China: Social, Political, Macro-economic
Table of Contents
Letter of Transmittal………………………………………………………………………………2
Causes of China‟s Economic Growth……………………………………………………………..7
China Trade Patterns………………………………………………………………………………8
WTO and China………………………………………………………………………………….10
China‟s Labor Market……………………………………………………………………13
China‟s Financial Market………………………………………………………………...14
China‟s Economic Education System……………………………………………………17
Expansionary Monetary and Fiscal Policies……………………………………………………..20
Result of Direct Foreign Investment……………………………………………………..22
China Has Become One of the World‟s Leaders of……………………………………...24
U.S. is China‟s Largest Exported Goods Market………………………………………...24
What Does China Gain?.....................................................................................................27
What Are the Affects of………………………………………………………………….27
Within the last quarter of the 20th century, China has experienced unprecedented
economic growth, and as a result has established itself as one of the major trade partners within
the global economy. Even today, China‟s economic growth continues to be especially significant
as many countries are experiencing the effects of the recent global economic recession. In order
to understand China‟s economic growth, it is important to not only evaluate the effects of the
major economic changes that have occurred, but also the socioeconomic changes that have taken
In order to continue this trend of economic growth, China must face many challenges.
Some of these challenges deal with social equality, environmental concerns, and limiting
corruption. In addition, China‟s government still remains largely communistic. This is seemingly
in direct contrast to the increasingly present capitalistic trends and policies that China has chosen
to adopt in the recent years of its economic growth. These challenges outline some of the many
challenges China must be ready face in the future.
Despite these challenges, China has shown great signs of great progress. This is
represented in China‟s ascension into the World Trade Organization which can be considered as
a milestone that draws a unique significance between the relationship of China‟s growth as an
economy and as a society. Therefore in order to continue to experience the benefits of economic
growth, China must work to limit the risks that remain present.
OK, excellent start. You are asking the right question. The contradiction (Marxist idea) between
the communist government and the capitalist economy is an interesting theme. Also a
complicated one. Trade, growth, WTO membership all are important aspects.
Official Name: The People‟s Republic of China
Population: over 1.3 billion people (1,330,044,605 as of mid-2008)
Official Language: 7 main Chinese languages including standard Chinese or Mandarin,
Cantonese, and Wu.
Currency: Yuan (CNY) also referred to as the Renminbi (RMB)
Capital city: Beijing
GDP: Purchasing power parity $7.973 trillion (2008 est.)
In order to understand economic in China, people must understand the political system
which indicates the different structures that are showed below.
The Constitutional System
The Constitutional System is a fundamental law of the state. The current constitution was
adopted by the 5th National People Congress on December 4, 1982.
The System of People's Congress
The System of People‟s Congress is China‟s fundamental political system which is an
organizational form for the state power. The National People Congress (NPC) is the highest
authority of state power while local people congresses are the local authorities. Both authorities
are elected by the people.
The Party in Power
The Communist Party was founded in 1921, and it was the established the People Republic of
China in 1949.
The System of Multi-Party Cooperation and Political Consultation (CPC)
The CPC is the only power in the People Republic of China, but the eight other political parties
may take part in state affairs under the recognized leadership of the CPC.
The Central Administrative System
The Central Administrative System makes up of the central administrative organs under the
National People Congress and the central administrative organs leadership over local
administrative organs. Central administrative organ is the State Council of the People of China
which is the highest administrative organ.
The Local Administrative System
The Local Administrative System makes local administration possible by establishing
administrative regional divisions and local administrative organs.
The System of the Head of State
The head of state is the President of the People Republic of China. The presidential term lasts
five years and no more than two consecutive terms can be served. The duties of the president are
the various domestic powers as well as handling foreign affairs.
The System of Civil Servant
Civil servants instigates power in state administrative organs, and their duties include the
execution of laws and public services.
The Election System
The election system is a structure which citizens choose the state public servants which includes
the people‟s right to vote and stand for election, function of the powers that oversee the election,
procedures of direct and indirect election, election expenditure and punishment of violations.
The System of Self-Government of Ethnic Autonomous Areas
Areas heavily populated with ethnic minorities are managed by self-government under national
leadership. The administrative status of these areas is determined by size and population.
Autonomous regions are equal to provinces, autonomous prefectures are equal to prefectural-
level cities, and autonomous counties are equal to counties.
Special Administrative Regions
When it needed, the state establishes special administrative regions according to the law enacted
by the National People Congress. The political system includes a chief executive, administrative
organs, a legislative council, and judicial organs.
The Chinese Communist Party‟s (CCP) 17th Congress was held October 2007 to adapt
and redefine itself in the face of emerging economic and social challenges and CCP is still trying
to maintain its authoritarian one-Party rule. The Chinese Congress validated and re-emphasized
the priority on continued economic development. According to the political report that Secretary
Hu delivered at the opening of the Congress, “scientific development concept has been described
as a new concept of development, one that moves away from China‟s previous „development at
all costs‟ approach and toward economic and social progress that is “people-oriented,
comprehensive, balanced and sustainable.” The scientific development concept was the
Congress policy. From Secretary Hu‟s political report, “the primary policy emphasis of the
Congress, as anticipated, was on continued economic development in China, continued market
reform and continued integration of China into the global system. The Party also endorsed the
goal of moving away from a purely investment and export-driven economic growth model to one
that includes expansion of domestic consumption.” The other economic goals included in
developing and improving modern service sectors, promoting rural development (protecting
arable land, enhancing food security, preventing animal and plant diseases, etc.), improving
fiscal, tax, and financial restructuring in order to improve access to basic public services, and
promoting private companies and individual entrepreneurship (by removing institutional barriers
and promoting equitable market access).
