The paper aims to discuss attractiveness of China as a destination of foreign funds outflowed from Australia. The flawless growth of China in the past last few decades holds an important place in economic development of modern world. In the last thirty years, China has accounted a GDP growth close to 9.5% (worldbank.org, 2018). In fact, in terms of GDP China is now considered as the fourth largest economy in world.
There are several factors that makes the nation attractive for FDI. With its unprecedented growth experience for a considerably long period China overtook USA as the largest recipient of foreign fund. The existing large amount of capital can attract other countries to invest more capital in the developing nation. China’s attractiveness towards foreign funds also rests on rapid development infrastructure, availability of resources, productivity and skills of workers and business value chain. Favorable regulatory environment, economic and political stability, business environment and trade openness are other factors contributing to growing foreign investment in China (Holmes et al., 2016).
The report analyzes political economic environment of China. The benefits, risks and cost associated with political, economic and legal system are discussed with reference to empirical evidences.
Political economy discusses about production and trade along with their links with government, custom and law for a country (Frieden & Eichengreen, 2018). Moreover, this theory discusses on distribution of wealth and national income.
China is experiencing a huge change in its political, economic and legal ground and through these changes; each factor has helped others to become strong (Malesky & London, 2014). Thus, China has obtained huge significance in world economy by transforming and industrializing itself to grow rapidly and extensively.
Country: China
|
Political Economy Analysis |
BENEFITS |
RISKS |
COSTS |
|
Political System |
Ø Single party system Ø Policy stabilization Ø Efficient government to take challenges Ø Corruption control |
Ø Vulnerable economy Ø Insufficient political support for investment Ø External shocks and domestic political instability |
Ø Limited FDI due to political instability Ø Strong public restriction for foreign companies |
|
Economic System (Socialist market economy) |
Ø Efficient resource allocation Ø Necessary government support. Ø High growth rate Ø Low wage rate Ø Weak currency |
Ø High debt Ø Financial risk due to economic restricting Ø Ageing population Ø Shrinking workforce |
Ø Openness to corruption Ø Weak response public enterprises to investment. Ø Inefficiency of state run enterprises Ø Growing dependency on government subsidies |
|
Legal System |
Ø most committed system Ø use negotiation to resolve disputes Ø leader tries to maximize benefits and effectiveness of this legal system |
Ø Product sell restriction due to legal system Ø Tax are imposed on the U.S companies |
Ø Decreasing number of foreign companies Ø Decreasing number of FDI |
The political system of China takes the form of a socialist republic that a single party, which is, the Communist Party of China, conducts (Jia, Kudamatsu & Seim, 2015). Hence, the Communist Party, State Council and their local and provincial exercise state power within this republic country.
Firstly, under the single-party system, China can formulate a long-term plan to develop the nation and to ensure policy stabilization, where other parties cannot oppose. Secondly, the government is highly efficient and effective to take challenges and opportunities. Thirdly, China can control corruption during the period of social transition.
Risks: Foreign companies and economy of China are vulnerable due to external shocks, regional political unrest and epidemics. Moreover, foreign firms conduct their business in this country with uncertainty as politics influences investment decision.
Cost: Political instability can restrict inflow of foreign direct investment in China. Moreover, public restriction can discourage foreign companies to conduct their business in China.
The economic system of China is characterized as a socialist market economy. The market economy contributes to an efficient allocation of resources. In the market economic system there is co-existence of public and state-owned industries (china.org.cn, 2018).
China’s shift towards a more market oriented economy resulted in an increase in China’s GDP since 1978 (cia.gov, 2018). The benefits of China’s economic system can be seen viewed in terms of different macroeconomic indicators.
Economic growth of a nation is one important indicator that determine the flow of foreign fund in a nation. A rising growth trend helps to build confidence of foreign investors. The figure below indicates trends in economic growth of China.
As shown from the above graph after reaching peak in 2006, China’s economic growth has slowed down. The economic growth though has slowed down but it still higher than many contemporary economies and therefore, keeps the nation still an attractive destination of FDI (worldbank.org, 2018).
