2 Economic Reform
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2.1 The progress of economic
reform
2.2 The consequences of WTO entry
2.3 Market growth in China
2.1
The progress of economic reform
China's economic reform process started
in the countryside. Farmers were freed from state control
in order to encourage them to boost productivity. The focus
shifted to the industrial centres of the East Coast, with
the creation of special economic zones. There is now an
increasing tendency for the government to step back from
the micro-management of the economy as a whole, leaving
private and foreign investors with more freedom to explore
the market and operate within it.
Over the past decade, China has enjoyed consistent annual
growth rates of 7% or more, making it the world's fastest
growing major economy. In addition to being rapid, China's
growth is also stable. It remained largely unaffected by
either the Asian financial crisis or the dotcom boom and
bust in the latter half of the nineties. Much of this growth
is due to China's success in attracting Foreign Direct Investment
(FDI).
In the past five years, according to official statistics,
China has attracted over US$450 billion in FDI, both from
new players in the market and from those already present
increasing their existing investments. Following China's
accession to the World Trade Organisation (WTO) in December
2001, new FDI for 2002 totalled a record breaking $52 million.
China now accounts for 85% of all investment into the Asia-Pacific
region.
Broadly speaking, this investment can be divided into two
categories. Many companies relocate existing activities
to China to take advantage of cheaper labour costs and a
generally favourable investment environment. Foreign companies
now account for 44% of China's exports, which stood at US$316
billion for 2002. Others seek to find new markets within
China itself and its neighbours. By the end of 2002, China's
GDP reached $1.3 trillion, with privately owned businesses
- foreign and domestic - responsible for 45% of this output.
The Peoples’ Republic of China (PRC) has succeeded
in developing its internal market whilst remaining a cost-competitive
investment environment.
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2.2
The consequences of WTO entry
The Chinese accession to
the WTO is the logical conclusion of the government's rolling
programmes of economic liberalisation: these have successively
dismantled barriers to market entry, removed restrictions
on industrial and commercial sectors and extended commercial
laws to govern new areas of investment activity to international
norms.
This process will be accelerated after China's accession
to the World Trade Organisation, which committed the government
to more rapid across the board liberalisation. Examples
include duties on foreign goods falling from an average
of 44% in 1992 to 9% by 2005; ownership rights for foreign
companies in areas like telecommunications networks and
100% foreign ownership for banks and other financial service
companies.
From the Chinese point of view, one important function of
FDI is to smooth the transition towards a market economy.
On average, some five million people in China are made redundant
from the state sector each year. A further five million
young people enter the labour market each year. Foreign
investment generates employment for these groups and so
reduces social pressures, as well as providing wages that
contribute to general economic prosperity.
The Chinese government has also made it a priority to equalise
incomes across the country as a whole. Currently, 57% of
China's GDP is produced in the provinces on China's Eastern
seaboard, 26% in the central belt and only 17% further west.
To combat this, the government has embarked on a combined
strategy of investment in infrastructure and inducements
to foreign investors.
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2.3
Market growth in China
An income the equivalent
of US$2500 or more per year admits its owner to the Chinese
middle classes, the group numbering around 200 million who
are the main target for businesses seeking customers in
China. It is a market, the strength and sophistication of
which, is symbolised by its appetite for hi-tech goods:
190 million Chinese people have mobile phones, 57 million
access the Internet through personal computers, and over
100 million have cable TV.
This surge into the information economy does not simply
demonstrate China's modernity and sophistication, but also
symbolises a general openness to business mandated by government
policy and facilitated through both domestic measures and
WTO membership.
Overall, the picture differs from sector to sector and industry
to industry. China is still a unique place to do business.
Pursuing business relationships requires understanding of
its social and political context and abiding cultural nuances
(see Section 5 for more details). What makes it all worthwhile
is the fact that the trend in all areas is firmly on the
path towards greater freedom of action for foreign investors.
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