China Most Recent Developments
● On August 2008 to March 5, 2009, the Bank of China reported that the exchange rate
China‟s currency (the Chinese Renminbi or Yuan) and the U.S. dollar stood at 6.86 to
6.84, an appreciation of 18.2% to 19% since China‟s currency was reformed in July 2005.
However, on July 2009, the exchange rate was 6.82 showing that the Chinese government
had allowed its currency to depreciate against the dollar in part in order to help Chinese
● On August 2008, the Chinese government reported that GDP had grown about 10% in
the first half of 2008. The government also reported that foreign direct investment (FDI)
in China has risen by 46% over the same period in 2007. But on February 2009, the
Chinese government stated that FDI had declined 5.7%. Due to the decline of FDI,
Chinese exports and imports had declined by 17.5% and 43.1%.
● On June 2008, the Netherlands Environmental Assessment Agency estimated and said
that China in 2007 became the world‟s largest emitter of CO2, exceeding the United
States by 14%, and accounting for two-thirds of last year‟s global carbon dioxide
Causes of China’s Economic Growth
Economists usually ascribe much of China‟s rapid economic growth to two main factors.
One of the factors is the large-scale capital investment which is financed by large domestic
savings and foreign investment. The other factor is the rapid productivity growth. These two
factors appear to have gone together hand in hand. Economic reforms led to higher efficiency in
the economy improving output and increasing resources for additional investment in the
Historically, China has been maintaining a high rate of savings. When reforms were
started in 1979, China GDP domestic savings stood at 32%. Though, most Chinese savings
during period were generated by its state-owned enterprises (SOEs) profits; the SOEs were used
by central government for domestic investment. Economic reforms (included the decentralization
of economic production) led to significant grown in Chinese household savings (these now
account for half of Chinese domestic savings). As an outcome, China‟s GDP gross savings had
risen to 52% in 2008 (compared to a U.S. rate of 8%).
Several economists have concluded that productivity gains were caused largely by a
reallocation of resources to more productive uses, especially in sectors that were formerly
heavily controlled by the central government, such as agriculture, trade, and services. For
instance, agricultural reforms increased production, giving workers to pursue employment in the
more productive manufacturing sector.
China‟s decentralization of the economy led to the increase of non-state enterprises,
which attended to make more productive activities than the centrally controlled SOEs. In
addition, a greater share of the economy (mainly the export sector) was exposed to competitive
forces. Local and provincial governments were able to establish and operate various enterprises
on market principles from the central government. Also, foreign direct investment (FDI) in
China brought with it new technology and processes that increased efficiency.
Since prices for many goods and services are much lower in China than in the United
States and other developed countries, the purchasing power parity (PPP) exchange rate almost
doubles the size of the Chinese economy growth from $4.2 trillion (nominal dollars) to $8.3
trillion (PPP dollars), appreciably larger than Japan‟s GDP in PPPs ($4.4 trillion), and 58% the
size of the U.S. economy. The data below indicated that PPP raised China‟s per capita GDP from
$3,190 (nominal) to $6,210.3. Also the PPP data showed that China‟s living standards remain
far below the U.S. and Japan living standards while the size of China‟s economy is substantial.
China‟s per capita GDP on a PPP basis was only 13.6% of U.S. levels. Thus, China‟s living
standards would likely to remain below the United State‟s living standards for many years to
and Per Capita
Country Nominal GDP GDP in PPP Nominal Per Per Capita
($billions) ($billions) Capita GDP GDP in PPP
United States 14,142 14,142 46,540 45,540
Japan 4,977 4,404 38,100 34,590
China 4,236 8,252 3,190 6,210
Source: Economist Intelligence Unit (estimated, based on World Bank Data).
China’s Trade Patterns
Economic reforms have helped China to have a major trading power. Chinese exports have
increased from $14 billion in 1979 to $1,429 billion in 2008. In the same period, Chinese
imports have risen from billion to $1,132 billion (see table below). In 2004, China exceeds
Japan as the world‟s third-largest merchandise trading economy after the European Union and
the United States. China surpassed the United and became the second largest exporter in 2007.
From 2003 to 2008, China‟s imports rose by an average of 19% per year, and China‟s exports
have grown dramatically in recent years with an average annual growth rate of nearly 27%.
From 2004 to 2008, China‟s trade surplus was totaled $32 million and $297 billion
( $ billions)
Year Exports Imports Trade
1979 13.7 15.7 -2.0
1980 18.1 19.5 -1.4
1985 27.3 42.5 15.3
1990 62.9 53.9 9.0
1995 148.8 132.1 16.7
2000 249.2 225.1 24.1
2001 266.2 243.6 22.6
2002 325.6 295.2 30.4
2003 438.4 412.8 23.6
2004 593.4 561.4 32.0
2005 762.0 660.1 101.9
2006 969.1 791.5 177.6
2007 1,218.0 955.8 262.2
2008 1,428.9 1,131.50 297.4
Source: Economist Intelligence Unit (estimated, based on World Bank Data).
