Role of China in World Economics

Introduction

Today China stands as one of the most important countries of the world because it is China that has not only participated in the world economy but also contributed in bringing social and political growth in the world economy and has contributed as a significant participant in the world trade. Its turnover has increased and according to GATT data China was ranked as the 11th largest exporter in the world. Further more, it stands at the significant position in the international capital market, where its inflows and foreign investment have emerged substantially. Its growth rate has increased in the past 30 years but now due to financial turmoil in the world economy Chinese economic growth has also slowed with other countries but its still at the growing rate.

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This paper contains for sections, first section identifies different sources of economic growth, second section mentions china’s trading relationships, third section explains the Chinese currency trends and the forth section explains the US and china’s relationship. In the end, the conclusion will be given.

Section 1

This section of the paper highlights the basic sources or factors that lead to economic prosperity of the Chinese economy. China which is an emerging star in today’s economy gained success by expanding its entire economy.

China has gained considerable success by expanding its role in the goods market, labor market, market for land and market for financial capital. Goods market included investment in the rural urban areas, in the capital goods such as machinery and equipment. Pricing strategies were determined and reformed on the major goods such as oil, coal, energy, transportation, and other products as grain, wood, pulp, chemical fertilizers, pesticides and others.1

China’s investing strategies have leaded the various foreign multinational companies to invest in China. They are investing in China’s manufacturing sector because their investments are providing them with promising and successful prospects. Some of the major corporations that are investing in china are Hewlett Packard of the USA, LG Electronics, General Electrics, HP, Motorola, IBM, Chevron Overseas Petroleum Ltd of USA, etc.

China is not only increasing its saving and investment rates but it is also creating a strong agriculture foundation, making human capital formation effective (lowing the literacy rate), lowering the income inequality gap and changing the demographic transaction (lowering the population and fertility rate). China’s is growing at such a rapid rate that various studies suggest that soon china would be ranked as the world’s second or third largest world economy. The result is already seen, as according to International Monetary Fund china’s economy ranked 6 percent of the world economy and has been ranked third in the world economy. If china continues to grow, very soon china’s poverty, illiteracy, overpopulation, corruption will be completely eliminated.

Section 2

China’s top trading partners are Japan, Honk Kong, US, Korea, Taiwan, Germany, Singapore, Russia, Malaysia, Thailand and Australia. China exports its Chinese goods to the following highest top exporters. They are ‘United States’ which got $162.9 US billion and increased its imports to 30% (2004-05) , Hong Kong which got $124.5 US billion and increased its imports to 23% (2004-05), Japan which got $84 US billion and increased its imports to 14% (2004-05), South Korea which got $35 US billion and increased its imports to 26% (2004-05), Germany which got $25.9 US billion and increased its imports to 37% (2004-05), Netherlands, United Kingdom, Singapore, Taiwan and Russia.

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China’s main importers are Japan which exports $100.5 US billion goods to china at a 9% increase rate (2004-05), South Korea which exports $76.8 US billion goods to china at a 23% increase rate (2004-05), Taiwan which exports $74.7 US billion goods to china at a 15% increase rate (2004-05), United States which exports $ 48.7 US billion goods to china at a 9% increase rate(2004-05), Germany which exports $ 30.7 US billion goods to china at a 1% increase rate(2004-05), Malaysia, Singapore, Australia, Russia and Thailand.

China enjoys its trade surplus with United States (114.2$), Germany ($1.8) and Singapore ($0.1) and its trade deficit with Taiwan ($-58.1), South Korea(-$41.7), Japan (-$16.5) and Russia(-$2.7). 2China’s strengths in continuing these relationships could be considered because these countries are providing china with healthy surplus for the consecutive 10 years as china’s surplus increased to 500 % from 1995 to 2005, i.e. 16.7 billion to 101.8 billion. China should concentrate more on US because that comprises the healthiest balance of trade between china and America. But if China continues to trade with deficit countries then it will certainly face problems in the near future.

Section 3

Chinese money is called Renminbi (RMB), and the popular unit of RMB is Yuan. The official exchange rate between U.S. dollar and Renminbi Yuan is 1: 7.5, i.e. 1 US dollar is equal to 7.5 Yuan RMB.

There are different factors that influence the value of Chinese currency, such as unemployment, Interest rates, Trade balance, consumer price index (CPI) and retail sales. 3Among the five, interest rates or exchange rates and trade balances are the most important factors. A country’s exchange rate is affected by the demand and supply of the country’s currency in the international exchange market. If yuan’s demand increases than its supply then Yuan’s value will increases and vice versa.

The demand of the country’s currency gets higher when interest rates increases and inflation rate decreases. And china experiences high interest rates and low inflation rate and it’s has resulted in high investment from multiple corporation and multinational because they do not expect its value to erode as China currently is in a progressing or a growing position.

Trade balances effect country’s currency as China’s exports are greater than its imports that lead to higher demand of the currency because the deal becomes stronger. When foreigners import china goods they push up the Yuan’s price therefore strengthen the Chinese currency and America is one of the important country that has strengthened the Chinese Yuan because of its positive trade balance. 4

Section 4

China and USA relations have strengthened and progressed since 1972 and USA have helped china towards an open, market based economy. USA promoted Chinese trade by removing the artificial barriers, opening new markets for China, helped the Chinese currency ‘Yuan’ to strengthen and encouraging it to correct its imbalances within its system. 5 American multinational invested in Chinese economy and imported Chinese goods, therefore leading to a positive balance of trade between china and USA.

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When we consider economic interdependence, I do not think that future economic relationship between the two nations is going to be affected by economic growth in China. Under economic interdependence if one country enjoys economic prosperity it would lead to economic prosperity of the other country as well. So if China’s economy keeps on prospering it would lead U.S economy also to prosper. So under these conditions relationship between these two countries is going to strengthen.

Conclusion

It can be concluded that China has been on increasing trend since the past 30years, it has faced several slow growth but that does not take it into recession because china is still progressing and is moving ahead but now at a slower rate. If it continues to grow very soon china will be one of the leading countries of the world. Then USA and China trade relations have helped china on great footings as China enjoys a positive balance of trade and a stable economy and currency.

Work Cited

Daniel Workman. 2006. China’s top Trading Partners: Chinese exports and Imports Soar. Web.

Bureau of East Asian and Pacific Affairs. 2006. U.S.-China Relations.. Web.

Joshua Kunken. 2005. Factors Influencing a Currency Pair Exchange Rate. Web.

Nickolas R. Lardy. China in the World Economy. Pp.11-22. Web.

Trishussey. July 19, 2006. Five key factors that Influence Currency. Web.

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Footnotes

  1. Nicholas R. Lardy. 1994. China in the World Economy.
  2. Daniel Workman. 2006. China’s top Trading Partners.
  3. Trishussey. 2006. Five key factors that Influence Currency.
  4. Joshua Kunken. 2005. Factors influencing a Currency Pair Exchange Rate.
  5. Bureau of East Asian and Pacific Affairs. 2006. U.S.-China Relations.
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