1. Will China’s WTO membership change the significance of these factors and Hong Kong’s role?
Shahnam Taheri
May 2010
Introduction
The economic rise of Asia and China specifically, is one of the most important factors reshaping the
world economy in twenty-first century. China has continued to impress all economists with its 8 to 10
percent of GDP annual growth rate within two last decades. China is the largest single finance source for
the USA current account deficit. China is investing billions dollars in energy and raw materials in
different regions from Middle East to Africa to Latin America which is attracting a growing attention in
the world and increasing the prices of these resources.
Capital investment accumulation, economic reformation: a transitional from a central planning or
command economy to a state market economy, Hong Kong‘s supporting role in facilitating financial and
trade services in Mainland , productivity improvement and finally China’s membership in the World
Trade Organization(WTO) are the main factors for China’s economic success.
In this paper first we look at some macroeconomic data of China, and then we analyze all the factors
which have been effective in China’s economic growth. At the end we will briefly discuss about the
problems which China faces today, such as environmental disaster, government bureaucracy and
corruption, widening gap between rich and poor, international economic tension around undervaluation
of Renminbi (Yuan) in compare to other foreign currency and some political and social challenges about
human rights violation, Tibet sovereignty debate, and Taiwan conflict.
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2. 1- Economic Growth
China’s economy has a growth for more than two decades. China’s economic effect to world economy is
so important that it’s impossible to ignore it. If we look at table 1 we can see the lowest annual real GDP
growth rate was 7.1 percent in 1999.Even in 2008 and 2009 which most of developed countries had
negative growth rate, China had 9.6 and 8.7 percent growth.
Table 1:China's Growth Rate
(1996 - 2009)
Year Annual real GDP Growth Rate (percent)
1996 9.6
1997 8.8
1998 7.8
1999 7.1
2000 8
2001 8.3
2002 9.1
2003 10
2004 10.1
2005 9.9
2006 11.1
2007 11.4
2008 9.6
2009 8.7
Source: IMF,Country Report: China
Figure 1
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3. Annual real GDP Growth Rate (percent)
0
2
4
6
8
10
12
1995 2000 2005 2010
Year
Percent
Annual real GDP
Growth Rate
(percent)
China after USA is the largest host of Financial Direct Investment in the world in2010.
According to UNCTAD report in 2oo7, Figure 2 shows United States remained the largest recipient
country, followed by France, China, the United Kingdom, and the Russian Federation.
Figure 2: Global FDI inflows, top 20 economies, 2007–2008
($billion)
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4. UNCTAD,2007.
China’s Industrial production is growing ahead at average rate of 17 percent per year.” Its economy is
now the second-biggest in the world, behind only the U.S., and there are predictions it will assume the
top as early as 2020.”[8, 1] “Per capita income has nearly quadrupled in the last 15 years”. [9,2] There
are important factors affecting China’s economic growth which are explained in following paragraphs.
2-Capital Investment
According to Harrod – Domar growth model saving and investment rate determines the economic
growth rate in each country. Saving rate has increased in China from29 percent in1970 to 38.9 percent
of GDP in2000. [1,31] Investment rate was even higher than saving rate since China attract FDI.
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5. In China, there has been a rapid increase in attracting foreign direct investment. Monetary policy has
been keeping interest rate low by 0.27 percentage point to encourage investment.[2,264] At the same
time fiscal policy was expansionary .Government expenditure were concentrated in building
infrastructure, science and technology improvement , military, space and security and education.”