China’s Major Trading Partners
China‟s trade data often differ largely from those of its major trading partners, including
the United States because the large share of China‟s trade (both export and imports) that pass
through Hong Kong (which reverted back to Chinese rule in July 1997 but is treated as a separate
customs area by most countries, including China and the United States). Although many
countries that import Chinese products through Hong Kong usually attribute their origin to China
for statistical purposes, China holds a large share of its exports through Hong Kong as Chinese
exports to Hong Kong for statistical purposes. In your presentation, if time permits, please make
a chart out of the data in this table. To get around the extreme difference between the numbers of
1979 and those of 2008, you could “normalize” the data. That is, subtract the column‟s mean
value from each table number and divide the difference by the column‟s standard deviation.
Base on the Chinese trade data in 2008, China‟s top five trading partners were the
European Union (EU), the United States (U.S.), Japan, the ten nations that constitute the
Association of Southeast Asian Nations (ASEAN), and Hong Kong. The data below indicated
that China‟s largest export markets were the EU follow by the U.S. and Japan. Japan, the EU,
and ASEAN were Chinese‟s top sources for imports. China continued to have large trade
surpluses with the United States, the EU, and Hong Kong, while reporting deficits with Japan
A growing level of Chinese is from foreign-fund enterprises (FFEs) in China. A large
share of the FFEs are owned by Hong Kong and Taiwan investors whom have shifted their labor-
intensive, export-oriented, firms to China to take advantage of low-cost labor A larger share of
the products made by such firms is likely exported to the United States.
China's Trading Partner's Reported
Total Chinese Chinese Trade Trade
Country Trade Exports Imports Balance Balance With China
EU 425.9 293 132.9 160.1 -247.6
US 333.8 252.3 81.5 170.8 266.2
Japan 266.8 116.2 150.6 -34.5 18.6
ASEAN 231.0 114.1 116.9 -2.8 n.a.
Hong Kong 203.7 190.8 12.9 177.8 -3.1
Trade 2,560.4 1,428.90 1131.5 297.4 n.a.
WTO and China
Next, we will talk about China‟s involvement with the world trade organization.
Although China has been a dominant country throughout the history of mankind, they did not
become a member of the WTO until December 11, 2001. The WTO, which was established on
January 1, 1995, aims to promote trade and trade agreements for the countries involved in the
There are multiple reasons for China joining the WTO. First off, China wanted to be
acknowledged as one of the world‟s modern great power and sees its exclusion from the WTO as
a hindrance. Also, the internationalist sector of China‟s economy has expanded greatly as their
economy grew and market forces expanded. This promoted an increase in domestic pressure for
lower tariffs on foreign imports and improved access to foreign markets. Yet another reason
would be that economic reformers in Chinese leadership felt that joining the WTO would help
China to avoid economic stagnation by increasing productivity and improving internal allocation
of economic resources.
Challenges for China with this initial acceptance would be the fact that China‟s culture
did not mesh well with what the WTO promotes. For example, China had a monopoly culture
while the WTO demands an anti-monopoly stance, which shows human civilization and
progress. Monopoly is a feature of a planned economy, and there is a contrast between China‟s
culture, which infringes on rights formed under a planned economy, and the WTO, which
respects rights formed under a market economy. Because of this, China‟s economic
transformation upon entering the WTO also transformed their culture.
However, WTO benefits China in many ways by expanding the range of services
provided to them. Countries bring in services such as insurance, finance, and distribution, which
stimulate the Chinese economy. Through the protection and trade that the WTO promotes, many
countries can set up businesses in China, which will help them, as well as China‟s economy
through competition. Also, being part of the WTO forced Chinese companies to go overseas,
which helped them to grow and become more powerful. The money earned by these Chinese-
based companies also helps to stimulate the economy. China‟s benefits from the WTO, and also
to other countries in the WTO, have proven to be extraordinary as seen in China‟s WTO
statistics from last year. (Figure 1)
Out of the 153 members in this organization, China ranked second in exports and third in
imports of merchandise, and fifth in commercial services. They also contributed to almost 6% of
the WTO budget, which is a nice chunk given the amount of members. Given the information on
this chart, China has proven to be very effective in the WTO, and benefits well from it. (Figure
China’s Labor Market
Due to its vast population, China possesses largest labor force in the world with a
population of 807.7 million people (world fact book).Within the last two decades China has
achieved tremendous economic growth due to the liberalization of its industries. In 1978, Deng
Xiaopeng began reforms of China's economy and centralized structure; however it wasn't until
after the Tiananmen massacre that radical economic liberalization began. During the 1990s more
comprehensive reforms were put through in the direction of a market economy along with the
reformation of social services, state-owned enterprises, and social security. This is essential to
the employment within a private enterprise, since previous to the reforms there was no
penetrating a centralized Chinese market.
Under the socialist economy most workers were either in rural communes or state-owned
enterprises. The economy revolved around a concept called “Danwei”, or the worker‟s unit. Each
Danwei consisted of its own housing, health care, services, education, etc. This resulted in
discrimination of foreign enterprises that offered outside jobs. Today the state sector has been
downsized dramatically, due to the increase of private corporations. Economic development has
accumulated mostly within the coastal regions. Approximately 200 million rural workers have
relocated to these urban areas in order to find work. (World fact book)
Chinese Labor Laws, are becoming more westernized, but still possess unique
characteristics. The eight-hour workday and the forty-hour work week are still enforced.
