INVESTMENT ECONOMICS REPORT TOPIC: CHINA'S ECONOMIC POLICY IN THE PERIOD OF 1978 - NOW AND ITS EFFECT ON BOTH DOMESTIC AND FOREIGN CAPITAL MOBILIZATION Classcode: KTEE311HK1-23241.1 Gr
THE BACKGROUND OF CHINA’S ECONOMIC POLICY
Overview of China ”s economy before the reforims - Si, 6 1.2 Overview of China's economic policy shit -ccc- SSSSSSsS He 7
During the pre-reform period, the state established its dominance over the economy, leading to centralized economic control at the national level Over the years, there was a back-and-forth between central and local government control, influenced by various economic and political factors Despite experiencing two cycles of centralization and decentralization, the fundamental issues within the economic system remained unresolved The centralized approach, reminiscent of Soviet-style planning, resulted in inefficiencies and bureaucratic challenges that were criticized by China's leaders Conversely, decentralization, which shifted control to local governments without increasing market reliance, led to poorly managed and uncoordinated economic activities across regions, causing significant economic disruptions.
In 1949, when the People's Republic of China was established, the economy faced significant challenges due to decades of political turmoil and conflict, resulting in industrial and agricultural production levels far below those of the early 1930s and a devastated transportation system The situation was exacerbated by hyperinflation caused by financing war expenditures through money printing However, by 1952, the economy had stabilized thanks to strict monetary and fiscal policies, leading to a substantial restoration of the transportation system and industrial production.
Over the 25 years leading up to economic reforms, China's output growth averaged around 4 percent annually, driven by rapid industrial output growth, while agricultural production lagged at about 2 percent This growth was primarily fueled by increased labor and capital, with minimal improvement in total factor productivity The average growth rate concealed significant fluctuations linked to shifts in economic control between centralization and decentralization Notable downturns occurred during the Great Leap Forward and the Cultural Revolution, where initial growth from decentralization was followed by economic decline due to disincentives for production, particularly in agriculture, and ineffective national economic management.
In the late 1970s, the Chinese economy faced significant challenges similar to those of other centrally planned economies, including irrational pricing due to controls, over-staffing, and inefficiency in industry The focus on quantity over quality and isolation from foreign competition further exacerbated these issues Additionally, biases against individual incentives, markets, and labor specialization hindered productivity, as there was no correlation between individual output and pay The labor market was nearly non-existent due to strict restrictions on labor mobility, job assignments for new entrants, and a lifetime employment system that provided various welfare benefits Furthermore, financial markets were largely absent, compounding the economic difficulties.
1.2 Overview of China's economic policy shift
In 1978, China initiated a significant economic policy transformation led by Deng Xiaoping, focusing on revitalizing the economy, unlocking its potential, and correcting the flaws of the centrally planned system.
7 economic reforms introduced during this period were extensive and transformative, marking a departure from the previous economic model
The introduction of market-oriented reforms marked a significant shift in economic management, highlighting the role of market forces in resource allocation and production decisions The government sought to balance state planning with market mechanisms, emphasizing the liberalization of various economic sectors This approach involved reducing government control, dismantling barriers to entry, and fostering competition State-owned enterprises (SOEs) gained greater autonomy in their business decisions, while the private sector was encouraged to thrive.
The government has actively promoted private enterprise and entrepreneurship by allowing private businesses to operate alongside state-owned enterprises New policies have been introduced to facilitate the growth of these private enterprises, representing a significant shift from the previous focus on state ownership and control.
China has actively sought to attract foreign investment by opening its doors to multinational corporations The establishment of special economic zones (SEZs) in coastal areas has created favorable conditions for foreign businesses Additionally, the government has implemented policies that encourage technology transfer, joint ventures, and collaborations with international firms.
China's transition to a socialist market economy involved balancing socialist principles with market mechanisms to enhance economic growth Recognizing the significance of rural development, reforms like the household responsibility system empowered farmers, leading to increased agricultural output and improved living standards Additionally, China embraced globalization by reducing trade barriers, expanding export markets, and actively participating in international organizations and global economic forums.
The 1978 economic policy shift was a pivotal moment in China's development, igniting entrepreneurial spirit and fostering innovation This transformation spurred rapid economic growth, establishing China as a global economic powerhouse and significantly reducing poverty for hundreds of millions.
EVALUATION OF CHINA'S ECONOMIC POLICY
Gradual shift from a planned economy to a socialist market economy
The era witnessed a significant transformation in the economic structure, characterized by the decentralization of economic decision-making This shift towards a socialist market economy involved deregulating specific sectors, enabling market forces to have a more substantial impact on resource allocation and pricing State-owned enterprises were granted increased autonomy and accountability for their profits and losses, fostering competition, efficiency, and innovation within these organizations.
