University of sarajevo

CHINA AT THE WORLD STAGE

ACADEMIC PAPER

Subject: International Economics

Mentor: Snježana Brkić, PhD

Students: Tarik Smajlović, ID 72942

Vedran Kolarić, ID 72669

Management, FM/MM

Sarajevo, January 2016

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Table of contents

Table of contents.........................................................................................................................1

Table of figures...........................................................................................................................2

1. Introduction.........................................................................................................................3

2. Causes of China's economic growth....................................................................................4

2.1 Large – scale capital investment.......................................................................................5

2.2 Rapid productivity growth................................................................................................6

3. World's Largest Manufacturer.............................................................................................7

3.1 China’s Wage ‘Advantage’...............................................................................................8

4. Trading powerhouse............................................................................................................9

4.1 EU Takeover...................................................................................................................11

4.2 Regional and bilateral Free Trade Agreements..............................................................13

5. Conclusion.........................................................................................................................14

6. References.........................................................................................................................15

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Table of figures

Figure 1: Percentage annual increase of China's GDP in comparison to last year.....................4

Figure 2: China's outward FDI flows..........................................................................................6

Figure 3: Showcase of percentages held by countries in World Manufacturing........................8

Figure 4: China's average yearly wages in manufacturing.........................................................9

Figure 5: China's top trade partners for the year 2010..............................................................10

Figure 6: Picture showing 2 major trading partners of China...................................................11

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1. Introduction

36 years ago, prior to the initiation of economic reforms and trade liberalization, China

maintained and continued with policies that kept the economy stagnating, being centrally-

controlled and extremely inefficient, excluded and isolated from the process of global

economy. Just slightly more than 20 years ago, China burst onto the world stage, transforming

itself from an isolationist country with virtually no international trade into a major global

economic power, becoming the world’s largest economy (on a purchasing power parity

basis)1.

With this evolution came ambiguity of China’s role, with its daunting economic leverage and

1.3 billion people, that China would play in regional and global politics. As China became

increasingly assertive in pursuit of its interests in Asia and around the world, policy makers

turned their attention to the emerging power and its ambitious agendas. Yet even as China

seemed poised to become one of the world's new superpowers, questions remained about its

ability to maintain such an exceptional rate of economic growth, particularly in light of heavy

reliance on government manipulation of monetary and banking policies of developing

infrastructure.2

Nevertheless, China has been among the world’s fastest-growing economies, with the real

annual gross domestic product (GDP) growth averaging nearly 10% through 2014 - the size of

its economy has quadrupled since the launch of market reforms in the late 1970s and, by some

estimates, will double again over the next decade. It has become one of the world's major

manufacturing centers and consumes roughly a third of the global supply of iron, steel, and

coal.3

China accumulated enormous foreign reserves, worth more than $1 trillion at the end of 2006.

Strongest manufacturing industry, merchandise trade, holding foreign exchange reserves,

1 Home, D., University, D., Archives, D., Videos, D. and Item, V. (1985). The rise of China on the world stage. [online] Repository.library.georgetown.edu. Available at: https://repository.library.georgetown.edu/handle/10822/552652 [Accessed 6 Jan. 2016].2 Morrison, W. (2015). China’s Economic Rise: History, Trends, Challenges, and Implications for the United States. 1st ed. [ebook] Available at: https://www.fas.org/sgp/crs/row/RL33534.pdf [Accessed 6 Jan. 2016].3 Ikenberry, J. (2015). The Rise of China and the Future of the West. [online] Foreign Affairs. Available at: https://www.foreignaffairs.com/articles/asia/2008-01-01/rise-china-and-future-west [Accessed 6 Jan. 2016].

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cheap labor force and others are just a peak of the iceberg of China's presence at the world

stage.

2. Causes of China's economic growth

Economic reforms led to higher efficiency in the economy, which boosted output and

increased resources for additional investment in the economy, stamping China's way towards

joining an exclusive club last year: its economic output exceeded $10 trillion, making it only

the second country to achieve that feat (America reached this level in 2000). At market

exchange rates, China’s economic output was $10.3 trillion last year, more than five-times

bigger than a mere decade ago, when it was $1.9 trillion.4

Figure 1: Percentage annual increase of China's GDP in comparison to last year5

Witnessing the colossal economic growth of China in the twentieth century, more and more

economists base China’s success on two very important financial factors which played a huge

role in the recent extensive economic growth: large - scale capital investment and rapid

productivity growth.6 4 The Economist, (2015). From a very big base. [online] Available at: http://www.economist.com/blogs/freeexchange/2015/01/chinas-slowdown [Accessed 6 Jan. 2016].5 Ibid.6 Morrison, W. (2015). China’s Economic Rise: History, Trends, Challenges, and Implications for the United States. 1st ed. [ebook] Available at: https://www.fas.org/sgp/crs/row/RL33534.pdf [Accessed 6 Jan. 2016].