Overtime pay is mandated by law with limitations on how many hours. Paid leave is also
required, and there are protection laws for work assigned to women and teenagers. However
Chinese labor laws possess some of its own features that multinationals should be familiar with.
There are three funds which the employer and employee must contribute to: endowment
insurance, unemployment insurance, and hospitalization insurance. If there‟s any sort of labor
dispute, arbitration is required, before taking the case to court. Depending on locality some of
these things may vary along with paying an employee labor union fund.
China’s Financial Market
China‟s financial system is characterized by a number of functions including banking,
insurance, securities, and other monetary policies. China is one of few countries that has
maintained its composure and stability throughout the global recession. Although economic
development has slowed down from its annual double-digit percentages; the momentum is still
quite strong compared to other emerging country markets. The $586 billion stimulus package
passed in November 2008 attempts to strengthen China‟s rather underdeveloped financial
system. With this stimulus, financial infrastructure, innovation, and reform have significantly
improved; coming a long way from the overall restructuring initiated in 1994.
Banks are fast becoming the primary players in the Chinese financial system. Unlike
many Western countries, China‟s banks are not as reluctant to lend money to the public, and
encourages development. However, these banks prefer to lend to the government compared to
private investors to avoid uncertainty. Interesting point here: bank are not as reluctant to lend to
the public, but prefer lending to gov‟t, because of risk in public sector. In US, gov‟t subsidizes or
bails out selected private sector banks; is there a significant difference here? The Chinese
practice an ideology called Guanxi, which focuses on long-term relationships. Banks are
sometimes skeptic of private investors whom they haven‟t built a relationship with, especially
during this current financial crisis. Table 1 (figure 2) shows a comparison of China‟s banks,
according to their outlook and financial strength.
Table 1: Comparison of China‟s Banks
Banks Owned by the Central Government Outlook
Agricultural Bank of China STA
Bank of China STA
Bank of Communications STA
China CITIC Bank NEG
China Construction Bank STA
China Development Bank STA
Industrial & Commercial Bank of China STA
Banks Owned by Local Governments
Guangdong Development Bank STA
Shanghai Pudong Development Bank STA
Shenzhen Development Bank POS
Moody‟s Investor Service is one of the world‟s most recognized and widely used sources
for credit ratings, research, and risk analysis. They perform financial research and analysis of
commercial and government organizations. According to Moody‟s, China‟s domestic and
international banks have generally shown a positive/stable rating in terms of the financial
strength. Although Moody‟s doesn‟t consistently follow some of these banks, a majority of the
banks “possess strong intrinsic financial strength.” Typically, they will be institutions with
valuable and defensible business franchises, good financial fundamentals, and a predictable and
stable operating environment. Shown in Table 1, only one of their banks had a negative outlook
and one bank had a positive outlook. In general, a vast majority of their banks were stable,
which indicates good financial strength.
ii. Government Fiscal Situation
China‟s government fiscal situation has shown that they have had an annual government
budget surplus. Chart 4 depicts that their budget surplus, as a percentage of GDP, was 1.7%,
1.0%, 4.0%, and 7.2%, from 2004-2007 respectively. This shows that China has been steadily
increasing their income faster than they have been spending their money. Compared to the US,
who has had over a billion dollar government deficit, China is doing well. With their surplus,
China is capable of lending money to other countries that are in need of help, such as the US.
They can also use their surplus money to increase spending by stimulating the economy or
cutting taxes – which provide citizens with an increased amount of money to spend (Source:
ADB, Key Indicators for China).
iii. Monetary Stability
Table 4 below shows a comparison of China‟s monetary stability during the years 2002-
2007. Included in the table are China‟s money supply growth rate, short-term nominal interest
rates, consumer price inflation, and real interest rates.
2002 2003 2004 2005 2006 2007
Money Supply Growth Rate -0.9 8.4 9.3 5.1 15.4 20.8
12-Month Nominal Interest Rate 0.7 0.1 0.3 1.7 3.0 2.8
Consumer Price Inflation (% Change) -3.1 -2.5 -0.4 0.9 2.1 2.0
12-Month Real Interest Rate 3.8 2.6 0.7 0.8 0.9 0.8
Table 2: Comparison date China’s Monetary Stability, 06-07 (Source: ADB, Key Indicators for China)
Chart 5 below is a depiction of the data that is provided in Table 3 above regarding China‟s
Chart 2: China Monetary Stability, 2006-2007
The growth rate of the broad money supply for China has increased over the past six
years, as seen in Table 2. There was a slight drop in 2005, but it exploded in 2006 and 2007. An
increase in this supply could mean that businesses and individuals are borrowing more money so
that they can fund their investments and consumption. This explains why more money is being
introduced into the supply. This, in turn, can lead to a higher GDP since more goods and services
are being sold and more money is being invested (Source: ADB, Key Indicators China) Demand
for money won‟t increase its supply. The cent bank must have sped up growth in an effort to
keep interest rates down. The real rate in your table drops to below 1% the year after monetary
growth went up. The higher nominal rate may be because people expect inflation, which is what
they are getting by the end of your series. The central bank (Peoples‟ Bank) may have depressed
the interest rate to stay with US & Japanese rates and to keep too much hot money from flowing
in. Too much means too much resulting inflationary pressure, so they interfered to keep
inflationary pressure at the level they wanted, not the higher level that international pressures
might have brought in. They also had their exchange rate to worry about.
