Free Custom «Economic Potential of China» Essay Paper

As of the year 2010, People’s Republic of China ranked the second largest world economy after the USA (Starr). For the last 30 years, it has been the fastest growing economy, having a highly consistent GDP growth of approximately 10%. Today PRC is the world’s largest exporter as well the second largest world importer of goods (Chevalier & Xiao, 2011). Since China initiated new economic reforms in 1979, the country has become the fastest growing economy in the world with per capital GDP of $7,544 as of the year 2010 (rank 94^th in the world)(Brainerd 5-8). Between the years 1979 to 2005, the Real GDP of China grew with an annual average rate 9.7% and 9.9% specifically in the year 2009. Between 2006 and today, China’s economy has been growing with an alarming rate of 10% annually (Wayne Morrison, 2011). In the year 2010, China valued its GDP at $5.87 trillion, which surpassed second world largest economy, Japan, who’s GDP for the same year valued at $5.47 trillion. Many economists project that China could the next world’s largest economy (in terms of the Nominal GDP) by 2020. Industrial and manufacturing sector has largely contributed to Chinese growth. Contributing to massive exports China has been producing over the years (Yifu Lin, 2011). 

Trade has been the main driver of China’s thriving economy. The country records the highest trade surplus in the world, in 2005, China’s export rose by 28.4% to $762 billion while import only grew by 28.4% to $762 billion (Fewsmith, 2010). This gave the China a trade surplus of approximately a $102 billion. Trade boom experienced in China has mainly been facilitated by large inflows of the direct foreign investments (FD1) into the country. Foreign firms investing in China contribute to over half of the country’s trade (Wang & Liu).  China’s remarkable growth is facilitated by the liberalization of surplus labor in the economy which leads to a high saving rate (Chevalier & Xiao, 2011).

China mainly focuses on implementing the long term development plans which include natural resources, rare earths, green energy and bicycles. On the issue concerning natural resources, China has greatly invested in Africa and Australia, so that it can have the right to get access to minerals. This is a very wise decision, since the natural resources in China are limited and they cannot sustain its future economic growth (Keidel Albert, 2008). 

China has also done much investment in the rare earths and that has encouraged the growth of a deep pool of research projects and technical experts in the field. This has made China have the most number of researchers and other experts in the ‘rare earth’ science.

China has also encouraged the need to use green energy so as to limit the harmful pollution from the industrialization and urbanization which pose a very large threat to public health.  The use of green energy involves the use of clean energy technologies and products like wind turbines. The use of bicycles as means of transportation in China has also boosted the growth of its economy (Wolf Charles, 2004). Since 1991, when the Chinese government made the manufacturing of electric bikes also known as “e-bikes” an official technology goal, the world bike production has outstripped the global car production by almost triple. By now, there are 2,600 manufacturers of e-bikes in China (Prasad Eswar, 2004).

Domestic reforms and open up policy developed by China in 1979 have since then made China to grow and become among the leading nations in earth both economically and politically, especially since the 1990s. India on the other hand established its economic reforms around 1991 and since then the nation has been observing rapidly rising annual GDP growth rate (Bosworth, 2008). The economic and technological progress in these two nations has made both China and India to recognize that economic progress and globalization does not necessarily depend on efforts of an individual country but mainly on economic co-operation and interaction between countries.  Since both China and India have different economic potential and produce different commodities, close economical cooperation is highly practical.  Co-operation between China and India makes both nations to highly benefit from each country’s unique potentials. Today China is one of the major players in the world economy and very few countries in the world can match the pace of its sustained economic growth.  Below explained in details are the main drivers of China’s economic growth (Clesse Armad, 2004).

Foreign direct investment in China rose to an amazing record of $105.7 billion in the year 2010. It is the world’s fastest-growing major economy with investment rising to 17.4%. China in 2009 overtook the United States of America to emerge the world’s biggest car market, passed Germany as the largest exporter in the world and overtook Japan to become the second-biggest economy in 2010. It is probable that China might overtake the U.S. as the largest economy by 2027 (Sun Haitao, 2011).

An important part of the economic reform process in China has been the promotion of the foreign direct investment (FDI) inflow. Since it launched the economic reforms and called for foreign capital participation in its economy in 1979, China has received a large part of international direct investment flows. FDI in China has grown rapidly since 1978 and especially in the 1990s. China has been the world largest FDI recipient among developing countries since early 1990s. In recent years, FDI to China accounts for 25% to 33.3% of total FDI inflow to developing countries (Du, Jiang, 2010). Foreign investment has become an important source for China’s investment in fixed assets. Its share in total annual investment in fixed assets grew from 3.8% in 1981 to its peak level of 12% in 1996 (Jiang, Zhiqiang, 2009).

The market oriented reforms and adjustments carried out by China have yielded high economic growth and a great economic transformation. Since the start of the reforms real GDP has averaged 9.5%, increasing the per capita income and enabling the Chinese government to make advanced steps in reducing poverty.  Nongovernmental sector accounts for almost 60% of the total GDP (Zhang, Wang, 2009). An open economy that favours trade and foreign direct investment has propelled this exceptional growth performance. Foreign direct Investment will continue to be a great determinant of enormous growth of Chindia economy in the years to come.

Thirty years ago, China emerged as an export oriented economy producing cheap industrial products and manufacturing consumer goods, in the world market, thus recording the fastest rate of economic growth. With a vast population and 200 million of them middle class, China has industrialized rapidly with a robust domestic market demand provided by its vast population (Narayan & Kumar, 2004).