Government debt has increased from $4.9 billion in1981 to more than 3 trillion in2005. Debt to GDP
ratio is around 20 percent. [2,266]
3- Market-Oriented Reforms
Chinese government with leadership of Deng Xiaoping, implemented economic reforms at the end of
1970’s by introducing a free market economy. The government in contrast to communism and Maoism
ideology encouraged direct foreign investment in the country. After many years of dominance planned
economy and Cultural Revolution which was a disaster for country, in 1978, the china’s government
started an economic reform. The reform included formation of rural and private businesses, liberalized
foreign trade and investment, relaxed state control over some prices, and invested in industrial
production and the education of its workforce.” While differing from transition in Eastern Europe, the
process of China’s transition to market system seems to share some common elements with the
industrial revolution in the eighteenth century England and the general historical pattern of institutional
development in the west. The industrial revolution is not just an economic phenomenon; it is also a
process of fundamental institutional changes. [6, 32] ”Post- 1978 China saw average real growth of
more than 9 percent a year. “[9, 1] The reforms raised economic productivity and efficiency by giving
profit incentives to rural collective enterprise, family firms, small private firms, and foreign investors.”
Further, the post-1978 reforms granted autonomy to enterprise managers.”[9,4]. Manager could have
their plan according to changes at economy and became flexible and efficient to maximize their profit.
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6. 4- The Role of Hong Kong
Hong Kong’s economic with the Mainland expanded rapidly in the 1980s and especially After Hong
Kong’s return to Chinese sovereignty in 1997. Hong Kong has had an important role in China’s
economic development on three areas: economic integration with mainland, increasing service export
and as China’s international financial centre.
First, the growing economic integration with Guangdong Province, especially the Pearl River Delta, in
the development of an export oriented industries. “Figures from a recently conducted survey find that
Hong Kong based manufacturing and import/export companies employ over 11 million workers in
Chinese Mainland, and is responsible for intermediating 40 percent of China’s external trade and one-
third of total foreign direct investment flows into Mainland in 200.”[6, 1] Hong Kong has been the
source of Foreign Direct Investment in China. “The cumulative foreign direct investment (FDI) from
Hong Kong was estimated at about US$171 billion as of 2000, or about 55 percent of China’s total
FDI.”[6, 2] In Guangdong, 53,000 Hong Kong based companies have manufacturing operations there.
[6, 8]
Second, export of services account for an increasing large share of Hong Kong’s total export and
amount to one-quarter of Hong Kong’s GDP. “Service contribution to Hong Kong’s GDP rose to 85.6
percent in 2000 from 74.5 percent in 1990.”[6, 9].The major service groups are transportation, travel,
financial and insurance services. Service export supports the export oriented manufacturing base in
Guangdong Province and FDI in mainland and export of Chinese products to the world.
Third, Hong Kong has an important international financial centre as well as Shanghais. Hong Kong has
advantages that will likely to preserve its role as a centre for China’s international capital raising for the
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7. foreseeable future including: “Sound legal framework and independent and efficient judiciary, free flow
of capital and information, and a mature financial market and sound banking system.”[6, 12]
There is a lot of potential for Hong Kong’s corporation to help China’s economy in financial, insurance
and transport services. Here the independent management and choosing capable managers instead of
party’s authorities have an important role in continuing Hong Kong’s support to Mainland economy.
5-Membership at WTO
After fourteen years of arduous negotiation in 2001 China became a member of World Trade
Organization (WTO).”The WTO agreement promised to create tremendous new opportunities for
foreign business. For example, China’s telecommunications market is exploding. The fixed-line network
added 35.6 million subscribers in 2000 alone. Development of mobile telephony is even more rapid,
with 42 million new subscribers in the same year, bringing the total to 85 million. In July 2001 China
surpassed the U.S.A in mobile phone market.” [3, 3] China’s admission into the WTO has been
accelerated China’s economic growth. The amount of China’s international trade increased from $20
billon in 1970 to $475 billion in 2000.” The World Bank now estimates that exports represent a quarter
of China’s GDP, five times the level of 1978.And it’s not just exports that are booming, china is
consuming and importing at a frantic rate. Global trade was moribund in 2003, but China managed to
boost its imports by 40 percent that year. It is now the world’s biggest consumer of copper and
aluminum” [8, 1].”China’s membership in WTO created the economic efficiency for that country and
this country has been able to use the WTO dispute settlement process to protect its economic interest”
[3,133].Although China’s membership opened the door of that countries to foreign products but more
than that helped to China’s exports which have lower prices because of low labour costs. This
accelerated the trade balance surplus of China in its relation with other countries specifically G20
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8. countries. Foreign Direct Investment amount also increased specially in industry, financial service
insurance, and transportation.
