Assignment no 1

Current Business Affairs

Shumaila Shakeel (9792)

MBA-4C

03 MARCH 2011
Introduction: Emerging Economy

One of the biggest giants that ever emerged in the economy is china. Its economy is huge and is
expanding rapidly. In the last 30 years the rate of Chinese economic growth has been almost
miraculous, averaging 8% growth in Gross Domestic Product (GDP) per annum, reaching 3.42
trillion US dollars by 2007. In per capita income terms, China stands at a lowly 107th out of 179
countries. According to the analysts, china has been the biggest economy after United States and
some of them predict that it would be the largest economy in the world. Though China’s
economic performance so far has been a true miracle, its continued success remains far from
certain.

China’s Path to Modernization

Communism is the base on which china made great progress in every walk of life.
Communist revolution came in china in 1949. Before this, the people of the world did
not know much about the people of china. In the terms of both population and GDP, China was
the largest economy on the planet until the early nineteenth century. It lost its lead with the
Industrial Revolution, and its economy experienced a long period of decay from 1820 to 1949.
After the founding of the People’s Republic in 1949, China’s process of industrialization and
modernization began.

As a latecomer to modernization, China has had no choice but to chart a new path in catching-up
with the rest of the world and achieving a modern economy. In 1952 China was one of the
poorest countries in the world. The per capita GDP of Western Europe was 7.15 times higher
than that of China, and the GDP per capita of the United States was 18.8 times higher. After
more than 20 years of modernization, China now ranks as the sixth largest economy in the world.

In the era of the globalized, knowledge-based society, China has gone under profound and,
indeed, accelerated transformation. This is so much so that China might leap over several stages
of development to transform itself simultaneously from a traditional society to a modern society,
from a predominantly agrarian economy to a knowledge-based economy, and from a planned
economy to a modern market economy.

1978: A New Stage of Economic Development

Since 1978, China’s successful economic transformation focused mainly on GDP growth and
economic reforms that have since achieved per capital economic growth of 8 to 10 percent
annually, among the highest rates in economic development history. Global economic factors,
crucial for China's post-1978 growth, include global economy trade opportunities, foreign
investment, foreign advice, foreign loans, export-lead development opportunities, export
processing zones, investment and assistance by Chinese from Hong Kong and other parts of
"greater China," and the examples of successful export-led economic development by Japan and
by the four Asian "tigers".
After 1978, the Chinese government continued to own and to control most major Chinese
industrial and economic sectors, including transportation, communication, energy, mining,
manufacturing, and financial services. Private control of agricultural land was made possible
through long-term leases for farmers, and a free market was opened up to small business people
and those providing consumer goods and services. Foreigners would also be permitted to
participate in joint ventures with Chinese companies and eventually to be able to open wholly
owned companies under Chinese regulations in selected areas of the Chinese economy.

Why Is China Growing So Fast?

There are several factors explaining that why china is growing so fast. Firstly is high savings and
investment. Improved productivity increased growth and generated funds used for new
investment. China also benefitted from having a very large pool of domestic savings to draw
from to finance investment when reforms were begun. Moreover the economic reforms, which
included the decentralization of economic production, led to substantial growth in Chinese
household savings. The second factor is foreign direct investment. China’s trade and investment
reforms and incentives led to a surge in foreign direct investment (FDI), which has been a major
source of China’s capital growth. Although small relative to domestic saving, it is argued that
this capital is used much more efficiently (much domestic saving flows to state owned
enterprises), and thus makes an outsized contribution to economic growth and much of the FDI
going into China has gone into export-oriented manufactured goods, such as consumer
electronics. The third factor is the increase in the productivity.

Positive Aspects of Chinese Economy

The success of reform over the last 26 or so years has proved that Chinese leaders possess
adequate policy-making ability. Indeed, China has now begun to enjoy comparatively mature
economic decision-making. A country’s human resources, capital, natural resources, and level of
science and technology determine the durability of economic growth. China’s large labor supply
has already resulted in it being the production center for global consumables. Its huge population
also means that it is an enormously attractive market. Foreign direct investment (FDI) is another
vital engine of domestic economic growth; educational levels and use of science and technology
have also played an important role. High-tech industries have become the engine of economic
development in China’s coastal areas.

In 2004, China surpassed Japan as the world’s third-largest trading economy. China currently has
the world’s largest mobile phone network and one of the fastest-growing markets, in 2002, China
replaced Japan as the world’s second-largest personal computer (PC) market. China also became
the world’s second largest Internet user (after the United States).

Negative Aspects of Chinese Economy

There are many challenges the Chinese economy has faced and is facing. The areas include
institutional, social, and issue-related factors, potential-for-conflict areas, and international
issues. Moreover trying to establish an economic market system has negatively impacted social
justice. Another problem that the economy has faced is rampant corruption. While no country
has been able to stamp out corruption completely, the extent of this ill varies widely. In China,
corruption is mainly institutional. In addition to this, China also has a widely damaged natural
environment, with some ecologists regarding China’s present ecological environment as a
nightmare. China’s drinking water resources are less than 25 percent of the world average; its
forest resources are less than 12.5 percent; and its grassland resources are less than 50 percent.
Pollution has grown along with GDP, as the catching-up strategy has paid little attention to
environmental protection.

Is China a Threat to U.S Economy?

China’s rise as an economic power has raised a number of concerns among U.S. policymakers,
including efforts by Chinese companies with substantial state ownership to take over major U.S.
companies such as Lenovo Group Limited, a computer company primarily owned by the Chinese
government, signed an agreement with IBM Corporation to purchase IBM’s personal computer
division for $1.75 billion. On April 30, 2005, the acquisition was completed. Furthermore the
demand for commodities and natural resources is another channel through which China’s
economic development might affect the U.S. economy.

Conclusion

China’s economic ascendency over the past 30 years has been described by some as an economic
miracle. China has gone from a poor, backward economy to the world’s second-largest economy
(on a PPP basis). Although many have welcomed China’s prosperity and integration into the
world economy, others have viewed it with alarm, contending that China’s rise as an economic
superpower threatens to undermine the U.S. economy.

Apart from all the discussion above, it is clear that in upcoming years China would be the giant
ruling the economy but the key questions concerning the future of China’s economy are whether
China’s faster economic growth is a reality, a myth, or just a bubble, and whether China can
continue to sustain high growth rates for the foreseeable future or not.