Economy of China: Relationship with South Korea and the United States

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Introduction

This research paper explores the socio-economic history of China, covering a wide range of ideas that have significantly influenced the country’s economy. Importantly, the period from 1949 to present will be the epicenter of the analysis in understanding China’s economic history.

Chinese economy since 1949

The period after 1949 was characterized by a wide range of changes that demonstrated a contrast of the previous period that the country had gone through^[1]. Under the political leadership of a communist government, People’s Republic of China, the country experienced a new outlook as the government geared towards taking full control of the country.

As a result, a chain of economic restructurings were undertaken including, land reform and gradual control of major Chinese economic sectors like heavy industry, energy, financial sector, railways, agricultural processing and communication among others^[2].

Additionally, the government took control of the country’s international trade and regulation of tariffs in order to manage import and export trade. As a way of rehabilitating its addicted citizens, opium production was eradicated, with several programs being established to oversee the elimination opium addiction. A host of other social problems like corruption, diseases and homelessness that had rocked the country were contained by the new government. How was this achieved?

To realize its success, the Chinese government adopted the Soviet-style of central planning for a period of five years, starting from 1953. This meant a lot of changes in the manner in which different sectors of the economy were managed. For example, all private enterprises were restructured and became state enterprises. In the agricultural sector, the government distributed land to the landless after it was brutally taken from landowners^[3].

This was followed by formation of cooperatives and later advanced into communes in the year 1958. It is believed that this idea was part of Chairman Mao’s Great Leap Forward Movement. In this line of thought, it is imperative to mention that the Great Leap led to over twenty five million Chinese deaths from 1959 to 1962^[4].

Economic Reform

Like in other countries, politics and Chinese economic growth were strongly intertwined. This implied that political leaders influenced the economic path of a country and the likelihood of making progress under a particular regime. In 1978, the communist government was headed by Deng Xiaoping, whose major was role to implement economic reforms and achieve a market-oriented economy^[5].

This was believed to be the best time for reforms to be implemented because of four reasons. First was the unpopularity of the Cultural Revolution, which the Communist government and party, wanted to cut their relationships as the old regime in order to win the trust and support of people in the country^[6].

The second reason was based on the experience of most government officials, who understood the need for economic planning as a way of realizing economic growth and stability^[7]. They therefore accepted and embraced the change that was being propagated by the communist government.

The achievements of the Four Tigers, Taiwan, South Korea, Hong Kong and Singapore, equally proved to the Chinese government and its people that a market-oriented presented more economic success opportunities than a planned economy^[8]. The last reason why the economic reforms were inevitable was the public support as majority of people supported the government’s idea of adopting a market-oriented economy.

It is also important to note that the need for reforms in ownership of enterprises was an experimental way of approaching economic change in China. This is because the idea was to give authority to the government that would enable it to control production decisions and strategies other than being governed by a central planning system^[9].

Additionally, the approach aimed at enhancing financial independence of people, through receiving their benefits after remitting levies to the government. In addition, the move was to usher in a contract responsibility system that was to affect specific enterprises, through a decision that was reached at in 1984^[10].

Another important factor was price control for commodities around the country. The reforms were meant to introduce a new system that was to allow natural determination of price by allowing market forces like demand and supply to be appreciated.

To achieve this target, the government adopted a two-year plan that was to oversee the allocation of scarce resources in the country, which included foreign and local inputs that were being used to run state enterprises. This allowed the government to distribute the resources at a lower price compared to what was on the market. Lastly, the restructuring of state enterprises that was adopted in 1997 was quite significant as these institutions became share-holding companies^[11].

Why Chinese Reforms Succeeded

There are several reasons that explain the success of Chinese reforms, which were initiated by the Communist government in 1949. According to economists, the pragmatic nature of most Chinese leaders was a major boost as they rose above ideological restraints that were considered to be limiting factors^[12].

Secondly, the absence of a blueprint to guide the economic agenda meant that most of the decisions were to be experimented since others had worked elsewhere successfully. For instance, reforming of enterprises was introduced gradually by targeting a smaller group before the same idea was extended to the entire population^[13]. Due to this experimentation approach, Chinese economic reforms occurred systematically through steps that guaranteed success to the entire process.

Another reason why economic reforms in China were successful was based on the experience of the Chinese people and government officials, who had tasted the inefficiency and failure of a planned economy^[14].