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2.1 Large – scale capital investment

China has maintained a high rate of savings throughout its history. When reforms were

initiated in 1979, domestic savings as a percentage of GDP stood at 32%. However, most

Chinese savings during this period were generated by the profits of State Owned Enterprises

(SOE-s), which were used by the central government for domestic investment. In theory, any

individuals/enterprises can go to the banks to obtain loans outside the state plan, but

generally, in practice, 75% of state bank loans go to SOE. Economic reforms, which included

the decentralization of economic production, led to substantial growth in Chinese household

savings as well as corporate savings.

As a result, China’s gross savings as a percentage of GDP is the highest among major

economies. The enormous level of savings has empowered China to substantially boost

domestic investment process. In fact, China’s gross domestic savings levels far exceed its

domestic investment levels, which have made China a large net global lender. Besides being a

lender stronghold, China showed in 2000, with the initiation of a new “go global” strategy,

which wanted to encourage Chinese firms (primarily SOEs) to invest overseas, that it can

become one of the world FDI leaders by the year 2015. A key factor driving this investment is

China’s massive accumulation of foreign exchange reserves.7

According to U.N. estimates, China ranked as the third-largest source of global FDI in

2014 (at $116 billion), up from sixth in 2011, (see Figure 2). The stock of China’s outward

FDI through 2014 is estimated at $646.3 billion.

7 Economists-pick-research.hktdc.com, (2016). Guangdong: Hong Kong service opportunities amid China’s “going out” strategy | HKTDC. [online] Available at: http://economists-pick-research.hktdc.com/business-news/article/Research-Articles/Guangdong-Hong-Kong-service-opportunities-amid-China-s-going-out-strategy/rp/en/1/1X000000/1X09VH3I.htm [Accessed 6 Jan. 2016].

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Figure 2: China's outward FDI flows8

2.2 Rapid productivity growth

Several economists have discussed that productivity gains (i.e., increases in efficiency)

have been a major factor in China’s rapid economic growth. The improvements to

productivity were caused by a reallocation of resources to more productive uses, especially in

sectors that were previously heavily controlled by the government, such as services, trade,

and agriculture.

For example, agricultural reforms enhanced and improved production, letting workers

to pursue employment in the more productive manufacturing sector. China’s decentralization

of the economy led to the rise of non-state enterprises, which tended to pursue more

productive activities than the centrally controlled SOEs and were more market-oriented and

more efficient. Additionally, a greater share of the economy (mainly the export sector) was

exposed to competitive forces. Local and provincial governments were allowed to establish

and operate various enterprises without interference from the government. In addition, FDI in

China brought with it new technology and processes that boosted efficiency.9

8 China-trade-research.hktdc.com, (2016). Economic and Trade Information on China | HKTDC. [online] Available at: http://china-trade-research.hktdc.com/business-news/article/Fast-Facts/Economic-and-Trade-Information-on-China/ff/en/1/1X000000/1X09PHBA.htm [Accessed 6 Jan. 2016].

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3. World's Largest Manufacturer

In Global Manufacturing Competitiveness Index for the year 2013, Deloitte (an

international consulting firm) ranked China first in manufacturing in 2013 and projected it

would remain so in five years (the United States ranked third in 2013 and was projected to

rank fifth in 2018). The report stated that “China’s competitiveness is bolstered by conducive

policy environment either encouraging or directly funding investments in science and

technology, employee education and infrastructure development,” and further stated that “the

landscape for competitive manufacturing is in the midst of a massive power shift, in which

twentieth-century manufacturing stalwarts like the United States, Germany and Japan will be

challenged to maintain their competitive edge to emerging nations, including China.”10

China became the largest manufacturing economy in the world (with a 23.2% share of

manufacturing activity) through extremely fast growth in the physical volume of value-added

and modest inflation. The U.S. is in second place with a 17.2% share. China has more than

four times the population of the United States, and though its manufacturing intensity of

$1,978 per capita value-added in 2013 is high for a developing economy, it is well behind

advanced countries such as the United States ($6,338)11. China attained its number one

ranking through a combination of price increases, exchange rate appreciation, and an

extremely fast growth rate in the physical volume of manufacturing value-added. The

predominant focus of development in the chemical industry is to expand the output of

chemical fertilizers, plastics, and synthetic fibers.