The average consumer price inflation (CPI) rate for China has fluctuated between being
negative and positive. The inflation rate was negative during the years 1994-2004. Conversely,
the data in Table 2 shows that inflation has been steadily increasing since 2002. It has been
estimated that the CPI will be 3.6% in 2008 and 4.5% in 2009. Ultimately, this has caused
China‟s citizens to purchase their goods and services at a higher price. The drop in purchasing
power can make consumers feel as if they are less wealthy. Although, if it stays at a low rate, it
will not have an adverse effect on the economy (Source: ADB, Key Indicators for China).
China‟s 12-month short-term nominal interest rate on deposits for 2002-2007 is provided
in Table 2, and is depicted in Chart 2 above. The short-term interest rate moves with inflation or
deflation in order to prevent the currency from being undervalued or overvalued. As is evident,
the interest rate was very low in 2004. Almost nothing was earned on deposits but luckily, it has
been able to grow over the past few years following 2004 (Source: ADB, Key Indicators China).
Subtracting the inflation rate from the nominal interest rate yields the real interest rate.
Table 2 and Chart 2 show that this rate has been stable over the past few years. If this rate were
to dramatically decrease or increase, then a currency will either become overvalued or
undervalued. The government would then have to step in so that they could prevent the
exchange rate system from failing. The government has the option of either increasing or
decreasing short term interest rates in order to stabilize the exchange rate.
China’s Educational System
Over the last couple of decades, China‟s education system has been restructured in order
to keep up with the rapid growth of its economy. In 1985, a central government agency known as
the Ministry of Education planned to reform the educational system with scientific and technical
training as a top priority. The Ministry of Education requires 9 years of compulsory schooling to
increase literacy to build a foundation for working within a modernized economy.
The education system is divided into three main sections: basic education, higher
education, and adult education. Students compete through placement tests as they advance from
primary to senior secondary schools. After basic education students either attend to universities
or vocational schools. Education continues to expand as China‟s citizens continue to pursue more
advanced degrees. About a decade ago, possessing an MBA was a rarity; however, in 2004 those
with their masters reached 47,000. About 19% of China‟s population is enrolled in a higher
learning institution, with over 20 million students in 2,236 schools. Throughout the last couple of
decades, the number of young adults attending Higher Education institutions has dramatically
increased. The chart to the left depicts the gross enrollment percentage of the population between
ages 18 to 22 who are enrolled in China‟s universities.
China’s Legal System
The legal problems facing companies entering the Chinese market have been copyright
piracy. Chinese companies are copying various products from DVDs to purses and the
multinational companies are the ones suffering from it. Historically, companies who have sued
Chinese companies have received little compensation in the few cases that have been won. The
reason for this major problem has been the fact that the Chinese government has failed to enforce
their law against copyright infringement.
Part of the reason for this is the lack of education about copyrights and many Chinese
companies fail to realize that it is a crime. China‟s law on copyrights was first drafted in 1982
but was not established until 1996. In 2001, when China became a member of the World Trade
Organization (WTO), it amended the law to meet the WTO requirements. Another factor was
the 2008 Olympics that took place in China. Because there was so much focus on preparing the
country for the Olympics, the crack down on copyright enforcement lacked resources.
Recently in March of 2009, China won a ruling in the WTO regarding rights with
movies, DVDs, and publications. The US, who brought up the issue to the WTO, claimed that
China has failed to protect the rights of companies and that China‟s punishment for these crimes
has been weak. The ruling party stated that there was a lack of proof to support US claims
against China‟s copyright law.
China’s National Culture
Institutional concepts of this section of the analysis include that of the family and the
culture of China as a whole. The thought style of china regarding family is one of a patriarchal
nature. This means that the society as a whole view men as above women. Also being a
communist nation the nation as a whole values a collective style of thinking. This means that
they are more concerned with the group than the individuals needs. The concept of long term vs.
short term is strongly skewed to the long term which means that long term relationships are
valued highly and should be sought out by foreigners wishing to conduct business in the Chinese
These concepts of collectivism have come from the years of a communist nation. Even
before communism there was a need for a strong community in China because it was vital to the
survival of the individuals to stick together. This is another reason why the Chinese are more
concerned with the group rather than the individual. There is also a very high power distance in
China. It has a power distance of 80 which is much higher than the other countries in South East
Asia. This condition is not necessarily forced upon the population, but rather accepted by the
society as their cultural heritage.
There is also not an emphasis placed on free time. Free time in the West is very
important. We enjoy taking long vacations, taking breaks during work, and a long lunch hour.
All of these things are not important in the Chinese culture. The Chinese culture puts more of an
emphasis on structure rather than that of free time. A basic look at this could be if you are not
working than you are wasting time. The need to work hard is something that is instilled in the
Chinese people due to the hard life that many have known for centuries.
