Discuss Chinas emergence as the worlds factory.

What are the

implications of this emergence?

Table of Contents

Introduction

Chinas emergence as the worlds factory

Conclusion

References

Introduction

In 2010 China bypassed Japan as the second-large world economy based on an indicator

of It has now only the USA above it, but it can be matter of only few several years (from 10

to 15) before to achieve the first place. The combination of cheap labor has made all possible,

transformed China from mainly agricultural society to what became world factory. Everything,

beginning from cars, toys, high-sensitivity electronic goods, such as iPhone or Motorola Xoom

tablets are manufactured in China.

With its capability of rather cheap products, China has given the opportunity to the

whole world to improve living standards . Be it someone in Brazil, Africa, Europe or America,

all of them have won from the cheap goods in China. Nevertheless, there is also an underside to

it, with consumers cautious about their purses and often prefer to buy more cheaply products that

are made in China, and local manufacturers found themselves more difficult to compete. The

final outcome is less manufacture localization, and it means less works, and purchase of cheaper

goods from China means higher unemployment. As a consumer, we are glad with these luxury

goods which became suddenly achievable, but as the worker we should be disturbed. The big
success of China can mean for economy in Africa and the South America necessary to find new

ways to remain competitive. And even whole USA and the Europe are also not secured. One

dominating player has never been good for all. (BBC Online, 2005)

Chinas emergence as the worlds factory

China is the vast country with approximate 1.3 billion population in the World (CIA,

2010). It promoted many aspects of a human civilization during the last history. Nevertheless, its

recent growth as one of the leading economy in the world scenario is a subject of a close

attention for economists and business world. "The world factory is a term recommended for

China, for the finished goods which are exported worldwide. Consumers of small electro

technical products and toys are in plenty "to see with label made in China", and they have

possibility to buy at lower price than what was in the past.

Chinese socialist revolution in 1949 has led to "command economy". Leaders, in

subsequent years foresighted weakness in system, and made the strategic decision in 1978, for

introduction and realization of limited form of "market economy". Results were impressing in

the next years. Between 1978 and 1997, the economy grew in the size of 10 % annual. Poor men

was reduced from 33 % in 1978 to 4 % in 1997. The rural enterprises employed 9 % of rural

population in 1978 which grew to 28 % in 1996. Transition to manufacture economy even more

obvious and evident as 40 % revenue from agricultural population in 1996, occurred from

nonagricultural sources. (CIA, 2010)

Export of the industrialized goods in the open international market is one more strategy

which is accepted by the China government. Perfection of an infrastructure, orientation of

separate regions and industries (for example - textiles and electronics), representing tax

privileges for the foreign enterprises and decentralization of trade administration, were major

policies responsible for what leads to China as a leading economy known to the world now. Most

of foreign investments (87 %) are concentrated in the free trade special economic zones located

in eastern China (OECD, 2010). The structure of foreign inflow of the capital between 1979-
1998 consisted of 65 % of FDI and 35 % of credits. For the same period, total amount of FDI

amounted $306 billion that makes 10 % of all foreign investments in the world. The industrial

sector took the largest share of investments (59 %) which basically are concentrated on labor

stimulations (50 % of all investments) productions.

Originally, many foreign companies adopted international joint ventures as easy approach

to enter in the Chinese market. However such enterprises had high percent of failures. It resulted

in many international companies to opt for the wholly owned foreign enterprise (WOFE) as an

entrance mode. Competitive advantage of cost of labor, considered to be a principal cause of

inflow of investments in China, employing thereby 2.6 % of total labor work force in 1998.

However, in East region where the most part of activity of FDI were based, 85 % of city

employment had been given by the foreign companies in that same year. Mass scale production

of standardized products led cheaper Chinese imports of many consumer goods into the USA,

Europe and in other markets all over the world. Looking at export on sales relation of the foreign

enterprises, as a whole it was 39 % (with 1979 - 1998) while the same for the domestic

enterprises has made 10 % (OECD, 2010). Thus, it is possible to ascertain that 61 % of sales (in

the foreign enterprises) occurred from home market for this same period.

Occurrence such bright manufacturing resulted economy to boost up substantially and

mainly because of capital introduction, high technologies and manufacture methods of the

foreign enterprises. Domestic economy benefitted from consequences of these positive factors.

China had been compelled to import a lot of equipment and technicians, for setting up

production capacities. Besides, it was necessary to import raw materials in huge quantity for its

industrial lines. Neighboring countries, USA and Europe gained advantage for export goods to

China. This finally lead China to membership of the World Trade Organization (WTO) in 2001.

Economists considers that WTO membership of China would be favorable for China and the rest

of world if the ethics are followed properly. Home market of China has huge potential for
development of world economy which can be seen by Chinese products all over the world and

surely China will win from the further penetration in the market.

Henderson (1999) somehow allocated a number of factors which will threaten the

economic conditions of China and, in turn influence rest of the world. Unprofitable state

corporations, bank system, overvalued currencies and poor domestic economy - were found to be

some basic threats to China. The estimation of its pessimistic views, expressed few years back

before the Chinese accessions to WTO, can be conducted with use of the newest data.

The state corporations had undergone reforms since 1998, therefore approximate 34

million workers were being dismissed. Subsequently many of those skilled qualified workers

secured work in a private sector and in this process labor costs moved downwards (through the

work offer). Listing the corporations in newly opened stock market with an aim to increase

efficiency made a positive effect. Orientation of the market process, however had been limited

in character as the government holds about 70 % of shares of corporation. By WTO rules, the

foreign companies should have possibility to invest in these corporations. There are already signs

that this process is already underway.