This generation therefore had the passion to shift to another economic system that would allow development and not exploitation as it had witnessed during the Cultural Revolution. Related to this was the fact that the country was politically stable as the Communist Party remained in power, and had autonomy over economic sectors across the plane^[15]. This augmented the reform process without obstruction from any group. Above all, the political leadership of Deng was highly applauded for the Chinese economic success story.

Although some top leaders were not willing to deviate from their traditional course, he managed to lead the Communist Party pragmatically and allowed the people to envisage the power of a market-economy. The Premier, Zhao Ziyang also played a key role in designing the reform strategy. The country continued nurturing brilliant leaders including Jiang Zemin, and Zhu Rongji. These represent an endless list of leaders who contributed to the economic gains realized in China since 1949^[16].

China’s economy since 2000

Chinese economy has witnessed an array of trends since 2000. This was attributed to a number of factors including political and economic. The Communist Party implemented changes through constitutional amendments, to allow the government’s emphasis on certain sectors of its economic policy^[17].

Through this approach, the government worked towards creation of more jobs to fight unemployment, protection of the environment and rebalancing of income among its people to promote equity. These amendments were ratified in the year 2004 by the National People’s Congress^[18]. Additionally, an economic program of five years was approved during the party’s Fifth Plenum that was held in 2005 and was expected to run from 2006 to 2010.

Between 1990 and 2004, China registered an economic growth of 10% annually, and this was noted as the world’s highest growth rate at the moment. The country’s GDP grew by 10%, 10.1% and 10.4% from 2003 to 2005^[19]. Although this was the case, the government was committed towards cooling the country’s economy.

In the year 2006, China was ranked third largest trading nation after the United States and Germany, after its total trade exceeded $1.76 trillion. According to the World Bank’s publication, China’s growth in 2007 was its highest after it hit a high of 13.1%. Based on these, it was argued that Chinese growth may have overgrown Germany’s with its informal economy accounting for a significant portion^[20].

The graph below compares the GDP of China to other countries in 2010.

The GDP of China to other countries in 2010

Importantly, reforms in China have led to the improvement of several economic and social indicators. However, a sharp contrast continues to be observed between developed provinces and poor islands.

According to a report released by the United Nations in the 2007, 130 million Chinese live in poverty, surviving on less than a dollar a day. Besides this, approximately 35% of the population survives on $2 a day. By 2007, many economists projected continuous growth of the country’s economy, even though the country is faced with a degraded environment and an aging population^[21].

Like many other countries, China initiated its Economic Stimulus Plan that was aimed at mitigating the impact of the Global Financial Crisis that hit the world in 2007. This program targeted lowering of taxes, increasing housing affordability and infrastructural development in the country through improved ports, road and railway network.

China’s economy has also been affected by natural disasters like the winter storms, earthquakes and floods of 2008^[22]. Nevertheless, these had a mild impact on the country’s economy. In this line of thought, it is important to note that China was severely hit by the global financial crisis even though the government was swift to implement mitigation programs.

In addition, taxation of companies is fixed at 25% even though those industries, which receive state support, are exposed to a tax fee of 15%. By the year 2009, China was ranked position 79 worldwide with regard to corruption and transparency, a common scourge haunting developing economies^[23].

By the year 2010 China was ranked as the second largest economy after the United States with a GDP of $5.87 trillion, with analysts speculating the possibility of China overtaking the U.S. on global ranking. Another important fact about China is that it is the leading creditor in the world, owning over 20% of foreign owned Treasury securities in the United States.

U.S.-China Economic relationships

The two countries resumed their economic relationship in 1972, and has expanded exponentially in the last three decades. Between 1979 and 2010, trade between China and America rose from $2 billion to $457, in 2010, indicating the mega significance of their association. The graph below trading activities between the two countries in 2010:

Notably, China is the leading trading partner with the United States, a major export market and the main source of U.S. imports^[24]. From this relationship, it has been observed that the United States imports a lot of products from China, as compared to what it exports to China. As a result, the American merchandise trade deficit has surged with more than $200 billion between 1990 and 2010. The table below shows U.S. Merchandise Trade with China:

U.S. Merchandise Trade with China: 1980-2010 and Projections for 2011($ billions)

Moreover, the economic integration between China and the United States has positively impacted the two sides, a phenomenon that has defined the relationship as complex. Similarly, China’s large population, coupled with a booming economy has turned into a lucrative export market for the United States^[25].

In recent years, China has become the main destination for American exports while the U.S. on its side has increased its purchasing power by acquiring Chinese products, which are relatively cheap. Additionally, several U.S. firms have gained global competitiveness by offering low costs, realized through utilizing Chinese inputs or considering it the main destination for finished products^[26].

