China Unbalanced Case Memo
The China’s export-led growth strategy, since the mid of the 1990s, significantly affected the balance of trade. The fueled consistent growth of trade surpluses, which from 2004 to 2009 shown ten times rise, contributed to the highly export-oriented sector development. The “primary world factory” became a threat to the employment in manufacturing in the developed countries.
For example, some US politicians blamed China for the loss of as many as 3.5 million manufacturing jobs. The astonishing results in trade surplus were accompanied with the Chinese currency - yuan appreciation by 21% for over three years from 2005. However, the global financial crisis led to the lower trade volumes and thus affected millions of jobs and thousands of enterprises in China. Primarily, those processing and assembly plants that were highly actively involved in the orientation on export. The Chinese Government realized the significant dependency on foreign trade and decided to re – orient the export capacities for the domestic consumption and at the same time to maintain the currency exchange rate. The era of endogenous growth, driven by innovation was announced by Premier Wen Jiabao as a new economic development model.
To Get Rich Is Glorious
The poor state of the Chinese economy and high levels of poverty before the introduction of export-led growth strategy in 1978 was a result of closed economy, inefficient collective agriculture, and money-losing state-owned enterprises.
The reforms implemented to solve the economic growth and poverty problems:One-child policy (led to the drop in population growth to less than 1%);Household responsibility system and market incentives (made China self-sufficient while supported local farmers);Introduction of town and village enterprises (TVEs contributed to employment of 140 millions of people and creation of 22 million firms);Introduction of special economic zones (SEZs attracted high volumes of investments from developed countries);The unification of two separate internal currencies (resulted in the simplification of trade and currency control efficiency).As a result of the implementation of reforms the nominal GDP growth of 18% on average and with the real economy growth of 9%. The foreign exchange reserves reached $149 billion.
Entry into World Trade Organization
Having lowered the tariffs and begun large-scale state-owned privatization China received WTO membership in 2001. The next reforms to be implemented to comply with WTO requirements and to be evaluated by other WTO members within Transitional Review Mechanism: Facilitating foreign enterprise (foreign-invested firms were restricted to certain amounts of growth and limited to geographic location. In addition, different sectors of economy had different approaches to control the operations of foreign enterprises);
Promoting free trade (China agreed to stop provisioning of export subsidies and committed to treating imported goods comparable with domestic goods);
Improving transparency and predictability of law (China committed to tightening the legal protection of patents, trademarks, and trade secrets, and copyrights).
Softening of capital controls (Implementation of qualified domestic institutional investors (QDII) provide the Chinese individuals and companies with the possibility to invest in overseas …
