China White Paper

Jose Roberto Quiroz Mata

34384159
 As globalization increases competition between countries for control and share of the

international market, China’s has maintained top performance. The countries journey for

exponential growth and economic strength within the last few decades started back in 1978

when significant reforms including the gradual liberalization of the market were initiated. This

growth has been attributed to 55.71%, 12.65%, and 9.67% increase in physical capital, surplus

potential, and labor respectively. These reforms resulted in China's ranking as the second

largest economy after the U.S., when it grew its GDP to $10.4 trillion in 2014 (Lau, 2015). Since

then, however, the country has shown a slight decline in this economic growth rate.

One of China’s economic sources of strength is privatization. By 2011, the deliberate

effort of the government to reduce the entry barriers and encourage private investors to enter

into business, resulted in new private businesses generating more than 195 million jobs (Song,

Garnaut, Fang & Johnston, 2017), all from this attractive environment that reduced

unemployment and encouraged additional investment.

Although China has promoted these private enterprises in the last few decades, the

state has retained control over economic activities and major corporations. It has been

reported that 12 of the largest companies in China that are among the top 500 global or

multinational corporations are owned by the state (Cendrowski, 2015). The high level of state

control has enabled the country to create more substantial companies that can compete in the

global market, increasing foreign currency. The government's control over the value of the

currency has promoted favored investment among local firms, as the state control has also

made it difficult for foreign companies to invest in China, protecting the local firms from stiff

competition. An example of this is the Anti-Trust Law which gives the state power to review,
approve and reject any merger or acquisition that involves a foreign company (Rashed & Nesha,

2016). This protective advantage for domestic firms enhances their opportunity for further

company growth while maintaining economic stability.

Privatization and state control are key economic strengths for China, but China’s large

market size is also an important factor to note. The home market size for its high population of

about 1.3 billion citizens (Zhou, 2017) makes China the largest single population size in the

world. This market size has protected China from external impacts like trade barriers imposed

by other countries while also reducing reliance from these other countries. It has played a

critical role in providing domestic firms with a starting point where they can enter the global

market helping to the overall growth and economic stability.

Alongside this privatization to motivate investment, the low labor cost in China fuels

competitiveness of the goods produced in the country. The relationship between these

variables is determined by the fact that labor affects the overall cost of producing commodities.

A study conducted to investigate China's manufacturing sector, showed that it has low labor

costs with an expanding market (Page, 2016) enabling a strong competitive advantage for China

as it can produce different types of goods at a little cost compared to the other countries.

Consequently, the country has experienced exponential growth in exports since it is able to

offer goods at a lower price in the global market.

While the availability of cheap labor has also attracted foreign direct investment, as

multinational companies seek to take advantage of the low cost of human resources, China has

invested heavily in establishing academic institutions that seek to boost the engineering talent

that is currently driving the national economy through innovation. Engineering education dates
back to 1895 when the Qing government created the first modern institution to train

engineering candidates. Since then significant improvements have been made during the last

few decades that include the large-scale adjustment of faculty, teaching reforms and quality

improvement (Dong &Liu, 2017). This investment in the education sector has helped China

build a pool of talented and competent engineers with the capacity to design products that

meet and exceed the international standards proving that the growth of economic and

scientific knowledge has a direct relationship.

In China, talent does not just stop with engineers; the entrepreneurial talent that

pushed economic transition in the last few decades of the twentieth century is another

strength of China. The privatization and state control development for a better business

environment promoted this rise in entrepreneurial talent to start their own businesses.

Between 1995 and 2014 private enterprises rose by fivefold where they reached 15 million

(Song et al., 2017) Other statistics show that the private sector contributes 60% of the country's

GDP, owns 60% of the fixed asset investment, and accounts for over 70% of the technological

innovation (Xinhua, 2018). The boost of this entrepreneurial talent also helped in the creating

of millions of jobs that enhanced the overall quality of life.

While this large market size of population for China live day to day lives in the country,

China has a rich population of citizens living and working in different countries. Yet the citizens

living abroad contribute to the strength of the national economy by remitting funds back to

their respective states, determining the country’s share of the global remittances. Over 35

million Chinese live in more than 151 countries (Embassy of the People’s Republic of China in

the United States of America, n.d.), of these, the amount of money they fund back to their
families contribute to the economy and foreign currency reserve, ranking China as the second

country, after India, in terms of the number of global remittances as it receives about $61

billion each year (Lyengar, 2017). This money being sent back not only reduces the poverty level

but is associated with the positive spillover that affects several sectors including education,

gender equality, and health.

The growth of China's economy also has a direct link to their exports and partners.

Countries value their trading partners because they provide a sell market for their locally

manufactured commodities and a buyers market for the goods they are unable to produce.

China’s top trade partners include the U.S.A. $430,328,146.52, Hong Kong $279,201,546.47,

Japan $137,258,933.31, Korea $102,703,776.59 and Vietnam $71,617,248.16 (World Integrated

Trade Solution, 2017a). This data proves that partners provide reliable export destinations that

not only offer China a large market for its goods but also give the country a good flow of foreign

currency. With China's many trade agreements, the business environment has furthered

facilitated trade, labor, and movement of goods.

Looking forward, the strength of China’s economy is likely to continue to dwindle.

Although the reforms that were implemented in the past spiked the growth as a result of

central industrialization and the emergence of private companies, it will be difficult for the

government to sustain the same growth rate in the coming years. Data shows that the 6.5%

projected growth in the country's GDP would be a stretch, given that fixed investment,

industrial output, manufacturing, and retail sales have already slipped. This along with the stock

market losing 22% of its value in 2018 (Fensom, 2018). This declining common trend
throughout the primary sectors that once strengthen China's growth rate is now inhibitors for

the country's growth.