These environments have led to the basic rules that a MNC must look into to operate in
China. Some of the norms that China has produced for operating in a business setting as a society
are very different than some of those in the West and they must be taken into account when
conducting business in China. Some of these norms include not using your hands when you talk
because it is felt to be distracting from your message. Also one must avoid all physical contact in
public. It is very important to be on time or early, which is similar to that in the West. It is also
inappropriate to discuss business over a meal. This point is very important to dealing with
Chinese business people because it is such a norm in the West to take a client to lunch to discuss
Guanxi describes the complex nature of personalized networks of influence and social
relationships, and is centralized in Chinese society. Despite the growing interests among both
academics and business professionals in the west, the concepts of Guanxi is not questioned and
are considerable implications for businesses and doing business in China. The three main
purposes of using Guanxi are (but are not limited to) the following:
● Facilitate business activities
● Generate new/retain old clients
● Find business partners
● Source of information
“It can be maintained or developed through continued reciprocal exchange of favors (renqing).
Reciprocity, which is a strong social normative rule and morally binding for Chinese people, is
tightly associated with the culture of “face” (Mianzi) in that failures to repay favors in a Guanxi-
based relationships can lead to loss of face, thus resulting in disharmony within the network and
possible dissolution of the relationships (Lee, and Dawes, 2005). Saving Mianzi is a shortcut by
Chinese to build their network and tapping others‟ social resources (Buckley, Clegg and Tan,
2006). Therefore, Guanxi and Mianzi are prominent cultural characteristics that have strong
implications for interpersonal and inter-organizational dynamics for HP.”
In other words Guanxi is used as a source of knowledge and expertise, for finding
business partners and/or suppliers. Guanxi is, also used, to get better relationships in order to
create new business and generate new clients. Through referrals, opportunities arise to develop
and support the usual business. Guanxi is also used to cooperate, to stay informed and to keep
existing clients. Consulting firms also use Guanxi to help, make business deals, explore the
potential buyer‟s network and as a marketing tool.
Creating Chinese business networks are essential and do dominate in East and Southeast Asia. At
the core of these networks is the family business system, which has been dominant in Southeast
Asia, Hong Kong, and Chine for a long time. Business Guanxi are mainly the product of the
political and socio-economic systems in the contemporary China.
For international companies doing business in China, Guanxi is an important
consideration mainly at the initial stage: introduction, negotiation and set-up of operation. As
soon as the business is up to running, other factors will take up their importance. The Guanxi
relationship established during the early stage needs to be reassessed of its equity values to
decide whether to maintain it over time. This is because the Guanxi stock and the role it plays
will be changed or diminished while foreign firms move down the learning curve in the Chinese
market. Ultimately it is not Guanxi, but high quality products and good marketing strategies that
make business success in the Chinese market just as it is true anywhere else.
Expansionary Monetary and Fiscal Policies
The following observations demonstrate the expansionary monetary and fiscal policies
that China has participated in up to the present. This is with the purpose to continue facilitating
the rapid outward growth of its economy. Despite the overall positive results experienced by
these policies, it is uncertain whether or not they can continue to remain unchanged due to the
recent economic events that have taken place both domestically and globally. As these events
have indicated a sharp slowing down of global economic progress, China now has no choice but
to adapt and position itself accordingly in relation to its trading partners. The trading partner
being of greatest concern is the U.S, China‟s largest export market. The uncertainty is if these
adjustments will cause a positive, negative, or no have no affect on China‟s continued growth.
This model (figure 1) illustrates the general structure of the foreign exchange market for
China‟s currency in relation to the dollar up until the recent economic downturn, and also
illustrates China‟s conventional economic strategy of the last two decades. S represents the
supply of foreign exchange. D represents the amount of foreign exchange demanded. Q$1
represents the amount of dollars supplied, while Q$2 represents the quantity demanded. E
represents equilibrium where exports are exactly equal to imports. The current quantity supplied
and quantity demanded represents a negative current account balance where imports are worth
more than exports. China has established itself as export led and import dependent and therefore
demands more dollars. This has been usually readily supplied by the U.S in the form of direct
foreign investment by domestic U.S companies. This represented in the shift from S to S1 were
the Q$2 is the new quantity of foreign exchange.
Foreign Exchange Market and Balance of Payments (China) (Fig1)
Your symbol (¥) represents the Japanese yen. I assume you know that. To avoid confusion, it
might be better to use Y unless you find a more accurate symbol.
Q¥ : Q $
Result of Direct Foreign Investment Rate
Foreign direct investment may threaten local industries: As China puts money into
foreign nations and buys its companies and even bring in some of their own companies, local and
federal governments may feel a loss of economic growth as most of the productivity will be
secured by the hands China. Less money may be going into the local and federal governments.
Chinese companies may also drive less profitable local companies out of businesses and hurt
national the industry. As a result, many developing nations put strict limitations on the amounts
of foreign direct investment in their nations. For example:
“The Chinese government has promulgated and issued a series of laws and statutes concerning the
establishment, operation, termination and liquidation of foreign-invested enterprises. The main laws and
regulations include the three basic laws ― The Law of the People's Republic of China on Chinese-Foreign
Equity Joint Ventures, The Law of the People's Republic of China on Chinese-Foreign Contractual Joint
Ventures, and The Law of the People's Republic of China on Wholly Foreign-Owned Enterprises; detailed
rules for the implementation of the three basic laws; The Company Law of the People's Republic of China;
The Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and
Foreign Enterprises; Interim Provisions for Guiding Foreign Investment; Industrial Catalogue for Foreign
Investment; Interim Provisions Concerning the Investment within China of Foreign-invested Enterprises,
Provisions Regarding the Merger and Separation of Foreign-invested Enterprises, and Liquidation
Measures for Enterprises with Foreign Investment. These provide legal bases from which to guarantee the
independent operation rights of foreign-funded enterprises and to protect the legitimate rights and interest
of both domestic and overseas investors.” 