Another way in which the two countries relate is through China’s ability to purchase U.S. Treasury Securities over years. The most economic impact of this is that it helps to lower the interest rates in the American market. From a critical angle, analysts argue that the current strong ties between China and U.S. have continued to expose most American firms to unfair competition since most of the products offered by the Chinese market have low-cost value.

As a result, several U.S. firms have physically relocated to China, a move that haunts the American economy due to loss of jobs and manufacturing firms^[27]. Additionally, it is viewed that the capability of China possessing huge holdings of U.S. government debt may give China leverage over the United States in future.

It is however important to note that the relationship between the two nations has not always been smooth with several emerging issues. For example, the partial implementation of a market-oriented economy in China and its adoption of harsh economic policies generate economic friction^[28].

China has remained adamant in allowing its currency to appreciate to market levels, has a mixed history on the implementation of its World Trade Organization obligations, poorly protects intellectual property and has discriminative industrial policies, which favor local firms at the expense of foreign investors^[29].

Consequently, the United States responded in 2010 by launching three WTO dispute resolutions against China. Some Congress members have argued that the Chinese policies are unhealthy based on the current performance of the U.S. economy. Due to the complex nature of the relationship, analysts affirm that several approaches need to be considered in dealing with the surrounding issues. Some of these include the use of WTO dispute settlement process, mixed policy formulation and U.S.-China Strategic and Economic Dialogue^[30].

Projected economic growth for China, USA and other countries — *The table below illustrates projected economic growth for China, USA and other countries.*

China-South Korea political and economic relationship

The relationship between China and South Korea has been described as warm. The two nations have engaged in a wide range of activities that are aimed at strengthening their ties. This is mainly through foreign trade between the two states and exchange programs among learning institutions. Importantly, recent years have seen a large number of businessmen from South Korea heading China. By 2004, trade between the two countries increased by 42% an equivalent of $90 billion based on the business level observed in 2003^[31].

The two sides have also continued to nurture their political relationships by agreeing on certain issues like denying Japanese PM, Junichiro Koizumi an opportunity to visit the Yasukuni and strategizing oh how to approach North Korea’s determination to explore nuclear weapons^[32].

On its side, China is considering a better way of engaging North Korea over the issue, and a better way of advancing economic growth without undermining political democracy. The two states generally deal with their issues through open discussions. This warm relationship has attracted Beijing to invest in North Korea, a country known for its natural resources like coal, gold, iron and affordable labor force. By the year 2005, Chinese investment in North Korea had been projected to be around $85 million.

As a result, Beijing has become North Korea’s biggest international trade partner^[33]. Kim Jung-Il cemented his country’s relationship with China by paying her rare visits. Notably, South Korea is keen on strengthening its association with China without undermining its link with the United States^[34].

The economy of Hong Kong and Shanghai

Chinese economic growth has impacted several parts of China including Hong Kong and Shanghai. As a result, Hong Kong has grown to become world’s most dynamic economy. In 2010, Hong Kong registered an economic growth of 6.8 % while inflation rose from 0.5% in 2009 to 2.4% in 2010^[35]. Several measures have been erected to prevent the effects of economic crisis. Hong Kong is able to contain global changing times through low corruption, enough foreign exchange reserves, excellent banking system and a sound legal system.

It has been maintained as a gateway to China government, measures that make it more attractive as a trading center. These include elimination of tariffs on goods from Hong Kong, standardization of regulations, improvement of infrastructure and reducing trade barriers. The 2011 GDP for Hong Kong was projected to be 5% up from 4.3% in 2010. Due to its attractive economic environment, Hong Kong is highly favored by the U.S. as a business center^[36].

As mentioned above, China’s continuous economic growth has significantly impacted Shanghai, to become Chinese Trade, finance, culture and technology center. The city is China’s main industrial center, hosting 157 kinds of industries. Of importance is steel and iron, which are highly ranked in China.

Car industry in Shanghai is equally booming with Dazhong Car Co Ltd producing over 200 cars annually. The region has a well established communication and transport network, facilitating its accessibility. As a result, Shanghai has risen to become China’s leading commercial center.

Conclusion

From this analysis, it is evident that China is one of the countries of the world with the most fascinating economic history. The country has undergone a series of transformations from Cultural Revolution to a market-oriented economy. During this process, China has initiated policies and established relationships with other countries like the United States and South Korea among others. These links have been essential in promoting the country’s economy.