China's transition to a socialist market economy has included the liberalization of international trade and the attraction of foreign investment This was achieved by gradually reducing tariff and non-tariff trade barriers through initiatives like the Open Door policy and Special Economic Zones (SEZs), which enhanced market access for imports and exports The creation of foreign trade enterprises and the easing of foreign investment regulations drew multinational corporations, fostering technology transfers and driving economic growth Additionally, reforming China's banking system, including the establishment of specialized banks such as the Industrial and Commercial Bank of China, played a crucial role in supporting this economic transformation.
In 1984, reforms were introduced to enhance financial intermediation, increase credit availability, and support private enterprises, which in turn stimulated domestic investment and provided essential capital for economic development The shift to a socialist market economy in the 1980s created a unique hybrid model that combined socialism with market mechanisms While the state retained a significant role in key sectors, there was a strong encouragement for private enterprises and individual entrepreneurship This approach fostered innovation, competition, and economic growth, all while ensuring social stability and the pursuit of common prosperity.
The economic reform in China from 1978 to the 1990s marked a transformative era that reshaped the nation's economic framework Led by Deng Xiaoping, these comprehensive reforms spanned various sectors, including finance, agriculture, trade, and industry, unlocking the country's economic potential.
Chinese economy, leading to remarkable economic growth, poverty reduction, expansion of international trade, and increased foreign investment.
Development and Global Integration (20008) S22 kre 14 1 Entry Into the VWorld Trade Organization (WTO) In 2001
2.2.1 Entry into the World Trade Organization (WTO) in 2001
The second stage of the Chinese economy began with its integration into the global market following its accession to the WTO in 2001, a process that took 16 years of negotiations Transitioning from a strict command economy to a market-oriented system, China now embraces the obligations of WTO membership, which emphasizes openness, transparency, and the importance of markets and private enterprise.
To join the WTO, China has pledged to implement significant systemic reforms to enhance business operations This includes removing trade barriers and opening its markets to foreign companies and their exports across nearly all product sectors and a variety of services from the outset of its accession Additionally, China has agreed to reduce or eliminate restrictions on foreign companies' rights to import, export, and distribute goods within the country, while also addressing various trade-distorting industrial and agricultural policies (Sheng Bin, 2015).
China's accession to the WTO will lead to major reforms in its trade regime across all government levels, shifting from a directive role to one focused on enforcing laws and regulations that facilitate market operations This transition will require Chinese ministries and agencies to prioritize the implementation of measures that support market efficiency, while state-owned enterprises will also undergo significant changes in their operations.
14 face greater accountability for their business decisions, and together with other Chinese enterprises (Xiankun et al., 2022)
2.2.2 Focus on export-led growth and manufacturing
China's accession to the WTO in 2001 significantly expanded its market for international trade and boosted global demand for Chinese exports This membership led to substantial growth in both imports and exports, while the implementation of the Chinese Information Technology Agreement (ITA) reduced taxes and tariffs on manufacturing and agriculture Consequently, increased competition among Chinese manufacturers and farmers resulted in lower prices for consumers, making products more affordable.
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Figure China’s trade performance (Sun and Heshmati, 2010)
The accession of China to the World Trade Organization led to a significant reduction in input tariffs, which played a crucial role in trade liberalization From 2001 to 2007, this liberalization was closely linked to rising export prices and economic growth Firms that experienced lower costs due to the tariff decrease also raised their export prices Specifically, input tariffs dropped by 10%, while export prices increased by 5.8% between 2000 and 2006, highlighting the positive impact of trade liberalization on the economy.
15 allows firms to upgrade their input costs alongside with upgrading their exported products
China's "going-global" strategy has heavily relied on export activities, supported by its robust financial institutions since 2001 These institutions play a crucial role in assisting domestic enterprises with foreign operations by reducing political and commercial risks As a result, Chinese companies view this support as a safety net, contributing to China's emergence as the world's second-largest economy (Massa, 2011).
Table Medium- and long-term ECA financing as a share of merchandise exports (%)
Since 2001, the export credit financing systems have seen massive increases and the values are well above those of developed countries The national governments
Export Credit Agencies (ECA) play a crucial role in providing export credits, which can be state-owned, mixed, or private institutions These agencies can offer export credits directly to foreign buyers of national exports or indirectly through private financial institutions (Massa, 2011).