"1. What are the basic laws and regulations encouraging overseas investors to invest in China?"China.org.cn - China
news, weather, business, travel, language courses, archives and more. Web. 05 Nov. 2009.
The following import export flow chart (figure 2) of China illustrates the degree to what can be
imported and exported out of China. Notice how these are generalities to which the possibilities
for corruption may be present in handling more specific matters. Also, this chart seems to
emphasize how open China is to foreign investment given the looseness of specifics.
2. "Hktdc.com - 2.1 Import-Export Flow Chart." Hktdc.com - Verified Suppliers & Manufacturers from China &
Hong Kong. HKTDC, Apr. 2008. Web. 05 Nov. 2009.
China has become one of the world leaders of imports for oil, raw materials
(Fig 3) 
As you can see (figure 3), China imports 23% of its minerals and fuels from other countries.
Taking into account how big China is, 23% is a large sum of the world‟s supply of minerals and
3. Brubaker, Richard. "The Story of China‟s Imports." All Roads Lead To China. All Roads Lead to China, 31 Mar.
2009. Web. 05 Nov. 2009. <http://www.allroadsleadtochina.com/2009/03/31/the-story-of-chinas-imports/>.
The U.S is especially important to China because the U.S is China’s largest
exported goods market.
The growth rate of Chinese exports exceeds the world's average rate of 13 per cent. As a
result, the growth of Chinese exports is increasingly subjected to international markets.
Secondly, the cost of Chinese exports is increasing, partly because of the higher cost of labor and
environmental protection. Cheap labor is the foundation of the Chinese economy. However, the
worker shortage apparent in some areas of china indicates that it is inappropriate to sacrifice
workers' welfare for the sake of low export prices and the Chinese government should change the
situation. In recent years, china has tightened restrictions on the export of products that consume
a lot of energy, create a lot of pollution or use a lot of resources in their production. Limited
resources and the environment have become major obstacles to the growth of Chinese exports.
Thirdly, increasing international trade protection has caused china to stumble into difficult
territory. China has been involved in the world's largest number of anti-dumping cases in recent
China‟s trade surplus is sufficient to fund any import needs. The Chinese hold their
exports as the driving force to attaining more U.S. backed securities. China‟s trade surplus has
allowed the Chinese to attain dollars which they then use to acquire U.S. backed securities. In
more detail, the Chinese and U.S. economy is significantly linked by China‟s low interest rate
loans to the U.S. This is because of the tendency of Chinese savings, which is the underlying
reason for China having excess savings. Therefore, China is able to loan money to the U.S. Ben
Bernanke proposed that such this credit cycle would take years to work out. So far, Bernanke can
only say, “we probably have little choice except to be patient." What this means is that the U.S.
really had no choice but to borrow from such a source. Therefore, good economic ties between
the U.S. and China should be fostered among the two. “In the past decade, China has invested
upwards of $1 trillion, mostly earnings from manufacturing exports, into American government
bonds and government-backed mortgage debt. That has lowered interest rates and helped fuel a
historic consumption binge and housing bubble in the United States” (Landler) . According to
therawstory.com, “China is believed to have the world‟s largest foreign reserve reserves to be
mostly in dollars at around 800 billion dollars in U.S. Treasury bonds” 
5. Landler, Mark. "China and U.S. bound themselves with linked addictions - Community
News." YTL Community. International Herald Tribune, 26 Dec. 2008. Web. 1 Nov. 2009.
6. "The Raw Story | China has 'canceled US credit card': lawmaker." The Raw Story | Investigative News and
Politics. Http://www.afp.com/english/home/, 30 Apr. 2009. Web. 05 Nov. 2009.
According to John E. Tamny, editor of RealClearMarkets:
“The problem there is that China doesn't so much buy dollars and dollar-denominated assets because it
loves us, but because lacking a central bank with any experience when it comes to managing a major
currency (the Yuan), China's leaders have correctly deduced that despite our Fed's own monetary mistakes
(including the inflation we're struggling with now), its own interests are best served by importing the
currency expertise that our Federal Reserve currently offers. Large dollar reserves enable China to maintain
a fairly tight peg to the world's reserve currency; one that makes its worldwide trade far more certain.” 
7. Tamny, John E. "Generosity, Trade Deficits, and China." TCS Daily. TCS, 7 Sept. 2007. Web. 30 Oct. 2009.
This model (figure 4) demonstrates the gradually increasing trend of China‟s economy to
produce more goods in the form of experts. P represents the price level for which Q or quantity is
produced. AD represents aggregate demand while AS represents aggregate supply. At price level
P1, Q1 is produced. As a result for an increasing in demand for exports, demand has now shifted
to AD2. The cost to produce additional goods in order to meet demand remains the same at
increasing marginal cost along the supply curve AS1 at quantity Q3. Therefore, China now shifts
the supply curve from AS1 to AS2. This is a result of trade investment done by trading partners;
mainly the U.S. China is able to take advantage of economies of scale. In effect a greater level of
output at Q3 is attained at the same price level P1.