China exports were worth $149.9 Billion in January of 2012. Export growth has continued to be a major component supporting China's rapid economic growth. Exports on commodities i.e. goods and services constitute 39.7% of its GDP. China major exports are: office machines & data processing equipment, telecommunications equipment, electrical machinery and apparel & clothing. China’s largest exports markets are European Union, United States, Hong Kong, Japan and South Korea. The presence and availability of low-cost labor in China has made it internationally competitive in many low cost and labor intensive manufactures. The average hourly labor cost for manufacturing in China in 2010 stood at $2 being 5.9% the cost in the United States which was $34 (Arora, 2011). Export has been one of the major drivers of Chinese economy.

Business Process Outsourcing (BPO) industry in China was until recently very neglected. However, the trend is now changing as the BPO market has grown from $900 million in 2005 to about $1.3 billion in 2007 alone. Customer companies from Japan, Korea and Hong Kong are the key drivers of BPO business in China mostly due to the language barrier. However, most of these firms limit outsourcing to only low end services and aims at cost savings. Despite the fact that cost is the primary driver for any outsourcing to occur, China also provides a lot of other facilities. They include; low land rentals and favorable banking regulations. A lot of Chinese companies are insistently expanding their existence globally, and now aim to make more efficient their business processes so as to offer state of the art services. They are outsourcing their activities to some global and Chinese BPO service providers. The trend towards a BPO growth will promote a strong domestic market, improve the education infrastructure, get skilled laborers at law wages, create a comprehensive IT infrastructure and acquire government support for BPO development (Oshri , 2011).

There is already in existence a number of large scale manufacturing companies in China. However, more are expected to be put up before and after 2015.

Volvo Car Corp. plans a manufacturing base for the western Chinese city of Chengdu as it aims at expanding in the world’s biggest market following its buyout by independent automaker Geely. Large scale production will help in production efficiency, environmental protection and also in stabilizing the market price (Rima H, 2010). 

China’s economic model is not very different from that of Japan and Korea; it’s investment/export-led. China efficiently uses state capitalism as its economic model that drives growth in the country and the region at large (Milhaut, 2011). It is defined as a commercial economic activity undertaken by a government with management of the productive forces in a capitalist manner, even if the state is fundamentally socialist. The system is characterized by the supremacy or existence of a significant number of state owned business enterprises that are ran and operated within a country. The total state owned enterprises assets equaled 62% of China’s GDP in 2010. State owned enterprises in china are among the largest firms in china and the whole world. They have major investments in foreign countries (Brink, 2011). The state owned enterprises have had involvement in some of the largest initial public offerings and is still the major stakeholder in the Chinese and foreign stock exchanges. Several benefits are associated with the economic boost in china. They include; an increased number of new consumers to drive global growth, increasing fresh opportunities for entrepreneurship and employment creation and increased demand for goods and services all over the world.

 Progressively, India is seen to possess parallel demands as China in the near future. India’s growth and development was generated by strong economic reforms that aimed at changing India into an information-age economy. India is anticipated to experience significant economic growth in the near future, with the first and the most basic demographic shift ensuing from lower infant mortality and fertility rates. India is distinctive case among the developing economies owing to its strong, stable and self-sustaining economy whose growth does not overly depend on external trade. India has a growing middle class population of 350 million (Phadke, 2012). This have allowed for 87% of India’s gross domestic product to be propelled through domestic market with levels of consumption being projected to quadruple during the next 20 years.

India is also likely to experience the same upward middle class mobility like China. A significant reduction in the number of individuals living below a dollar per day has been attained as this level has reduced by 39% since 1985 and the middle class has increased rapidly thus increasing consumption and levels of income. Increasing incomes in India has resulted in rising consumption causing a significant growth in business opportunities and employment. The growth has reduced poverty and increased the middle-class mostly belonging to households with improved standard of living (Bloom DE, 2011).

Historical Development of India’s Economy

India was originally a British colony from the year 1850 until it gaining of its independence in 1947. At this period, India’s economy was a tangled part of the powerful Britannic empirical economy. This enabled India to utilize Britain’s already established market structure and consequently gained and adopted Britain’s economic security.

However, just after gaining their independence, the British governance left India therefore taking away the much enjoyed economic security. Even though the British government had inflicted many positive developments to India, like the Indian railway line network, it also retarded the development of the economy. India had the primary role of provision of raw materials to supply Britain’s flourishing industrial sector, and therefore India could not achieve modern manufacturing industries and infrastructure.

Even at independence, India’s economy was collapsing. Regardless of harboring 14% of the world’s total population, the economy of India at the time could only account for less than 1.2% of the global GDP. To mitigate the rising issues, the new government implemented a number of policies that gained control of the national economy. Among the policies employed is the 1956 Industrial Policy Resolution that regulated imports and foreign trade so as to encourage domestic production. The new policies in India helped to set the required standards of restricted trade and strict government control of the economy. These policies, although meant to strengthen India, weakened it so much as it now made it a closed economy. However, this system continued until 1991 when an unforeseen payment crisis made the government to change economy management style. The new reforms included; privatization of formerly state-run companies, deregulation of the imports –exports sector, and opening of direct investment chances for foreign investors. This resulted to a significant rise in GDP ratio from a weak 15% to 35% in a decade’s time. India has sustained the reforms up to date; it has shifted its approach to a full open economy.