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China: Economic Growth & its Consequences

Jason Guck
INTB-225
Professor Frater
April 5, 2014



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In the past three decades China has risen above all other world trading nations to
become the largest trading nation by pure numbers. This being the case China has gone from
being a minor participant to the key contributor in world trade. Having a large influence in
world trade, has aided the developing country grow its economy as well as the structuring in
which its financial structure operates (China's Trade Policy, n.d.).
At the beginning of the 21
st
century China joined the World Trade Organization, hereon
referred to as the WTO, this acquaintance opened up opportunities such as far-reached market
openings, and liberalization. While Chinas accusation to the WTO opened up many doors for its
members, China was less than a rule and regulation abiding member (China's Trade Policy,
n.d.). This could be the reason why China is not a member of the WTOs Government
Procurement Agreement [GPA]. While they are currently submitting their 3
rd
application.
Chinas obligations in regards to the WTO are often left incomplete (Davies, k, n.d.). Mostly due
to the fact, China is more concerned about its own wellbeing rather than the WTO as a whole
(China's Trade Policy, n.d.). Principals China has failed to fully comply with include,
nondiscrimination and transparency. As a result China has been at the center of many trade
conflicts, which may have influenced the reasoning why China is not a member of the GPA. One
would think, not fully complying with the WTO would drastically impact future trade
agreements between China and other countries, however China has successfully drawn both
Multilateral, and bilateral trade agreements with much of the world (Davies, k, n.d.). To name a
few of the agreements China has joined, Association of Southeast Asian Nations [ASEAN],
China-Australian FTA, China-Pakistan FTA, China-Switzerland FTA, and the Mainland and Hong
Kong Closer Economic and Partnership Arrangement. Many other trade agreements exist,
including an agreement between China and the United States, although this agreement exists, it
is not a free trade agreement (China FTA Network, n.d.).
The large growth in Chinas economy has influenced foreign direct investments in China.
As a result many structural changes have occurred. First being how one enters the FDI sectors
of China. Before China became more of a mixed market economy much of the businesses and
investments in China were government owned and operated, constraining much of the will to
invest. Now that China has parted with some of its communistic ways, FDIs have become very
popular in the developing country. In the early 1980s joint ventures were introduced as an
entry method for foreign investors to participate in the economy with little interference form
the government. Secondly, as the Chinese economy continues to rise, so does the middle class
population. As a result FDIs in services are surpassing FDIs in manufacturing. In 2001 FDI in
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Services made up 30.5% of FDI inflow, and by 2008, the value had grown to 52.3%, compared to
the figures from 2000 to 2010, the manufacturing sector of utilized FDI fell from 63.5% to
43.2%. Even though confidence among foreign investors in China is maintained because of their
economic strength, this may not be the case much longer. Rising labor costs and lack of skilled
laborers may be to blame. As of now Chinas largest FDI inflow comes from the 10 Asian
Economies, and North America (Davies, k, n.d.).