The growth of this industry has placed China among the world's leading producers

of nitrogenous fertilizers. In the consumer goods sector the main emphasis is

on textiles and clothing, which also form an important part of China's exports. Textile

manufacturing, a rapidly growing proportion of which consists of synthetics, account for

about 10 percent of the gross industrial output and continues to be important, but less so than

9 Morrison, W. (2015). China’s Economic Rise: History, Trends, Challenges, and Implications for the United States. 1st ed. [ebook] Available at: https://www.fas.org/sgp/crs/row/RL33534.pdf [Accessed 6 Jan. 2016].10 Morrison, W. (2015). China’s Economic Rise: History, Trends, Challenges, and Implications for the United States. 1st ed. [ebook] Available at: https://www.fas.org/sgp/crs/row/RL33534.pdf [Accessed 6 Jan. 2016].11 Meckstroth, D. (2016). China Solidifies Its Position as the World’s Largest Manufacturer | MAPI. [online] Mapi.net. Available at: https://www.mapi.net/blog/2015/09/china-solidifies-its-position-world%E2%80%99s-largest-manufacturer [Accessed 6 Jan. 2016].

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before. The industry tends to be scattered throughout the country, but there are a number of

important textile centers, including Shanghai, Guangzhou, and Harbin.12

Figure 3: Showcase of percentages held by countries in World Manufacturing13

3.1 China’s Wage ‘Advantage’

China’s huge population and relatively low wage rates gave it a significant

competitive advantage when economic reforms and trade liberalization were first begun by

the government in the late 1970s. However, this advantage appears to be eroding as wages in

China have risen in recent years. From 2005 to 2014, Chinese wages rose by 309%.14

12 Wikipedia, (2016). Economy of China. [online] Available at: https://en.wikipedia.org/wiki/Economy_of_China#Investment_cycles [Accessed 6 Jan. 2016].13 Meckstroth, D. (2016). China Solidifies Its Position as the World’s Largest Manufacturer | MAPI. [online] Mapi.net. Available at: https://www.mapi.net/blog/2015/09/china-solidifies-its-position-world%E2%80%99s-largest-manufacturer [Accessed 6 Jan. 2016].14 The Economist, (2012). The end of cheap China. [online] Available at: http://www.economist.com/node/21549956 [Accessed 6 Jan. 2016].

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Figure 4: China's average yearly wages in manufacturing15

Joerg Wuttke, a veteran industrialist with the EU Chamber of Commerce in China, predicts

that the cost to manufacture in China could soar twofold or even threefold by 2020.

AlixPartners, a consultancy, offers this intriguing extrapolation: if China's currency and

shipping costs were to rise by 5% annually and wages were to go up by 30% a year, by 2015

it would be just as cheap to make things in North America as to make them in China and ship

them there. Louis Kuijs of the Fung Global Institute, a think-tank, backs up the Wuttke's

statement with the observation that some low-tech, labor-intensive industries, such as T-shirts

and cheap trainers, have already left China. Also, some firms are employing a “China + 1”

strategy, opening just one factory in another country to test the waters and provide a back-

up.16

Nevertheless, Chinese wages may be rising fast, but so is Chinese productivity. The precise

numbers are disputed, but the trend is not: Chinese workers are paid more because they are

producing more.

4. Trading powerhouse

It's very easy to conclude that China definitely is a trading powerhouse; official Chinese trade

data shows largest trading partners in 2010 (based on total trade).

15 Tradingeconomics.com, (2016). China Average Yearly Wages in Manufacturing | 1978-2016 | Data | Chart. [online] Available at: http://www.tradingeconomics.com/china/wages-in-manufacturing [Accessed 6 Jan. 2016].16 The Economist, (2012). The end of cheap China. [online] Available at: http://www.economist.com/node/21549956 [Accessed 6 Jan. 2016].