In addition, the export structure had been changed from “soft manufactures” to
China's export landscape is dominated by "hard manufactures," which include machinery equipment, electronic products, and chemical products In 2002, over 30% of Chinese exports were vertically specialized, with certain sectors like plastic products, steel processing, and communication equipment exceeding 50% This shift towards manufacturing-led and export-oriented development has positioned China as a central player in the global economy.
China's rapid economic growth and increasing per capita income have led to a decline in the relative size of agriculture, while the industrial and service sectors have expanded significantly Notably, during the Tenth Five-Year Plan (2001-2005), the government's clear focus on optimizing and upgrading the industrial structure facilitated the swift development of the tertiary industry.
The traditional industrial structure has undergone significant improvements, as evidenced by the decreasing percentage of primary industry in overall GDP From 1978 to 2008, the secondary and tertiary industries experienced a general increase, although the primary industry saw a gradual decline after 1991, dropping to a mere 9.9% of total GDP by 2008 Throughout the reform period, the secondary industry maintained its dominant position in the Chinese economy, contributing 48.1% of GDP in 2008, making it the largest industrial sector Additionally, the tertiary industry demonstrated a consistent upward trend, particularly expanding after 2000.
17 dramatically, climbing to 42% in 2008 This transformation of industrial structure demonstrates the dynamic and viability of economic growth in China (Das, 2012)
Percentage of GDP at 2004 constant prices = WN © 2001 2002 2003 2004 2005
Figure The Percent of Different Industry in Total GDP (Naughton, 2006)
Since 2001, foreign direct investment (FDI) sources have become increasingly diversified, with notable growth in FDI flows from the European Union and North America China has emerged as a leading investment destination for multinational corporations (MNCs), ranking as the top-priority host economy since 2002 By 2005, China became the third largest recipient of FDI globally, following the United Kingdom and the United States.
China has experienced great economic success by being export led, and institutions and reforms have contributed in facilitating for this success with a major boost since
2001 with the accession to the WTO Economists find the success remarkable, but are
China's economic growth raises concerns regarding its sustainability, as it has led to significant environmental degradation, increasing inequality, labor exploitation, and issues with product safety (Zhu and Kotz).
Over the past thirty years, China's extensive economic growth model, marked by high investment and pollution, has led to severe environmental degradation and resource waste Reports from China's Ministry of Environmental Protection (MEP) indicate that in 2013, only three out of 74 cities met the new air quality standards, highlighting an "extremely severe" air pollution crisis Additionally, 90% of underground water is contaminated, and 19.4% of farmland is polluted This alarming environmental situation has sparked public discontent and social issues, posing significant challenges to the sustainability of China's economic development.
Also, it is known that economic growth results in institutional changes, as seen from China where each set of policies and institutional reforms was changed from 2001-
By the end of 2007, China's economy transitioned from a state and collective property system with central planning to one driven by private property and market forces, heavily reliant on exports and investments rather than domestic consumption This shift resulted in exports and fixed investments accounting for an impressive 78.7% of the total GDP, highlighting the challenges faced by state-owned enterprises (SOEs) in competing with privately held companies due to their costly social obligations, which in turn increased state subsidies and intensified pressures for privatization (Zhu and Kotz, 2010).
The high-growth numbers impose problems that can be seen when economic recessions are present, as demand for China’s exports drops quite significantly Evidence
In November 2009, China's exports fell by 15.8% due to the severe global recession, highlighting the risks of relying heavily on a single industry This dependence can pose significant short-term dangers when faced with sudden economic shifts (Zhu and Kotz, 2010).
Transition to Innovation and Consumption-Driven Growth ( 20103)
2.3.1 Shift towards high-tech industries and services
China's high-tech industries encompass diverse sectors that leverage advanced technologies to fuel economic growth, primarily within the digital economy, STEM fields, and green technologies Key high-tech industries include:
The Information Technology sector encompasses a wide range of areas, including computer software development, hardware manufacturing, IT consulting services, and cloud computing Notable Chinese companies such as Lenovo, Baidu, and Huawei have established a strong global presence in hardware, search engines, and telecommunications equipment, respectively.
E-Commerce: Companies such as Alibaba, JD.com, and Pinduoduo have transformed how consumers purchase goods and services, with a vast digital presence beyond just retail and into sectors like banking, entertainment, and logistics
China's Artificial Intelligence (AI) industry encompasses various sectors, including machine learning, robotics, autonomous vehicles, and facial recognition technology Leading companies such as Bytedance, known for TikTok, iFlytek, which specializes in voice recognition, and SenseTime, focused on image recognition, are at the forefront of these advancements.
China's biotechnology sector is thriving, with a strong emphasis on drug discovery, genetic research, stem cell research, and CRISPR technology Prominent companies such as BGI and Sinovac are leading the way in this rapidly evolving industry.