Prevailing wage rate is another important determinant of foreign capital flow. Multinational companies invest in nations having a relatively low wages in order to conduct labor intensive production operation. China is a relatively labor abundant nation which helps the nation to maintain a relatively low wage rate (Federico, 2014). Wages in China though have been constituted an upward trend but it is much lower in comparison to Australia.
Despite a favorable economic environment measured in terms of weak currency, low wage and stable growth rate the economy of China runs with several risks. The global financial crisis of 2008 interrupted the double digit growth figure of China expressing limitation of export driven growth. The economy is facing severe financial risks owing to economic restricting initiated by communist party (Prasad, 2016). High credit levels, ageing population leading to a contraction of available workforce are other factors that might pose a threat to international competitiveness of the nation.
The socialists’ market economic system though helps China to become the second largest economy in world, the economic system is not free from its cost. In such a system, ties of business and politics open the system towards corruption. The State run industries are not responsive to investors, which limits private investments (Chen, 2017). This might limit available money in the long run needed for a smooth growth. State run industries are not much profitable or productive as they rely heavily on government subsidies.
Legal system of China is socialist and depends on the civil law. The highest law of this country is the Constitution of the People’s Republic of China. The court system of this country has four levels, which are, grassroots, intermediate, higher People’s Court and Supreme People’s court (Zhang, 2018). The country operates the largest and extensive mediation power across the world.
Benefits: China’s legal system is one of the most committed one that use negotiation to resolve disputes. Moreover, the leader tries to maximize benefits and effectiveness of this legal system.
Risks: Without valid registration or license, provided by the Chinese authority, producer cannot sell product in market. The structure of the transaction determines tax liability of a U.S company under Chinese law.
Costs: Due to restricted legal system, foreign companies may not start their business in China and consequently FDI can decrease further.
To increase FDI, China can reduce its legal system for foreign companies. Moreover, the government can focus on political stability in domestically to maintain continuous growth of the economy.
Conclusion:
The report has stated about political economy of China through focusing on its political, economic and legal system. Each section has some benefits, risks and costs related to FDI.
Reference List
Chen, S. (2017). The context of social policy reform in China: theoretical, comparative and historical perspectives. In Social Policy Reform in China (pp. 37-50). Routledge.
China sourcing in 2016 – is it worth it for the Australian market?. (2016). Retrieved from https://hornetgroup.com.au/china-sourcing-2016-is-it-cost-effective/
Economic System. (2018). Retrieved from https://www.china.org.cn/english/features/38200.htm
Federico, S. (2014). Industry Dynamics and Competition from Low?Wage Countries: Evidence on Italy. Oxford Bulletin of Economics and Statistics, 76(3), 389-410.
Frieden, J. A., & Eichengreen, B. (2018). The political economy of European monetary unification: An analytical introduction. In The political economy of European monetary unification (pp. 1-21). Routledge.
GDP growth (annual %) | Data. (2018). Retrieved from https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=CN
Historical Data | RBA. (2018). Retrieved from https://www.rba.gov.au/statistics/historical-data.html#exchange-rates
Holmes Jr, R. M., Li, H., Hitt, M. A., DeGhetto, K., & Sutton, T. (2016). The Effects of Location and MNC Attributes on MNCs’ Establishment of Foreign R&D Centers: Evidence from China. Long Range Planning, 49(5), 594-613.
Jia, R., Kudamatsu, M., & Seim, D. (2015). Political selection in China: The complementary roles of connections and performance. Journal of the European Economic Association, 13(4), 631-668.
Malesky, E., & London, J. (2014). The political economy of development in China and Vietnam. Annual Review of Political Science, 17, 395-419.
Prasad, E. (2016). China’s Economy and Financial Markets: Reforms and Risks. Brookings. edu Research US-China Economic And Security Review Commission Hearing On “China’s 13th Five-Year Plan.
The World Bank in China. (2018). Retrieved from https://www.worldbank.org/en/country/china/overview
The World Factbook — Central Intelligence Agency. (2018). Retrieved from https://www.cia.gov/library/publications/resources/the-world-factbook/geos/ch.html
Zhang, X. (2018). Rethinking International Legal Narrative Concerning Nineteenth Century China: Seeking China’s Intellectual Connection to International Law. The Chinese Journal of Global Governance, 4(1), 1-21.
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