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Figure 5: China's top trade partners for the year 201017

In 2014, the list is narrowed to seven largest trading partners: EU (28 countries that make up

the European Union), USA, ASEAN (10 nations that constitute the Association of Southeast

Asian Nations), Hong Kong, Japan, South Korea and Taiwan. China’s top three export

markets were the United States, the EU28, and Hong Kong, while its top sources for imports

were the EU28, ASEAN, and South Korea.18

17 Topforeignstocks.com, (2012). A Look at China’s Major Trade Partners | TopForeignStocks.com. [online] Available at: http://topforeignstocks.com/2012/12/06/a-look-at-chinas-major-trade-partners/ [Accessed 6 Jan. 2016].18 Morrison, W. (2015). China’s Economic Rise: History, Trends, Challenges, and Implications for the United States. 1st ed. [ebook] Available at: https://www.fas.org/sgp/crs/row/RL33534.pdf [Accessed 6 Jan. 2016].

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4.1 EU Takeover

Figure 6: Picture showing 2 major trading partners of China

It is a very interesting fact that EU surpassed USA on its place of being the biggest trading

partner of China: EU-China trade has increased dramatically in recent years19. China is the

EU's biggest source of imports by far, and has also become one of the EU's fastest growing

export markets. The EU has also become China’s biggest source of imports.

China and Europe now trade well over €1 billion a day. Investment flows also show vast

untapped potential, especially when taking into account the size of our respective economies.

China accounts for just 2-3% of overall European investments abroad, whereas Chinese

investments in Europe are rising, but from an even lower base.20

19 Escaith, H. (2014). International Trade Statistics. 1st ed. [ebook] Available at: https://www.wto.org/english/res_e/statis_e/its2014_e/its2014_e.pdf [Accessed 6 Jan. 2016].20 Ec.europa.eu, (2016). China - Trade - European Commission. [online] Available at: http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/ [Accessed 6 Jan. 2016].

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EU-China "Trade in Goods" statistics21

Trade in goods 2012-2014, € billions

Year EU imports EU exports Balance

2012 292.1 144.2 -147.9

2013 280.1 148.2 -131.9

2014 302.0 164.8 -137.3

EU-China "Trade in Services" statistics22

Trade in services 2012-2014, € billions

Year EU imports EU exports Balance

2012 20.0 25.1 5.1

2013 20.9 29.0 8.1

2014 22.6 31.7 9.2

21 Ec.europa.eu, (2016). China - Trade - European Commission. [online] Available at: http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/ [Accessed 6 Jan. 2016].22 Ibid.

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As a result, the EU records a significant trade deficit with China. This is in part a reflection of

global and Asian value chains, but in part also due to remaining market access barriers in

China.

4.2 Regional and bilateral Free Trade Agreements

The Chinese government has maintained an active policy of boosting trade and

investment ties around the world, especially with countries in Asia.51 To that end, China has

entered into a number of regional and bilateral trade agreements, or is in the process of doing

so. China currently has free trade agreements (FTAs) with ASEAN, Australia, Chile, Costa

Rica, Hong Kong, Iceland, Macau, New Zealand, Pakistan, Peru, Singapore, and Switzerland.

China also has an “economic cooperation framework agreement” (ECFA) with Taiwan, which

is the equivalent to an FTA.

China is currently in the process of negotiating FTAs with the Cooperation Council for

the Arab States of the Gulf (which includes Saudi Arabia, Kuwait, the United Arab Emirates,

Qatar, and Bahrain), Norway, and the Southern African Customs Union (which includes

South Africa, Botswana, Lesotho, Namibia, and Swaziland), Sri Lanka, Japan, and South

Korea. China has also considered negotiating FTAs with India, Columbia, Moldova, and

Maldives.

In December 2012, China joined with the 10 members of ASEAN, Japan, South

Korea, Australia, and New Zealand to begin negotiations toward a Regional Comprehensive

Economic Partnership (RCEP), which, if concluded, could constitute the world’s largest free

trade bloc (in terms of combined population and GDP).23

23 Morrison, W. (2015). China’s Economic Rise: History, Trends, Challenges, and Implications for the United States. 1st ed. [ebook] Available at: https://www.fas.org/sgp/crs/row/RL33534.pdf [Accessed 6 Jan. 2016].

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5. Conclusion

China’s economy has shown remarkable growth over the past several years, and many

economists project that it will enjoy fairly healthy growth in the near future. However,

economists caution that these projections are likely to occur only if China continues to make

major reforms to its economy. Failure to implement such reforms could endanger future

growth. They note that China’s current economic model has resulted in a number of negative

economic (and social) outcomes, such as over-reliance on fixed investment and exporting for

its economic growth, extensive inefficiencies that exist in many sectors (due largely to

government industrial policies), wide-spread pollution, and growing income inequality, to

name a few.