6- Conclusion
. Chinese experience in development could be a good example is instructive for countries with high
unemployment rate especially in agriculture and rural sector by encouraging the growth of rural
enterprises and not concentrating in urban and industry and also attracting foreign direct investment in
their country which could bring technology transfer and educated skill workers, technicians and
managers.
China has its own problems. Inflation rate is increasing and there is a growing gap between high income
and low income classes. Millions have become richer but hundreds of millions have not. More than 60
percent of the population still are living in rural areas. Economic development has not any appearance in
far rural areas, yet. Farmers want change. We have seen an upsurge of peasant protests and urban unrest.
Environmental disaster and increasing dependence on imported energy is huge. China has among the
worst air pollution country and greatest emitter of carbon monoxide in the world. Foreign pressure on
national currency and persistent corruption among governmental bureaucracy and finally political
problems of Taiwan and Tibet, military ambitious in region, human rights violation threaten the
continuous growth and sustainable development in China. The main question still remains how can you
make one fifth of world population, more than 1.3 billion people happy and satisfied with political and
economic and social system leaded by communist party.
References
Book
1-Dowling J. Malcom,Ma Rebecca Valenzuela, Economic Development in Asia,Cengage Learning
AsiaPte Ltd,Singapore,2004.
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9. 2-Eichengreen Barry, Charles Wyplosz, and Yung Chul Park,China,Asia,and the New World
Economy, Oxford University Press, New York,2008.
3-Lardy Nicholas R., Integrating China into The Global Economy, The Brookings Institution,
Washington, D.C., 2002.
Journal and Periodicals
4- The Economist, A Survey of China, March 23rd
, 2006.
5-The Progress Freedom Foundation, Entrepreneurship and Innovation in China(1978-
2008),Periodic Commentaries on the Policy Debate,Release15,13 September 2008.
6- Yingyi Qian,The process of China’s Market Transition(1978-98) ,Journal of Institutional and
Theoretical Economics,June,1999,Wallerfangen?Sarr,Germany.
7- Yue-Chim, Richard Wong, The Role of Hong Kong in China’s Economic Development, The
University of Hong Kong, Working Paper Series Vol.2002-26, The international Centre for the study of
East Asian Development, Kitakyushu, Nov.2002.
Websites
8-CBC News Online, China’s economic miracle: the high price of progress
http://www.cbc.ca/news/background/China/ April 20, 2006.
9-Hu Zuliu and Mohsin S. Khan, Why is China Growing So Fast? International Monetary Fund, June
1997,http://www.imf.org/external/pubs/ft/issues8/index.htm.
9

10. 2-Eichengreen Barry, Charles Wyplosz, and Yung Chul Park,China,Asia,and the New World
Economy, Oxford University Press, New York,2008.
3-Lardy Nicholas R., Integrating China into The Global Economy, The Brookings Institution,
Washington, D.C., 2002.
Journal and Periodicals
4- The Economist, A Survey of China, March 23rd
, 2006.
5-The Progress Freedom Foundation, Entrepreneurship and Innovation in China(1978-
2008),Periodic Commentaries on the Policy Debate,Release15,13 September 2008.
6- Yingyi Qian,The process of China’s Market Transition(1978-98) ,Journal of Institutional and
Theoretical Economics,June,1999,Wallerfangen?Sarr,Germany.
7- Yue-Chim, Richard Wong, The Role of Hong Kong in China’s Economic Development, The
University of Hong Kong, Working Paper Series Vol.2002-26, The international Centre for the study of
East Asian Development, Kitakyushu, Nov.2002.
Websites
8-CBC News Online, China’s economic miracle: the high price of progress
http://www.cbc.ca/news/background/China/ April 20, 2006.
9-Hu Zuliu and Mohsin S. Khan, Why is China Growing So Fast? International Monetary Fund, June
1997,http://www.imf.org/external/pubs/ft/issues8/index.htm.
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