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Footnotes

Barry Naughton, The Chinese Economy Transition and Growth (New York: The MIT Press, 2007), 33.
Yu Keping, “Democracy in China: Challenge or Opportunity?” The President and Fellows of Harvard College, 2009.
Bin Wong, “Transformations of china’s post-1949 Political economy in an historical Perspective,” Pacific Economic Review 13, no. 3 (2008): 300.
Stephen Thomas, “China’s Economic Development from 1860 to the Present: The Roles of Sovereignty and the Global Economy,” Forum on Public Policy, 2012.
Yu Keping, “Democracy in China: Challenge or Opportunity?” The President and Fellows of Harvard College, 2009.
Satya Gabriel, “The Structure of a Post-Revolutionary Economic Transformation:The Chinese Economy from the 1949 Revolution to the Great Leap Forward,” Mount Holyoke College, 1998.
Gregory Chow, “The Chinese Economy, 1901-2000,” Perspectives, 2012.
Barry Naughton, The Chinese Economy Transition and Growth (New York: The MIT Press, 2007), 76.
Satya Gabriel, “The Structure of a Post-Revolutionary Economic Transformation:The Chinese Economy from the 1949 Revolution to the Great Leap Forward,” Mount Holyoke College, 1998.
Bin Wong, “Transformations of china’s post-1949 Political economy in an historical Perspective,” Pacific Economic Review 13, no. 3 (2008): 305.
Barry Naughton, The Chinese Economy Transition and Growth (New York: The MIT Press, 2007), 100.
Gregory Chow, “The Chinese Economy, 1901-2000,” Perspectives, 2012.
Stephen Thomas, “China’s Economic Development from 1860 to the Present: The Roles of Sovereignty and the Global Economy,” Forum on Public Policy, 2012.
Satya Gabriel, “The Structure of a Post-Revolutionary Economic Transformation: The Chinese Economy from the 1949 Revolution to the Great Leap Forward,” Mount Holyoke College, 1998.
Gregory Chow, “The Chinese Economy, 1901-2000,” Perspectives, 2012.
Yu Keping, “Democracy in China: Challenge or Opportunity?” The President and Fellows of Harvard College, 2009.
Albert Keidel, “China’s Economy: A mixed Performance,” China Business Review, 2001.
Barry Naughton, The Chinese Economy Transition and Growth (New York: The MIT Press, 2007), 103.
Albert Keidel, “China’s Economy: A mixed Performance,” China Business Review, 2001.
Stephen Thomas, “China’s Economic Development from 1860 to the Present: The Roles of Sovereignty and the Global Economy,” Forum on Public Policy, 2012.
China Mike, “Facts about China: Economy & GDP 2010-2011,” China-Mike, 2011.
Ibid.
Barry Naughton, The Chinese Economy Transition and Growth (New York: The MIT Press, 2007), 105.
Wayne Morrison, “China-U.S. Trade Issues,” Congressional Research Service, 2011.
Robert Sutter, U.S.-Chinese relations: perilous past, pragmatic present (Maryland: Rowman & Littlefield, 2010), 190.
Roya Wolverson and Christopher Alessi, “Confronting U.S.-China Economic Imbalances,” Council on Foreign Relations, 2011.
Wayne Morrison, “China-U.S. Trade Issues,” Congressional Research Service, 2011.
Roya Wolverson and Christopher Alessi, “Confronting U.S.-China Economic Imbalances,” Council on Foreign Relations, 2011.
Robert Sutter, U.S.-Chinese relations: perilous past, pragmatic present (Maryland: Rowman & Littlefield, 2010), 190.
Carolyn Bartholomew, Report to Congress of the U. S. -China Economic and Security Review Commission (Pennsylvania: DIANE Publishing, 2010), 1.
Reza Siregar, ASEAN and Korea: trends in economic and labour relations (Shanghai: Institute of Southeast Asian, 1997), 81.
Jae Chung, Between Ally and Partner: Korea-China Relations and the United States (New York: Columbia University Press, 2008), 63.
Wayne Morrison, “China-U.S. Trade Issues,” Congressional Research Service, 2011.
Peter Chow, Economic integration, democratization and national security in East Asia: shifting paradigms in US, China and Taiwan relations (United Kingdom: Edward Elgar Publishing, 2007), 265.
U.S. State Department, “Background Note: Hong Kong,” U.S. State Department, 2011.
Ibid.

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