Chinese companies such as Ant Financial and Tencent have transformed the financial sector through innovations like digital wallets, online lending platforms, and wealth management services, seamlessly incorporating financial solutions into daily life.
Green energy technology encompasses innovative solutions that prioritize environmental sustainability Key players in this sector include electric vehicle manufacturers such as BYD and NIO, alongside significant contributions from solar and wind energy sources.
Telecommunications: With the advent of 5G technology, Chinese companies like Huawei and ZTE are at the forefront, driving innovation and expansion in this field
China's industrial policy plays a crucial role in fostering the growth of high-tech industries, focusing on satisfying domestic needs while enhancing global competitiveness.
China's economic strategy has undergone a significant transformation since the 2010s, shifting towards innovation and consumption-driven growth As the country's growth rate continues to slow, the government is moving away from its traditional reliance on investment-led growth and export-oriented manufacturing.
The transition towards high-tech industries and services signifies the evolution of an advanced economy, primarily fueled by rapid technological advancements over the past decade China has experienced remarkable growth and global success in sectors like e-commerce, fintech, AI, biotech, and space tech This progress is largely attributed to substantial government funding, a high-risk tolerance, and a vast domestic market.
The shift towards driving economic growth through consumption, rather than focusing solely on manufacturing and exporting physical goods, highlights the importance of advanced digital services Companies such as Alibaba, Tencent, and JD.com illustrate how the Chinese economy is effectively harnessing digital platforms to enhance consumer engagement and stimulate growth.
21 technology to boost domestic consumption These enterprises offer comprehensive packages of digital services, from retail and entertainment to banking, promoting a more consumer-based and less export-dependent economy
Moreover, this transition has implications beyond China's borders, impacting global trade, technology standards, and geopolitics It has posed both opportunities and challenges to foreign businesses and governments
The transition presents challenges, including a heavy reliance on technology that can lead to fierce competition and security threats It necessitates substantial structural reforms in education, social welfare, corporate governance, and regulatory frameworks to promote innovation and achieve sustainable economic growth These efforts reflect China's ongoing commitment to redefining its role in the global economy.
In summary, China's shift towards innovation and consumption-driven growth signifies a strategic advancement towards a modern, technology-focused, and service-oriented economy, highlighting the country's adaptability and ambition to not only follow but also lead in the evolving global economic landscape.
2.3.1.1 Reason for developing high-tech industries in China in 2010s
In the 2010s, China's high-tech industry experienced significant growth due to several unique factors The country's emphasis on high-tech development was influenced by government policies, increased investment in research and development, and a focus on innovation to enhance global competitiveness Additionally, the rise of a skilled workforce and advancements in technology infrastructure played crucial roles in propelling the high-tech sector forward during this transformative decade.
China is undergoing an economic transformation by transitioning from a labor-intensive manufacturing economy to one that is driven by innovation and technology This shift emphasizes the development of high-tech industries, which is essential for moving up the value chain and promoting sustainable long-term growth.
Recent Trends and Challenges (20208) 0 ccccccccccceeeseesteeeeeeeeeeeeeeeeeeeeeenes 31 1 Emphasis on sustainable and quality growth - c2 31 2 Belt and Road Initiative (BRI) and global infrastructure investments
2.4.1 Emp6hasis on sustainable and quality growth
In recent years, China has placed a strong emphasis on sustainable and quality growth The country has recognized the importance of transitioning to a more environmentally friendly and sustainable economy
The upcoming global summit on biodiversity, aligned with the UN Convention on Biological Diversity, will be held in Yunnan This crucial meeting will gather delegates from 200 countries to establish key conservation goals for the next decade.
On January 1, 2020, China implemented a significant 10-year commercial fishing ban on the Yangtze River, the country's largest river, spanning 6,300 km This policy aims to conserve biodiversity and mitigate the adverse effects of economic growth and development, following widespread criticism of the Three Gorges Project, which resulted in the forced relocation of millions.
In China, local authorities, the private sector, and civil society are collaborating to promote sustainability Notably, in Baoding, Shenzhen, and Chongqing—home to over 60 million people—WWF China and various civil organizations are partnering with local governments to lower emissions in transportation and public buildings.
WWE China is collaborating with Yingli Solar and China Vanke to cut emissions by 2.4 million tonnes of CO2 equivalents, significantly surpassing Oslo's 2013 emissions of 1.43 million tonnes CO2 equivalents.
China is actively working to reduce pollution and promote renewable energy through stricter environmental regulations Its commitment to sustainable growth is evident in the emphasis on green development, which seeks to harmonize economic growth with environmental protection.