Crediting to the state corporations caused huge obstacle for banks which also belong to

the state. Productivity in those industries is poor for both products and the services to the

minimal level in comparison with foreign and even domestic private enterprises. It is natural that

bad debts are inevitable and in such conditions banks cannot cope with debtors. Private

enterprises, on the other hand face difficult to obtain loans from these banks. There has been

growing demand that China allows foreign banks to invest the capital, especially in the small

medium enterprises.

Chinese currency- Yuan, was considered underestimated. Japan and the ASEAN

countries, in particular demanded, that Yuan should be appreciated so that export from China

became more expensive. Eventually, In response China answered liberalization to its mechanism

of exchange rates. Export and import data figured in WTO (2010) showed that China exported in
total $1218 billion (the second place after Germany) for the total sum of the export goods in

2007 which was on 26 % in comparison with previous year. Import figures were also above for a

total sum $956 billion - the third seat in the world. It is certain that a rate of national currency

doesn't interfere with export. Actually, export and import growth shows bright character of

economy. According to CIA (2010), China exports 19 % of its various range of products to the

USA, and imports 7 % of its total import amount. There exists a big deficiency of trading

balance with USA (in favor of China). Though, the USA offer a large market for made in China

goods, (USA), in turn gets the big support from China through its (China) huge currency reserves

(saved up through its positive balance of trading balance), held in dollars to the sum $1,5

Trillion. It is an issue of utmost importance in a world financial system which China likes to be

under control.

In Worlds market concept prevails, assuming that Chinese extra-usual growth is export-

focused, and the world economic recession will have essential negative influence on the

economy of China. The economist (3th January, 2008), on this question, asserts that the Chinese

export shows upward trend in GDP (stood at 40 % in 2007) mislead. Export is calculated on the

scale of income and revenue whereas GDP is calculated on value added basis. Thus, true for

export ratio makes gross national product about 10 %. Because of huge investments at the rate

about 40 % of GDP (in 2007), China possesses basically stable, huge and growing home market.

One more proof of massive investments into an infrastructure can be noticed in the published

report of the American-Chinese business council (2008). It shows that investments into fixed

assets income in 2007 made 13723 trillion Yuan. Transformation of this figure to dollars at the

rate from 8 Yuan for dollar - will mean, $1715 trillion sum of investments that actually makes

more than 50 % of GDP ($3.251 trillion) for 2007 (CIA, 2010). In comparison with this figure

($1.715 trillion worth of fixed asset investment), an indicator of direct foreign investments (for

2007) in size $75 billion (CIA, 2010) is low enough despite of the fact that 75 billion dollars of

FDI is a major amount of the worlds direct foreign investments.

 Lifting of China on a foreground had casted impact on its environment, habitation and a

society. Pollution from factories and manufacturing plants has created huge negative influence

on its territories influencing a food chain. As China has plenty of land and workforce

significantly in manufacture of foodstuff, it still causes serious concern of health for millions of

its inhabitants and consumers. In housing sector, the prices have soared up to such degree that

the normal person, despite increase of a salary and the advantages finds extremely difficult to

afford simple place to live. Growing distinctions between Eastern rich and Western poor parts

can be noticed from their income ratio. The urbanized society has been feeling a stress on

personal relations and is exposed to stressful labor life.

Against all these factors, moving upwards on a value chain led to introduction of the

heavy industry, in addition to earlier manufacture of light consumer goods and textiles. The

Chinese government wants to enter new technology in the new industrial lines which are based

to Pearl Harbour basin and position low technical industries in interior of the country. Chinese

economist assumes that principal causes of economic success of China (namely structural

reforms, openness policy and labor advantage) are losing efficiency. His fears are seriously

supported by Mukeherjee (Bloomberg Online, 11th November, 2010) as Vietnam is developing

economy with an average half of labor cost, than in China, but similar to productivity. Technical

progress, improvement of value chain and skilled labor may establish some possible losses to

China in near future. It should be kept in mind that China still possesses enough poll of skilled

labor to react to demand and enough resources inside its country as well as in the world.

The credit crisis, much a discussed theme has caused in necessity to reconsider Chinas

role in world economy. As governments and trading blocs worldwide searched to enter packages

of fiscal stimulus, to prevent the general economic crisis - there is a general opinion that internal

demand can help to stimulate import to China in Chinese economy from different parts of the

world. The Chinese government has reacted to such concepts, entering a package of financial

stimulus worth $586 billion Improvement of an infrastructure of roads, rails and

communications, introductions of cheaper habitation to lower incomes of urban population,

granting of grants for agricultural sector and tax privileges for small-scale business - are a

package part.

Conclusion

Occurrence of China in world economic scenario has boosted the strategic decision on

partial liberalization of the market and to enter the limited form of private enterprises. The accent

for export, has led to infrastructure improvement in target areas of the country and granting of

tax privileges for the foreign enterprises. Within fifteen years of such strategic planning, modern

China has turned the of socialist economy, as a Worlds factory. The influence in the world

factory has moved the country to even more outstanding. Consequences of credit crisis have

allocated huge potential of the Chinese home market capable to resist actions of some crisis

tendencies through consumption. In reply to demands, it has led to introduction of a package of

financial stimulus from the Chinese government. The world is constantly observing Chinese

market as it has became an important task for leading economists.

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