Many of China’s economic problems and challenges stem from its incomplete

transition to a free market economy and from imbalances that have resulted from the

government’s goal of economic growth at all costs24. Regardless of the economic slowdown,

it is a fact that China will definitely keep pushing the economical boundaries of itself as a

country, its region, and ultimately the world, taking in concern the impact it's having

nowadays, since recently the world is economically turning towards east, more than towards

west, implying that lots of things actually depend over the China and its region. With the high

influence on the global financial market, it is, without doubt, up to political, social and

economic decisions of China which will, as the final outcome, create the global economic

prosperity, or China – led recession in the future; what happens will surely affect the whole

world.

24 Morrison, W. (2015). China’s Economic Rise: History, Trends, Challenges, and Implications for the United States. 1st ed. [ebook] Available at: https://www.fas.org/sgp/crs/row/RL33534.pdf [Accessed 6 Jan. 2016].

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6. References

Home, D., University, D., Archives, D., Videos, D. and Item, V. (1985). The rise of China on

the world stage. [online] Repository.library.georgetown.edu. Available at:

https://repository.library.georgetown.edu/handle/10822/552652 [Accessed 6 Jan. 2016].

Morrison, W. (2015). China’s Economic Rise: History, Trends, Challenges, and Implications

for the United States. 1st ed. [ebook] Available at:

https://www.fas.org/sgp/crs/row/RL33534.pdf [Accessed 6 Jan. 2016].

Ikenberry, J. (2015). The Rise of China and the Future of the West. [online] Foreign Affairs.

Available at: https://www.foreignaffairs.com/articles/asia/2008-01-01/rise-china-and-future-

west [Accessed 6 Jan. 2016].

Wikipedia, (2016). Economy of China. [online] Available at:

https://en.wikipedia.org/wiki/Economy_of_China#Investment_cycles [Accessed 6 Jan. 2016].

Economists-pick-research.hktdc.com, (2016). Guangdong: Hong Kong service opportunities

amid China’s “going out” strategy | HKTDC. [online] Available at: http://economists-pick-

research.hktdc.com/business-news/article/Research-Articles/Guangdong-Hong-Kong-service-

opportunities-amid-China-s-going-out-strategy/rp/en/1/1X000000/1X09VH3I.htm [Accessed

6 Jan. 2016].

The Economist, (2015). From a very big base. [online] Available at:

http://www.economist.com/blogs/freeexchange/2015/01/chinas-slowdown [Accessed 6 Jan.

2016].

Meckstroth, D. (2016). China Solidifies Its Position as the World’s Largest Manufacturer |

MAPI. [online] Mapi.net. Available at: https://www.mapi.net/blog/2015/09/china-solidifies-

its-position-world%E2%80%99s-largest-manufacturer [Accessed 6 Jan. 2016].

The Economist, (2012). The end of cheap China. [online] Available at:

http://www.economist.com/node/21549956 [Accessed 6 Jan. 2016].

Tradingeconomics.com, (2016). China Average Yearly Wages in Manufacturing | 1978-2016 |

Data | Chart. [online] Available at: http://www.tradingeconomics.com/china/wages-in-

manufacturing [Accessed 6 Jan. 2016].

Page | 16

Escaith, H. (2014). International Trade Statistics. 1st ed. [ebook] Available at:

https://www.wto.org/english/res_e/statis_e/its2014_e/its2014_e.pdf [Accessed 6 Jan. 2016].

Ec.europa.eu, (2016). China - Trade - European Commission. [online] Available at:

http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/ [Accessed 6 Jan.

2016].

China-trade-research.hktdc.com, (2016). Economic and Trade Information on China |

HKTDC. [online] Available at:

http://china-trade-research.hktdc.com/business-news/article/Fast-Facts/Economic-and-Trade-

Information-on-China/ff/en/1/1X000000/1X09PHBA.htm [Accessed 6 Jan. 2016].

Topforeignstocks.com, (2012). A Look at China’s Major Trade Partners |

TopForeignStocks.com. [online] Available at: http://topforeignstocks.com/2012/12/06/a-look-

at-chinas-major-trade-partners/ [Accessed 6 Jan. 2016].

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