141 billion in 1978 to $439 billion in 1991. Exports too had risen 700% in the same period. Before long, the economy was growing at a rate of 9.6%.
As economic conditions changed, so did the political perceptions of China’s population. Calls for democratisation soon filled the air, exemplified in particular by a massive gathering of 100,000 demonstrators in Beijing’s Tiananmen Square in 1989. According to NATO, death toll estimates during these days of protest number more than 7000. Despite the bloodshed and widespread dissension, China’s economic growth continued throughout the 1990s, including during the Asian financial crisis of 1998.
The concomitant shutting down of many of China’s state-run enterprises led to a diminishing of the government’s role in the Chinese economy, to be replaced by more and more private industry. This transformation was broadly recognised in 2001 when China became a member of the World Trade Organization, and while many nations floundered during the intense global financial crisis beginning in 2008, China’s growth still averaged a solid 9% each year.
Current situation
After successfully navigating the 2008 recession with a massive stimulus, China seems now to be approaching income levels ($10,000 to $15,000) associated with the middle income trap. The gains that come from a rapid shift from an agrarian economy to an industrial one are fast disappearing. China is also at a point where the services sector might overtake the manufacturing sector as a percentage of GDP. This signals a shift from an export-driven economy to a consumption-driven economy.
While doomsday preachers have time and again predicted a Chinese collapse, what appears be happening is a gradual managed slowdown where China will settle into a new normal growth rate of 6% by around 2020.
In spite of all the positives, China does face many challenges. The need for business practices that will create a sustainable natural resource base, low domestic demand, a rapidly increasing migrant labour force, and corruption/crime are major headwinds to the nation’s continued growth.
Basic data
The table below provides basic statistical data on the position of China today. For full data tables and more detailed information refer to the World Factbook (www.cia.gov/library/publications/the-world-factbook).
Growth factors
Economic
Fuelled by massive investments and centralised economic policy,