China Business

By | September 27, 2021

China has the second largest economy in the world (after the USA). The Chinese economic system has been undergoing a profound change since the late 1970s, the focus of which is on the transition from central to decentralized control mechanisms and a diversification of the ownership structure.

Economic reforms: Since 1992 the goal has been ” socialist market economy with Chinese characteristics”. The associated restructuring of the economy led to unusually high annual growth rates from 1978 onwards. So did the gross domestic product (GDP) thirty-fold between 1978 and 2003. Economic growth remained very high in the following years as the export economy made a growing contribution to GDP. Foreign direct investment has made a significant contribution to this development. Regardless of this remarkable economic development, problems have arisen: an increasing national debt (2017: 47.8% of GDP) is offset by a slowly growing tax base. The old-age insurance system, which has so far been limited to the cities, is also associated with high costs with environmental policy measures and industrial structural reforms.

The economic structure has changed since the beginning of the economic reforms. The share of the primary sector (agriculture) in GDP has fallen by three quarters since 1978 to around 8%. Nevertheless, 17% of the workforce still work in agriculture. The share of the service sector has more than doubled to 51% and the contribution of industry has decreased from 48% to 41%. In terms of gross national income (GNI), China still belongs to the group of developing countries, but some coastal regions now have a level of development comparable to that of the East Asian emerging economies.

In rural China, yields and incomes were still stagnating in the late 1970s. The involvement of farmers in the system of collective farming within the framework of people’s communes and production groups hampered motivation and performance. There was widespread poverty in the countryside. With the household responsibility system, from the mid-1980s onwards, land was given into private hands for processing initially for five, then for 15 or now for up to 50 years. With the abolition of taxation in agriculture (2005) an attempt was made to reduce the income gap between urban and rural areas. The development of industry in the western provinces was also intended to counteract economic disparities and emerging unemployment.

In general, the administrative allocation of goods was largely replaced by markets and prices; from the end of the 1990s, 90% of consumer goods and 85% of capital goods were traded at market prices. In the urban industrial sector, the admission of private, collective and foreign-funded companies also pushed back the state sector. Large companies received special support, so-called key sectors (e.g. mechanical engineering, petrochemicals, automotive or construction industries) should reach a certain size and be concentrated on particularly suitable locations or regions. In order to maintain social stability, such adjustments have been made cautiously.

A clear separation of the private and state sectors is often not possible, as there is a dense network between state officials and private companies. On the one hand, the majority of today’s private entrepreneurs and managers of state-owned companies are recruited directly from the management apparatus. On the other hand, private entrepreneurs have built up a close network of relationships with the bureaucracies in order to protect themselves against political discrimination and economic uncertainties. Securing supply and sales channels for loans, raw materials, energy and transport capacities is often still dependent on the goodwill of the local bureaucracy.

The decentralization of economic decision-making rights has led to a change in state planning, which today only serves as a framework. In the 13th five-year plan (2016-20) the focus was on strengthening the internal market, improving energy efficiency and protecting environmental resources, and building up the previously underdeveloped service sector. The aim was to achieve economic growth of almost 7% annually. In the industrial sector, the expansion of information technology was primarily planned. The so-called development and growth strategy for the western regions was of particular importance in order to reduce the economic imbalance between West and East. In addition, the expansion of the infrastructure in the central and western provinces was a focus.

With China’s accession to the World Trade Organization (WTO) in 2001 , a further liberalization and opening of the economy was connected. At the same time, attempts were made to protect the domestic industry from the negative consequences of higher imports. Above all, agriculture, the motor vehicle and petrochemical industry, the information and communication industry, the textile industry and the financial sector are to be gradually opened up to foreign competition.

Foreign trade: The opening of foreign trade began in the early 1980s with the formation of special economic zones in the southern coastal provinces. Foreign companies that are given special investment incentives can also produce there for export under market conditions. As this experiment was successful, additional zones or “open coastal cities” were established. In 1992 the central government decided to build 24 open cities inland with preferential conditions similar to those for coastal cities. By 2017, the number of special economic zones had grown to more than 60.

Foreign trade in the People’s Republic of China was initially dominated by imports that were supposed to accelerate and improve industrialization (machines, metals, minerals, etc.). Before 1978, mainly minerals, textiles and agricultural products (rice, soybeans, silk, meat, raw animal products, etc.) were exported. After 1979 the state’s foreign trade and foreign exchange monopoly was restricted; the number of companies involved in foreign trade rose from an initial 12 to around 7,000 companies. Direct investment has been approved for foreign private companies. Until 1994 the volume of foreign trade increased annually by one sixth.

According to ZHENGSOURCING.COM, China now handles a tenth of world trade. It has been the world’s largest export country since 2009 (1980: 30th place). In terms of exports, electrical products, machines and transport equipment, textiles and clothing dominate. On the import side, processed goods (electrical engineering and electronics, chemical products, machines) take up front positions; a quarter are raw materials, fuels and metals. The close economic ties between Hong Kong and the southern Chinese province of Guangdong , which became the “extended workbench” of Hong Kong companies, played a decisive role in this success. Meanwhile also plays in the provinces of Shandong , Jiangsu and Fujian the share of foreign joint ventures in exports plays a major role. Investments from the Chinese special administrative region Hong Kong and neighboring Asian countries dominate. The most important trading partners of the People’s Republic are the USA, South Korea, Taiwan and Germany.

To give foreign trade further impetus, China developed the “New Silk Road ” project (also known as the Road and Belt Initiative) in 2013. In 2018/19, however, the USA rebelled against “unequal” bilateral trade relations, especially the Chinese export surplus, and levied import duties on Chinese groups of goods. China also responded with punitive tariffs and intensified trade with the EU. The US-Chinese trade conflict took a break with a partial agreement in early 2020.

China Business