China’s Economic System

This present essay outlines China’s reformed economic system from a purely planned economy to a partial market economy, which includes certain Chinese characteristics. Also, the reasons for the change in the economic system are discussed. Finally in the end different challenges are mentioned that China is facing today to sustain the development

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After the foundation of the “People Republic of China” in 1949 the Chinese government carried the planned economy in its country for the first 30 yrs. All the decisions were decided by the government and their local bodies. The factories produced according to the state plans, the farmers cropped under the surveillance of the government. There was no interference of the public in the decisions and everything including the prices and the number of goods was also fixed by the planning department of China’s economy.

Until and unless these decisions are not transferred to the general public problems will still exist in China. Due to this Corruption prevailed in society. People who wanted high profits and better living got it through illegal sources, like black money. Another issue that arose was government interference. The government seized the interest rates below the market level causing a shortage in ‘Loanable Funds’ and politics (political parties) determined the scarce capital division. Due to this, the public lost their economic freedom and trust in the government. (Dorn, n.d)

In 1978, China’s economic system reform started in the rural areas of China. Now the farmers independently got the right to use their land and worked according to their own wishes. They planned the farm work, dispose of the products, and sold their agricultural products with their own choices. Apart from freeing the farmers in their agriculture certain other policies were also made as prices of the majority of farm products were freed, agricultural policies were abolished and now farmers were allowed to engage in diverse businesses. This lead to economic progress and farm production increased. It is reported that from 1990 to 2000, cotton output fluctuated around a 4.4million tons while the use of cotton in yarn production grew by 25 percent. (Hsu, 2001)

The institutional change in China helped it to reduce its poverty level and increase economic freedom. As stated earlier that China was one of the depressed states of the world where all the decisions were dependent on the government but now China ranks above Russia in the economic freedom index The index of economic freedom is an American index that covers 162 countries across 10 specific freedoms such as trade freedom, business freedom, investment freedom, and property rights. (Professor Lin and other senior professors like Kate Zhoa state that China’s success emerged from spontaneous or induced institutional changes, especially the creation of the household responsibility system. (Dorn, n.d)

It was later than 1992 when the same trend was applied in the cities of China as well. This was the shifting of China’s economy from a planned economy to a market economy. The government now interfered less in the affairs of the individuals, and in businesses. Due to this foreign investment came into the country and set new grounds for China. ( Dorn, n.d) Since China has reformed its economic system it has lead to the widening of the market for China itself.

As economic freedom has lead to the expansion of economic activity and improvement in the planning system. (Dorn, n.d) China’s economy has reformed the traditional planning system and changed the country’s thinking, style, and approach. China’s economy hasn’t changed to an entire market economy as still today one of the largest and the biggest banks of China, “ICBC” is a state-owned bank. There are also 7000 farms and big firms like “Panda Electronics” have decided| to remain state-owned.

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Since China has reformed its economic system, some think that China has not successfully adopted the market system but it is in between these two systems i.e. it has adopted a more moderate system ‘mixed economy’. In a mixed economy, both the government and the public (individual and businesses) compliment each other. Certain issues are decided by the government and some issues are in charge of the public. In this system, investments are encouraged and businesses in some way determine the performance of the country.

Some people are in favor of the mixed economy and some have shown negative responses and also stated certain challenges for this new economic system. The people in favor of the reformed economy state that the GDP has not only increased but showed a major contribution to the progress of the country. While others like state officials and state-owned banks state that it has further degraded the economy. But its positive facts are widely seen as currently China is reported to have a 35 percent share of GDP by exports and it is heavily dependent on foreign technology. (Lindbeck, 2007)

China experienced the real growth in its exports and a decline in its imports thus contributing to a positive net trade as now China was producing in surplus. Due to its rise in industrial production, inflation started to recede even in non-food items causing international competitiveness in the domestic economy. China’s macroeconomic situation has also strengthened the trade weighted exchange rates for the past decade and it will lead to further expected exchange rates. (Finfacts Team, 2008)

