China has been one of the countries that have experienced unprecedented growth over the past couple of years. It has been a great achievement for China to become a global economic power, which currently ranks second after the United States of America (Guo, 2012). There are a number of factors that have led to the economic growth in China.
For instance, there have been significantly higher investment activities, as well as technological developments in the country since the political reforms that took place in China. One major economic and investment activity that has contributed to the growth of China is foreign direct investment (FDI), while the other activity is the business of exports (Guo, 2012). This essay will focus on the future of the Chinese economy and its dependency on exports.
Foreign investment has increased in China in the last one decade, with many international organizations investing in Chinese organizations. China has also become one of the biggest exporters in the world. The country’s growth has enhanced its global, as well as regional presence (Singh & Nabar, 2013). In fact, the country had the largest inflow of foreign direct investment over the last ten years, beating all the other developing countries. China’s economy is highly dependent on exports made by either Chinese companies or foreign companies based in China.
Why can China no longer continue to grow along the past track of relying on exports?
It is important to acknowledge that the export business in China faces a number of challenges that may affect the same and the economic growth in the long run. Among the challenges that are faced by foreign organizations, as well as the Chinese economy as a whole are as follows:
One of the major challenges that China is likely to face is a drastic decrease in the number of exports because many nations in the future may not depend a lot on Chinese products. There are many organizations across the globe that are venturing into the manufacturing industry and can be able to produce goods that are similar or better compared to the products from China (Guo, 2012). Such companies will offer competition to China and overthrow its dominance in the international market, which will lead to a significant decrease in exports made by China. This turn of events will affect the economic development of China in the future.
Another challenge that the foreign companies face in China is the issue of counterfeit and piracy. There have been complaints among foreign companies that their ideas and technologies are being stolen by the Chinese. The companies say that this might threaten their competitive advantage and hamper their success.
They have constantly complained that the Chinese copy their products and then produce them in cheaper ways and sell them at lower prices, thereby giving their original products stiff competition (Singh & Nabar, 2013). This is an issue that is likely to discourage foreign organizations from investing in China in the future. Therefore, foreign companies may not be of benefit to the Chinese economy in the long run. Resultantly, the country might need to change its strategies regarding foreign direct investors and find options that will help to keep the economic growth on the rise. This will have a significant effect on the amount of exports that the country generates.
The companies that are likely to move away from China will set up production plants in other nations, thereby denying China the opportunity to enhance its economy. The nations that will host the companies will mount competition against the Chinese exports. This will provide customers with alternatives, which will cause a decrease in the amount of exports that China will make. The long term effect is that China will, or may, not be in a position to depend on exports in the future.
What would be the new growth engines for China? And how fast would be the new normal growth for China?
There is a need for the Chinese government, as well as the people and institutions concerned with the economic growth of China to focus on the continuity of the country’s prosperity in the long term. The country faces the challenge of losing its advantage as one of the largest exporters, a factor that might affect its economic growth in the years to come (Jiagui, Shuchen & Tongsan 2011). China should, therefore, be focusing on the new engines that will help with the continued growth of its economy.
First, China needs to focus on the service industry. The economy has been highly dependent on the production of goods, which are then exported. The fact that there are a lot of experts and skilled people in China means that the country can also capitalize on offering services locally and internationally. This will generate income that can act as a supplement to the production sector in the short and middle run. The country can also move some of its production companies in other nations. This is a strategy that will help in diversifying its market.
What are the economic, political and social reforms critical for China to maintain sustained strong economic growth in the future?
A number of reforms need to be executed in order to maintain a sustained, strong economic growth in the future. First, in the economic sector, the banking costs should be reviewed. The Chinese financial system has been vibrant in mobilizing finances and capital allocation across the nation. This boosts investment and economic growth (Jiagui, Shuchen & Tongsan, 2011). However, the financial system has been costly, unbalanced, and arguably unstable. There should be reforms to stabilize the system, as well as balance it and reduce the costs in order to encourage more borrowing and mobilize more capital. The closed nature of the Chinese economy should also be reformed to make it an open economy, as this will encourage more economic activities.
Politically, the nation also needs to change its stance on foreign direct investment. The legal system of China should make it easier for foreign investors to set up businesses in the country. Although there are many foreign investors in the country, there are some political and legal factors that limit these investors (Jiagui, Shuchen & Tongsan, 2011). The reforms should include reducing the costs of licenses, both for local and foreign investors to encourage investment.
Regarding social reforms, the culture of China limits the economy in some instances. For instance, the Chinese culture limits the acceptance of foreign products. It means that foreign investors may find it limiting to set up their operations in the country, which may further limit economic growth (Jiagui, Shuchen & Tongsan, 2011). The people should change this trend and be open to foreign products to encourage more international organizations to invest in the country and boost the economic growth.
Guo, R. (2012). Understanding the Chinese economies. Oxford, UK: Academic Press.
Jiagui, C., Shucheng, L., Tongsan, W. (eds.) (2011). The China economy yearbook: Volume 5. Beijing, China: Koninklijke Brill NV.
Singh, A., & Nabar, M. (2013). China’s economy in transition: From external to internal balancing. Washington, D.C.: International Monetary Fund.