2.4.2 Belt and Road Initiative (BRI) and global infrastructure investments
The Belt and Road Initiative (BRI) is a pivotal element of China's economic strategy in the 2020s, focusing on global infrastructure development This initiative seeks to improve connectivity and foster economic collaboration between China and various nations As part of the BRI, China is actively investing in infrastructure projects throughout Asia, Africa, Europe, and the Middle East.
The Belt and Road Initiative (BRI) encompasses three interconnected projects that highlight its strategic significance Firstly, the Silk Road Economic Belt (SREB) focuses on establishing land-based economic corridors that connect China with Mongolia, Russia, Central Asia, and Southeast Asia, effectively creating a bridge between Asia and Europe Secondly, the 21st Century Maritime Silk Road (MSR) aims to develop economic corridors across the Indian Ocean, linking China with South Asia, the Middle East, Africa, and the Mediterranean Lastly, the Digital Silk Road project seeks to enhance information connectivity by linking China with Europe and the rest of Asia.
These three initiatives collectively make up the Belt and Road Initiative, representing China's vision for enhancing connectivity, economic cooperation, and cultural exchange across regions
By the end of 2020, 125 countries, including several in Europe, had entered into cooperation agreements under the Belt and Road Initiative (BRI) The US Council on Foreign Relations reported that China had invested $200 billion in BRI projects by 2019, with projections suggesting this could rise to between $1.2 trillion and $1.3 trillion by 2027 The World Bank anticipates that the BRI will contribute to lifting 7.6 million people out of extreme poverty and 32 million out of moderate poverty by 2030.
2.4.3 Addressing income inequality and environmental concerns
Since the reform and opening up in 1978, China has achieved significant economic growth and poverty reduction; however, this progress has been accompanied by rising income inequality and environmental pollution Since 2000, income disparity has remained high, while the quality of the environment, particularly concerning air and water pollution, has not kept pace with economic advancements.
(Bonnefond, Clement and Yan, 2020) Therefore, it is necessary and urgent to research the tradeoff between income inequality and environmental pollution e Income Inequality
The Gini index quantifies income or consumption inequality within an economy, indicating how much it deviates from perfect equality In the past two decades, China has emerged as a major global economy, experiencing significant affluence among certain societal segments Consequently, the country's Gini coefficient has sharply increased, surpassing the threshold that signals a heightened risk of social unrest over the last ten years Nevertheless, there has been a slight improvement since 2008, when the Gini coefficient peaked at its highest recent level.
Figure Gini coefficient of China from 2004 to 2021 e Environmental Concerns
Rapid industrial development and the dominance of economic growth in political considerations have taken their toll on the environment in China Hazardous levels of
Water and air pollution, along with frequent natural disasters, have become commonplace in the lives of the Chinese people By 2021, China was ranked fourth globally for the highest number of natural disasters The consequences of overexploitation and pollution are increasingly evident in daily life and are significantly affecting the country's economic situation.
In 2021, Henan province alone had reported a regional economic loss of over 132 billion yuan due to natural disasters
China faces significant environmental challenges, with air pollution being the most critical issue Emissions from industrial waste gases adversely affect both human health and the environment In 2021, carbon dioxide emissions from fossil fuels and industrial activities in China approached 11.5 billion metric tons To combat this, the government has established specific emission reduction targets within its national five-year plans and actively monitors their progress.
Figure : Territorial carbon dioxide (COz) emissions from fossil fuel combustion and industrial processes in China from 1960 to 2021
2.4.4 Achievements: Sustainable development focus, BRI's global influence
China's economic policy has significantly advanced sustainable development and enhanced the global impact of the Belt and Road Initiative (BRI) Furthermore, the BRI has enabled China to broaden its economic reach and strengthen relationships with nations worldwide.
Despite the challenges posed by the COVID-19 pandemic in 2020, a significant number of China's overseas projects continued to progress steadily and remained stable
In 2020, non-financial direct investment in countries along the Belt and Road reached
In the first quarter of 2020, direct investment in countries along the Belt and Road reached $17.8 billion, marking an 18.3% increase from the previous year Additionally, investment in these countries totaled $18.61 billion, reflecting a 14% rise Significant railway projects, including the China-Laos and Jakarta-Bandung railways, have shown positive advancements Furthermore, 1,241 new enterprises were established in China by countries along the Belt and Road, representing a substantial 44% increase compared to the same period last year, with actual investment also on the rise.
$3.25 billion, a 64.6% increase from the same period the previous year
China is leading the way in creating a sustainable and eco-friendly economy, making remarkable strides in renewable energy The country has heavily invested in solar and wind power, solidifying its position as a global leader in this sector.