The increased government control in many sectors of China’s economy in the second

half of the twentieth century particularly helped the private sector thrive, but the control that

once helped boost businesses is now spilling over and trying to control the individuals behind

them. The state calls this excess of control, the best interest for national security, monitoring

citizens movements and even internet’s usage as a way to protect and stabilize the state,

limiting the extent in which citizens perform economic and day to day activities (Mitchell &

Diamond, 2018). As the New York Times notes: the freedom that private businesses were given

in the past 40 years, is now being taken away (Yuan, 2018). This lack of freedom and pressure

for control has not only affected businesses but online commerce, real estate, and its private

citizens as well. Prior to the economic reforms, China was considered a socialist state, and as

the reforms took place, the country adopted some aspects of capitalism. However, it seems

that the state has now embraced two touchstones of capitalism that include the generalization

of wage and competitive markets; yet it is still to adopt the aspect of private asset ownership

(Appel, 2014). Although the state has made progress in addressing the problem of having

control of most of the profitable corporations and assets with a failure to value capitalism, it is

still inhibiting economic growth, confirming that commoditization of human labor and land has
made China anything, but a socialist state or society (Appel, 2014). Consequently, China may fail

to become a full capitalist state.

By overprotecting their local companies from stiff competition from the multinational

corporation through tariff barriers, China imposed a total of 29 tariffs compared to 19 for the

U.S. (World Integrated Trade Solution, 2017b). These tariffs have limited the country's ability to

transition to a free economy and reduce the capacity to exploit the full potential for foreign

investment. The process of trying to overcome these tariffs began in 2001, following accession

to the WTO, which made China revise the regulations and make them consistent with various

international obligations (International Trade Administration, 2017b). The existence of a large

number of barriers more than a decade and a half later indicated that the country has not been

effective in resolving this problem.

Another factor for China's declining growth is its record high global bank debt. It is estimated

that the debt has increased by over 300% just in the last decade (Brandt, 2019). This high debt

has reduced the possibilities in which the government can maneuver and borrow money to

encourage people to buy goods and help strengthen the nation. Some of the key strategies that

have been adopted to improve the communist government manages the problems associated

with the bank debt include, tax cuts that are intended to put additional money in the citizens'

pockets but as debt continues to increase, the government is still shuffling to repay this debt

more efficiently.

Massive debt is only made worse with 22% of China's stock market value being lost in

2018 alone making it the worst performing stock market in the world (Fensom, 2018). This is

ironic because China has the second strongest economy in the world, but due to the poor
understanding of its markets, the government fails to comprehend that the stock market

performs on the overall confidence of investors and not the intrinsic value of individual

companies and the economy at large. Failure to understand these markets along with the high

government control are desensitizing confidence in investors and are further causing this

economic downfall.

Adding to the issues, China’s current problem with its demographics dates back to 1970 when a

one-child policy was implemented that contributed to the rapid increase of population aging,

reducing the number of productive citizens and damaging the country’s demographics.

Statistics show that the percentage of citizens aged 60 years and above increased from 7.63% in

1981 to 13.26% in 2010 (Xu et al., 2018) marking a decline in a younger, productive generation

that has damaged the economic growth. An effort to address this issue was made by the

government to reverse this one-child policy, but there has been no evidence of success with

this decision, but mental problems have prevented Chinese citizens of imagining and wanting to

have more children.

China faces a humiliation problem by other states as it developed nationalism in 1949

(Modongali, 2016). Although the country has been able to overcome the challenges that forced

the promotion of nationalism, the communist regime uses the patriotic system to promote it.

The sense of nationalism resulted in strategies that helped rapid economic growth, but it raised

the question for the sustainability of development and environment implication of uncontrolled

industrialization. The government has yet, and the communist regime has continued to

propagate them through the education system.

 It is said that bureaucracy reduces the efficiency with which economic activities can be

carried out in the country, but China has followed a cadre as opposed to the Weberian type of

bureaucracy (Rothstein, 2014). This type of administration is supposed to enhance the political

legitimacy of a given leadership system but it is not in line with the representative democracy,

so it has created a situation where the policy directives that come from the national

government face resistance at the local level. In addition, the country has archaic policy

approval procedures that delay economic restructuring. A recent strategy that the government

has used to address this excess of bureaucracy involves some ideas that were borrowed from

the reorganization in Washington (Leng & Tang, 2018) but it still has a long way to enhance

efficiency with government operations and reduce delays with policy implementation.

Finally, the country has a problem with an excess of pollution that it needs to address.

Investing in industries and power generation companies to boost economic growth has also

created excessive polluters that affect the country. Especially since China produces the largest

quantity (9,040.74 million metric tons) of carbon dioxide per capita (Union of Concerned

Scientists, 2018). This pollution is the root of diseases that force the country to divert resources

that could be used to enhance national development to treat illnesses instead. Even worse,

contamination leads to the deaths of 3-7 million people each year due to airborne particulate

substances (Rohde & Muller, 2015). These deaths combined with the one-child policy mentality

loses the human labor needed to sustain growth while also spending excess resources in

healthcare. To minimize this pollution issue, the government has developed legislation,

including the Environment Protection Law and has established systems to monitor air quality
(Hernandez, 2015) but has not succeeded in reducing the pollution related problems creating

an unhealthy environment for the country and its citizens.

As a conclusion, many factors ignited China's past economic growth, but the same

reforms that lighted this fire have also gotten to the burning point where it is damaging the

economic growth instead of fueling it. The significant reforms adopted by the government

established an environment that favored investment for private individuals and companies,

marking a significant milestone for China's economic growth that helped it rank second in the

world and created millions of jobs for its citizens but the state control got to be excessive,

taking advantage of its power and capacity and eventually damaged what it had built.
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