Increase in Aggregate Output in the form of exported goods (Fig.4)
Recently in contrast to this however, China has bought large amounts of US debt in the form of
What does China have to gain by do this?
China gains an increase in the world‟s largest treasury holdings. The dollars that China
accumulates goes towards the purchase of these bonds. Having large sums of treasury bonds
allows China to be a more important factor in the world economy. Currently, most of the world‟s
greatest assets are traded in dollars. An asset such as oil is a very important commodity that will
continue to deplete. Because of this fact, it seems that the U.S. currency is at a risk if it ever
came to a point if the world‟s major commodities were to change currencies. By having control
by ways of influencing monetary policies within the U.S., China is one step ahead of leveraging
the U.S. debt against itself. Effectively, China indirectly gains more control. China is able to
bring better offers to the table when it comes to the acquisition of oil.
What are the affects of doing this or not doing this?
If China pulls out of U.S. treasury bonds interest rates would spike. The Chinese low
interest rates to the U.S. contribute to the U.S. interest rates to domestic and foreign lendees.
Since the value of the dollar is depreciating there is less demand to purchase such a currency.
Therefore, China would have a harder time selling the securities too anyone. If China were to
dump the securities, doing so would cause the dollar to depreciate significantly. The threat of
China dumping U.S. securities would have a drastic affect on the U.S. economy. The affects of
doing was believed to have also contributed to the cause of the
This model (figure 5) represents the present foreign exchange market for U.S currency in
relation to China‟s currency. S represents the supply of foreign exchange while D represents the
amount of foreign exchange demanded. Q¥1 represents the amount of Yuan supplied, while Q¥2
represents the quantity demanded. E represents equilibrium where exports are exactly equal to
imports. The current quantity supplied and quantity demanded represents a negative balance
where exports are worth more than imports. This model illustrates the current events that have
taken place, where China has bought a significant amount of U.S debt. There are very important
differences to note from the previous model. Firstly, is that the demand for the U.S dollar is now
low, and as a result the value of China‟s currency is now greatly appreciated against the dollar
Secondly, is that China‟s current account reflects an enormously positive surplus. Lastly, in
comparison it is now currently the U.S that seeks more foreign direct investment by selling
bonds to China.
Foreign Exchange Market and Balance of Payments (U.S) (Fig. 5)
Q$ : Q ¥
China needs the U.S. and the U.S. needs China. This begs the question, “What happens if
a relation between a socialist economy and a capitalistic economy clash together as it appears
that both support each other?” Why does China continue to buy U.S. backed securities? The
simple reason is that is has to, because of its exchange rate policy. In order to keep the value of
the Chinese Yuan from appreciating versus the dollar, China‟s central bank must buy U.S.
dollars in massive quantities. And rather than just sitting on the physical currency - which pays
zero interest - it buys foreign securities (Fessler) 
8. Fessler, David. "Why China Can't Dump U.S. Treasuries -- Seeking Alpha." Stock Market News, Opinion &
Analysis, Investing Ideas -- Seeking Alpha. Seeking Alpha, 13 Feb. 2009. Web. 05 Nov. 2009.
Barry, Tom. “WTO In Focus- V. China and the WTO”. Foreign Policy In Focus.
20 June 2002. 28 October 2009. http://www.fpif.org/wto/china.html
Brubaker, Richard. "The Story of China?s Imports." All Roads Lead To China. All Roads Lead to China,
31 Mar. 2009. Web. 05 Nov. 2009. <http://www.allroadsleadtochina.com/2009/03/31/the-story-
Fessler, David. "Why China Can't Dump U.S. Treasuries -- Seeking Alpha." Stock Market News, Opinion
& Analysis, Investing Ideas -- Seeking Alpha. Seeking Alpha, 13 Feb. 2009. Web. 05 Nov. 2009.
Landler, Mark. "China and U.S. bound themselves with linked addictions - Community News." YTL
Community. International Herald Tribune, 26 Dec. 2008. Web. 1 Nov. 2009.
Tamny, John E. "Generosity, Trade Deficits, and China." TCS Daily. TCS, 7 Sept. 2007. Web. 30 Oct.
“China and the WTO”. World Trade Organization. 23 October 2009. 28 October
“Real WTO Challenges for China Will Be Cultural, Economics Professor Says.”
China Internet Information Center. 15 March 2002. 30 October 2009.
What are the basic laws and regulations encouraging overseas investors to invest in China?" China.org.cn
- China news, weather, business, travel, language courses, archives and more. Web. 05 Nov.
"Hktdc.com - 2.1 Import-Export Flow Chart." Hktdc.com - Verified Suppliers & Manufacturers from
China & Hong Kong. HKTDC, Apr. 2008. Web. 05 Nov. 2009.
"The Raw Story | China has 'canceled US credit card': lawmaker." The Raw Story | Investigative News
and Politics. Http://www.afp.com/english/home/, 30 Apr. 2009. Web. 05 Nov. 2009.
Other than being an outstanding work of research, I have only stylistic criticisms. Up to page 22, it reads
like a paper, and contains much commendable work. But then, I assume you didn‟t have enough time to
get the whole thing done, it starts reading like a report with several subsections. Again, your work is quite
well done. Grades are as follows:
Paper: A. The reason for the A without a + is given just above.