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China: Social, Political, Macro-economic Table of Contents Letter of Transmittal………………………………………………………………………………2 Abstract……………………………………………………………………………………………4 China Overview…………………………………………………………………………………...5 Recent Developments……………………………………………………………………………..7 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 Economic Policies………………………………………………………………………………..15 China‟s Economic Education System……………………………………………………17 Legal System……………………………………………………………………………………..18 National Culture…………………………….……………………………………………………18 Guanxi…............................................................................................................................19 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 Conclusion………………………………………………………………………………………28 Work Cited………………………………………………………………………………………29 Abstract 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 place. 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. China Overview 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.) Political System 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 between 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 exporters. ● 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 increase. 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 economy. 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 $6,210.3. Also the PPP data showed that China‟s living standards remain far below the U.S. and Japan living standards while the size of China‟s economy is substantial. China‟s per capita GDP on a PPP basis was only 13.6% of U.S. levels. Thus, China‟s living standards would likely to remain below the United State‟s living standards for many years to come. Comparisons of U.S., Japanese, and China GDP and Per Capita GDP in Nominal U.S Dollars and PPP, 2008 Country Nominal GDP GDP in PPP Nominal Per Per Capita ($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). Interesting table. 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 China’s Merchandise World Trade: 1979-2008 ( $ billions) Year Exports Imports Trade Balance 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 and ASEAN. 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 Major Trading Partner: 2008 ($billions) 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 Total Chinese Trade 2,560.4 1,428.90 1131.5 297.4 n.a. Same source? 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 organization. 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) (Fig. 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 1) 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 (Fig. 2) 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. Economic Policies 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 monetary stability. 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 market. 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 business. Guanxi 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 ● Networking ● 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 $ Q$2 Q$1 D S1 S QB ¥: $ 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. <http://www.china.org.cn/english/features/investment/36741.htm>. 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. (Fig.2) 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. <http://www.hktdc.com/info/mi/a/bgcn/en/1X002LZA/1/Guide-to-Doing-Business-in-China/2-1-Import-Export- Flow-Chart.htm>. China has become one of the world leaders of imports for oil, raw materials ect. (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 fuels. 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 years. 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. <http://www.ytlcommunity.com.my/commnews/shownews.asp?newsid=43015>. 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. <http://rawstory.com/news/afp/China_has_canceled_US_credit_card_l_04302009.html>. 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. <http://www.techcentralstation.com/>. 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) AD1 P1 P2 Q3 Q3 Q1 AS2 AS1 Q P AD2 Recently in contrast to this however, China has bought large amounts of US debt in the form of bonds. 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 ¥ E Q¥2 Q¥1 D S Q¥ $: ¥ Conclusion 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. <http://seekingalpha.com/article/120547-why-china-can-t-dump-u-s-treasuries>. Work Cited 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- of-chinas-imports/>. 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. <http://seekingalpha.com/article/120547-why-china-can-t-dump-u-s-treasuries>. 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. <http://www.ytlcommunity.com.my/commnews/shownews.asp?newsid=43015>. Tamny, John E. "Generosity, Trade Deficits, and China." TCS Daily. TCS, 7 Sept. 2007. Web. 30 Oct. 2009. <http://www.techcentralstation.com/>. “China and the WTO”. World Trade Organization. 23 October 2009. 28 October 2009. http://www.wto.org/english/thewto_e/countries_e/china_e.htm “Real WTO Challenges for China Will Be Cultural, Economics Professor Says.” China Internet Information Center. 15 March 2002. 30 October 2009. http://www1.china.org.cn/english/2002/Mar/28871.htm 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. <http://www.china.org.cn/english/features/investment/36741.htm>. "Hktdc.com - 2.1 Import-Export Flow Chart." Hktdc.com - Verified Suppliers & Manufacturers from China & Hong Kong. HKTDC, Apr. 2008. Web. 05 Nov. 2009. <http://www.hktdc.com/info/mi/a/bgcn/en/1X002LZA/1/Guide-to-Doing-Business-in-China/2-1- Import-Export-Flow-Chart.htm>. "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. <http://rawstory.com/news/afp/China_has_canceled_US_credit_card_l_04302009.html>. http://www.fas.org/sgp/crs/row/index.html http://www.indexmundi.com/china/gdp_%28purchasing_power_parity%29.html http://geography.about.com/od/populationgeography/a/chinapopulation.htm http://fdi.gov.cn/pub/FDI_EN/Statistics/default.htm 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: Draft: A+ Paper: A. The reason for the A without a + is given just above.
"China Social Political Macro-economic"