Outward foreign direct investment [OFDI] has grown in popularity in China during the
last decade or so. Numinous 5 year plans have been set in place to encourage the country to go
global however these policies have put much stress on China. In the past OFDI has mostly been
limited to large state-owned companies, currently China is determined to open this channel up
to small and medium enterprises. As a result, FDI within China may become more evenly
distributed (Davies, k, n.d.).
For a country that has the second largest economy, there banking system was relatively
poor and controlled by the government. Since the establishment of the China Banking
Association in 2000 the banking system has much improved. China states their banking
structure is self-regulatory, yet the government has roughly a 75 percent share of all its banks.
Chinas banking system is a hierarchal system that is managed by the China Banking Regulatory
Commission and the Peoples Bank of China. Then the system branches into four different
sectors the two most important sectors are the commercial Banks and the Credit Cooperatives.
These two sectors make up approximately 99% of Chinas banking structure. These sectors then
get broken down to the different types of banks within China. These bank types include, State-
owned Commercial Banks, Joint-Stock Commercial Banks, City Commercial Banks, Foreign
Banks, Rural Commercial Banks, Urban Credit Cooperatives, and Rural Credit Cooperatives
(China's City Commercial, n.d).
Chinas main stock exchange is the Shanghai Stock Exchange *SSE+. The SSE has
surpassed all of the other stock exchanges in mainland China due to the its large number of
listed companies, shares listed, tradable market value, stock turnover value, and bond turnover
value. Being that the SSE was founded in 1990 and operational that same year, I have to say
they have come relatively far and have grown significantly. The SSE is directly governed by
Chinas Securities and Regulatory Commission, because of this, the SSE bases its regulations and
principles of development on Legislation, supervision, self-regulation and standardization. By
setting these regulations and principles in place the SEE hopes to create a marketplace that is
open, safe, and transparent to its members. Currently the SSE has listings of 998 companies
with a total market capitalization of RMB 15,869.844 billion which equates to approximately
2,554,609,770,000 US Dollars and a free float market capitalization of RBM 13,429.44 Billion
which equates to 2,161,679,559,000 US Dollars (Brief Introduction, n.d.).
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While the SSE has grown, so has Chinas Bond market. Over the last decade the
corporate bond market in China has went from almost nothing to being the 3
rd
largest in the
world. Only following the United States, being the largest and Japan, the second largest. As
corporate debt grows in China, investors begin to worry, as what happens if a major bond issuer
defaults. Recently a large corporation, Shanghai Chaori Solar Energy Science and Technology
Company defaulted on an interest payment for its corporate bonds. This company had only
come up with RMB 4 million out of RMB 89.9 million. This has been the first bond default since
China started regulating the market in 1997 (Not so sunny, 2014). Many investors are worried
the Chinese economy is going to crumble due to the decline in growth over the last few years. It
is believed this slowdown is related to the increased in labor costs within China, as many
movements are uprising in regards to fair wages and working conditions. It is also believed that
China is under apprising the value of its currency in order to make its products and services
cheaper compared to other countries. Currently one Chinese Yuan equates to just .16 Cents US
Concern, n.d.). Could this be one of the reasons why investors are becoming weary of the
Chinese market and its slowdown?

China has the largest population of any other country, totaling approximately 1.35
billion (Trade Profiles, n.d.). The majority of Chinas population is Male. The median age of a
Chinese citizen is 36. Currently China has an urbanization rate of 2.85%. Roughly 50 percent of
Chinas total population is urbanized. This being the case China is home to some of the worlds
largest cities. These cities include Shanghai 16.575 million people, Beijing 15.594 million people,
Chongqing 9.401 million people, Shenzhen 9.005 million people, and GuanGzhou with 8.884
million people (China Demographics, n.d.). As a result of these massive populations within the
cities, China has developed a 12 year plan to help aid the development of key infrastructures.
The industries of growth referenced with in this 12 year plan include new energy, energy
conservation, environmental protection, biotechnology, new materials, new IT, high-end
equipment manufacturing and clean energy vehicles. Due to the large percentage of
conventional growth China has achieved in the past decade, an increase of infrastructure
development has immerged. Roads, Buildings, bridges, and rail roads all have seen substantial
growth within the developing country. Chinas expressways have grown 16 percent year after
year since 2000. As a result more and more vehicles are being register every year the current
total of registered vehicles is approximately 16 million. The same can be said for Chinas rail
roads. As the country continues to grow and expand its rail road system, the number of people
using them and they ways they are used continue to grow as well (Infrastructure in China, n.d.).
Much of the development and Infrastructures in China are built around the countrys
terrain. Only about 15 percent of Chinas land mass is used, as a majority of the country consists
of mountains, hills, and high lands (Introduction, n.d.). As you can expect Chinas large
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population is very compressed, as a result air quality suffers in much of the country. This is due
to pollution from cars, factories, and coal power plants, as this is their main method to produce
electricity. It is predicted that the pollution level in China is going to double in the next decade.
Currently 16 of the worlds most polluted cities are in China. As a result of the pollution it is
estimates it takes 5 and a half years of the average Chinese citizens life. Efforts have been
made in order to try and reduce the amount of pollution. However as the population grows
within China it almost impossible to reduce the pollution to safe levels (China's massive
pollution problem, n.d.).
China has seen extraordinary growth over the last 30 year, resulting in booming growth
many areas such as banking, stocks, trading, manufacturing, population, and infrastructures.
Much of this growth has ended up being in the favor of the country. However nothing good
comes without consequence. Chinas environment has taken a massive hit, resulting is poor
living conditions for much of its population. However as Chinas growth begins to level off, I
foresee many other problems to arise. I believe China has been growing too rapidly, and as a
result, its government and economy, will begin to see more problems such as defaulting on
debt, which therefore could lead China in to a recession.















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References

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N

US Concern on China Currency Fades as Yuan Grinds Higher. (n.d.). CNBC.com. Retrieved April 6,
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