There are also certain other achievements that China has achieved. One of the remarkable ones is “Economic Development”. China has maintained and has shown healthy growth in its economy as the GDP of China topped over 10 trillion Yuan.. And now China is the sixth-largest ‘trading power’ in the world. There has also been significant improvement in the quality and livelihood of the people. But it is also reported by the “China Daily in 2005, that the income gap in China has widened but the health and education have improved in China in recent years. As of now, economic growth is dependent on efficiency rather than heavy input of resources. (Lindbeck, 2007)

China is also reported to have ‘social development’. Even though China has the largest population in the world but now certain measures are taken to lower the population growth. As different organizations like “National Population” and “Family Planning Commission of China” have established guidelines for family planning practices. There is not only a positive trend in science, technology, and education but marked progress has been reported in social security, poverty eradication, disaster relief, and proper medical services are provided to the public. ( Donithorne, 2004)

The government of China has also increased its spending on ecological conservation, protecting the environment. Different measures are been taken against the exploitation of natural resources. Efforts are made not only to curb the water pollution but also the air pollution. This global environment crisis has lead to problems like acid rain and water pollution. And to overcome prevent the worst catastrophes it is necessary to reduce the usage of greenhouse gases and totally eliminate the consumption of fossil fuels. (Marquit, 2008)

China is also faced with few challenges in sustaining the development. The four major challenges that Chinese government had to face when it switched it system to market economy was: the private verses public ownership of assets, western legal system verses eastern semiformal legal system, individualism verses the collective good and multipart verses one party political system.

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China has given the incentive and opportunity to both the public and private enterprises to work together, i.e. they both compliment each other. But the problem starts when both the state owned enterprises and private enterprises claim that they can be more productive and efficient if they financially independent and if they are given access to the ownership of assets. The public sector has adopted different incentive systems for the management of asset efficiency.

The most remarkable is leasing known as ‘responsibility system’; it is a system by which local managers were held responsible for the profits and losses of the enterprise. The government units have also created new enterprises at different levels. But the disadvantages are the social cost that is associated with the monopoly powers and they also face tough competition from other public enterprises as well as private enterprises. The problems of the private sector are also somewhat similar but the main issue is the collaboration between the two. And this is due to the incomplete contracts and the ex-post allocation of power, i.e. the position of each party if the other party does not behave opportunistically. (Chow, 2003)

The second challenge is the modern legal system that China has tried to adopt from the western economy as western investors have defined it as a semi-legal system. China is still practicing the same legal system; some of the marked ones are ‘Guanxi’ (it is a form of human Capital where personal connection between two people prevail upon another to perform a favor or service),, insufficiently law-abiding cases like violation of intellectual property rights and further negotiations even after the signing of contracts. (Chow, 2003)

Individualism is an ideal in western market economy and China not only strives for nationalism and collective welfare of the nation but also value individual freedom. At one moment individual’s rights, duties and freedom is being catered and on the other end welfare programs and collective good are being done. Both the two systems have certain advantages and limitations so China is stuck in between the two economies. (Chow, 2003)

China is also facing problems in adopting one of the systems among the two systems; the multiparty system or the one-party system. Chinese public is getting richer day by day so they are demanding more political rights from the government. And it is under the one-party system that the political representation in China strengthened during the past decade. But on the other hand how can a one-party political system enact laws on tax and transfer to determine the redistribution of income. (Chow, 2003)

Some other issues that China ’s economic system is facing today are: the financial system, improving the governance in China , labor, social and agricultural issues, (Herd, 2005) the conflict between the rapid economic growth and the voluminous consumption of resources, gap between different regions of China is widening due to social and economic development, population, poor infrastructure, inactive participation in international cooperation, economic and ecological security, depletion of resources and environmental issues.

It can be concluded that today China is practicing the socialist market economy with Chinese characteristics, and since it had reformed its system from planned economy it definitely faced a lot of advantages. As today China stands at on of the best and largest producing countries. And most of the countries, both the developed and developing countries are relaying on China. Even though it is facing certain limitations still its economy is prospering day to day and becoming globally strong.

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