Analysis of China Unbalanced Case

Town and Village enterprises (TVEs) – socialist organizations owned by local and provincial authorities sprung up everywhere, financed by farmers’ surplus earnings. Special economic zones (SEZs) – Equipped with cheap labour, adequate power and no taxes are mainly targeted for attracting foreign direct investment. Companies in these special areas contribute 54% of total china’s exports. Fixing State owned enterprises (SOP) – between 1997 to 2007, share of SOEs in employment in domestic companies declined from 81% to 46%. This strategy proved to be successful. Nominal GDP growth averaged about 18% and real economy grew at the rate of 9%.

Entry into the world trade organization China failed to gain WTO membership under Deng Xiapong and had continued to seek “most favoured nation” status from US throughout the late 1990s.China finally gained WTO membership in December 2001. The terms china agreed to could be classified into three realms –

* Reforms facilitating foreign enterprises

For foreign invest firms that sold goods in China, the most significant restrictions were those limiting distribution – whole selling, retailing, and franchising. Upon promise of china to give rights to foreign companies, Telecommunications and insurance opened first followed by banks.

* Reforms promoting free trade

China lowered tariffs significantly from 31% in 1997 to 14% in 2005. Tariffs remained significant in apparel and automobiles. China promised to stop subsidizing exports and domestic industries. China committed to treat imported goods with domestic goods. But implementation of these reforms were frustratingly slow as china was loath to stop programs to aid its ‘pillar industries’ such as steel, cement, petrochemicals, automobiles and machineries.

* Systematic reforms aimed at improving transparency and predictability of China’s laws.

China agreed to change country’s legal framework that were designed to remedy some of the main obstacles to foreign enterprise and trade. Transparency in operations and difficulty in learning new rules that remained too susceptible to capricious practices that customs official used to block imports. China committed to tighten its legal protection to prevent Chinese theft of foreign intellectual property to stop losing proprietary technologies to their technologies to competitors through employee defection, misappropriation and copying of sensitive documents.

Capital controls By 2001, China controlled 11 out of 13. These included transactions related to – * Capital market securities * Money market instruments * Commercial and financial credits * Direct investment and liquidation of direct investment * Real estate transactions * Personal capital movements China encouraged FDI inflows and tightly regulated FDI outflows and external debts.

Consequences of WTO accession China’s economy took off after 2001 with exports grew by 27% annually and real GDP growth accelerated from 8-9% to 10-11% annually. Imports also grew rapidly by 24% annually as china acquired raw materials from its neighbours. Because of this trade difference, China’s trade surplus grew to $360 billion by 2010, a gap of 8% of GDP. Foreign direct investments exploded and by 2008, China reported $148 billion FDI inflow, 3.5% of GDP.

Productivity China’s labour productivity grew by 8.5%.The roots of Chinese productivity growth can be traced to several factors. They are as follows - * Migration from rural to urban regions * Reduction in market share of SOEs entailed a massive reallocation of capital and labour * FDI brought better technologies and more sophisticated managed practices. * Importing equipment goods that embodied productivity

* Investment in infrastructure * Reduced communication and transportation cost * Availability of electricity at greater scale and lower cost.

Energy and Raw materials China was short of raw materials – food, iron ore, aluminium, copper, coal, natural gas and petroleum. The export led growth strategy, plus the growth needed for domestic consumption had fuelled massive demand for all sorts of raw materials. In may 2010, China already consumed 9.2 million barrels of petroleum products daily and 5.3 million barrels are imported daily. China began acquiring oil and gas assets outside china and Chinese companies to invest at least 18 billion in Iraq, Iran, Venezuela and Angola. Going out strategy was driven by sense of geopolitical insecurity. This resource-acquisition strategy seemed to fit well with Chinese foreign policy. Financial crisis

In 2008 when recession stuck in US and then rapidly spread to markets worldwide. As consumers in developed economies stopped consuming, China and other exporting nations felt the impact immediately in trade, foreign direct investments and loans. In Nov 08, government announced 4 trillion Yuan stimulus package targeted key areas such as housing, rural infrastructure, transportation, health and education, innovation, low-income housing and disaster rebuilding. Because of stimulus package real GDP growth of china stood at 8.7%.

The Hukou system The hukou was a permit that categorized people by location and as agricultural or non-agricultural. This system was established in 1950s to keep rural people active in farming to maximize food production. But this created a barrier for migrants to move from rural to urban. Moreover, health care, housing, pensions and children’s education were all tied to hukou. In 2010, china decided to scrap hukou system.

Health care As late as 2008, most health facilities were publically owned but they behaved as private entities. The government, which wanted these facilities to survive, set prices for high-tech diagnostic services above cost and allowed 15% profit margin on drugs. In April 2009, government spent 850 billion to invest in specific areas – * Expand insurance coverage

* Increase governmental spending on public health services * Establish primary care facilities in urban and rural areas * Reform pharmaceutical market * Pilot test public hospital reforms Pension reforms were introduced by china government for urban people.

Banking, Housing and Yuan China’s banking sector was not significantly affected by financial crisis. It had not traded extensively in derivatives, and state’s control over the banking system prevented a credit crunch. But China had used an expansionary fiscal and monetary policy to counter the recession. But unlike most countries, the central government had financed only about quarter of stimulus package. Loans granted by state owned banks financed most of rest. As a result money supply increased by 30%.

Housing bubble In 2009, residential investment grew by 16% in 2009. As china has high saving rate, people tend to buy property from their saved money. When real estate prices collapsed that reduced wealth of house owners and not banks so that hadn’t any adverse show in bank’s balance sheet.