China: Economic Overview, Foreign Investment, and Trade

This report provides a comprehensive overview of China's economy, examining its historical context, rapid growth, and global influence. It delves into key economic factors, including foreign direct investment (FDI), foreign exchange reserves, and exchange rates, highlighting China's role as a major recipient of FDI and its significant foreign exchange reserves. The report analyzes the competitive advantages of China's textile industry, focusing on factor endowments like labor and technology. It also addresses challenges such as environmental degradation and social discontent, offering insights into China's economic trajectory and its impact on the global stage. The report also covers the relationship between China and the World Trade Organization (WTO), strained relations with trading members, and demands for currency devaluation.

General overview of China
China has been ranked as the most populous nation in the world with a rich culture that
dates back 4000 years (TCT, n.d.). Some products such as gunpowder, compass, and paper
constitute that fragments that make up China. Under the communist regime that lasted for more
than two decades led by Mao Zedong, the founder of the People’s Republic saw China stagnate
for more two decades. However, China has been categorized as a nation with the fastest-growing
economy and as per the reports it is stated that China might be undergoing what is referred as the
second industrial revolution. China has also put in place space exploration program and entails
plans of establishing a space station by 2020.
Currently, China has been identified as the global leading exporter and is attracting a lot
of investments. Also, China is investing abroad in projects worth billions of dollars. Following
the collapse of global export markets that was followed by financial crisis globally in 2009 saw
China hit hard, though its economy rebounded first enough ensuring the country was back on its
track. China overtook Japan in 2011 in becoming the second largest economy in the world
despite the debt crisis that was evident in the eurozone in 2012 which played a critical role in
dragging China’s growth as Eurozone was the largest market for products from China. China
now benefits from a large access to international markets as it is a member of the World Trade
Organization. However, China relations with trading members have been strained due to China’s
piracy goods and the large trade surplus. This has led to increasing demands for Beijing to
devalue its currency that will see currency value raised and this will make goods from China
expensive for buyers and the overall effect will hold back exports. The economic differences that
exist between urban China and the remote hinterlands are among the largest in the global arena.

Over the past few decades, many rural dwellers that are impoverished have flocked to China’s
eastern cities and this has led to China enjoying a construction boom.
At the onset of 2012 for the first time, it was reported that the number of city dwellers
seemed to outnumber rural population. The manifestation of social discontent is evident as
revealed by demonstrations by both the farmers and employees. Thousands of individuals travel
to Beijing annually to launch legal petitions with the courts in the hope of seeking legal redress
for alleged corruption and grabbing of land. Other crucial matters entail corruption which
impacts negatively on the development of society and the alarming rate of HIV pandemic.
Environmental degradation has been propelled by the downside of the economic boom. China
has been reported as the hub to many most-polluted towns globally.
Campaigners from human rights continue criticizing China for the many executions that
involve hundreds of individuals annually and for failing to eradicate torture as well as the
continued censorship for artistic and political expression. China has been keen on stamping down
on what it considers as dissent among ethnic minorities such as the Muslim Uighurs that occupy
the North-west of China. The country’s rule over Tibet is considered controversial. The lobby
groups from human rights blame the state of the destruction of Tibetan Buddhist tradition and the
execution of monks that were loyal to the Dalai Lama, a spiritual figure that was exiled for
campaigning for autonomy in China.
Economic factors
Foreign Direct Investment
China continues to dominate and remains as the major recipient of the global hub of FDI
over the past two decades. Reports indicate that FDI accounts for more than 25% of the value-

added production,4% of China’s tax revenue and more than 50 % of foreign trade (Fogel, 2010).
Over 190 nations across the globe invest in the country and this entails 450 out of the 500
enterprises listed in the Worlds Fortune. In one of the surveys that were conducted by Member
Priorities Survey, it revealed that most of the companies from the United States of America
invest in China purposely to enrich the domestic market and not for purposes of exporting back
to the United States. As per the estimates by UBS AG, the approximated gross shares of US,
European and Japanese MNCs in exports from China was approximately 11% in 2009 (Fogel,
2010).Most exports were said to originate from Hong Kong and Korean enterprises. It is
approximated that approximately 75% of the MNCs from the European countries and Japan are
stationed in China to trade to the local market. However, a drop in foreign direct investment in
the previous decades indicates that enterprises are losing interest in the Chinese market. Priority
Sources of FDI for China have remained fairly constant over the past few years. Hong Kong
leads the list and is closely followed by other nations such as the Virgin Islands and Japan
(Bailey, 2018). The survey by Member priorities reported that more than 80% of the firms that
operate in China are profitable.
2008 2010 2012 2014 2016 2018 2020 2022 2024
0
2
4
6
8
10
12
GDP changes on annual basis(%)

April
May
June
July
August
September
October
November
December
MONTHS OF THE YEAR(2018)
Jan
Feb
March
0
200
400
600
800
1000
1200
1400
China's FDI in million($)
The National Development and Reform Commission set up a good plan of managing FDI
investment in China’s economy in 2006.The plan focused on the nexus between investment in
China’s security and foreign investment. The commission directed the country to impound
restrictions on holding of foreign firms. Foreign financing should be channeled towards
industries that are high-tech, service industries that are modern and high-end manufacturing. The
NDRC is urging the MNCs to raise investment and establish production and assembly centers in
China (Verbeke, 2018). The primary motive would be to boost the autonomy of creativity for
Chinese firms.
Outward FDI has seen China’s economy expand and prosper and China’s outbound direct
investment reached the target of about $73 billion by the close of 2016 financial year. Overseas
acquisitions were the primary sources of Chinese outbound direct investment (Verbeke, 2018).
Hong Kong, the Cayman Islands, and the Virgin Islands classified as tax havens received
approximately 81% of the total foreign investment (Fogel, 2010). The primary sources of
outward FDI from China are the states in the Coastal and border territories. Provinces such as
Fujian, Jiangsu, and Shanghai accounted for more than 60% of China’s outbound FDI (Fogel,

2010).The service industry received approximately 50% of the Chinese FDI, more than 20%
targeted manufacturing and 22% covered segments such as the wholesale and retail trade and
more than 15% was invested in the manufacturing sector (Fogel, 2010).
Foreign exchange reserve
The Chinese history of foreign exchange reserves indicates that in 1978 the reserves were
minimal though substantial to support the import sector. The exports as per 1980 were critical in
contributing to the rise in reserve to approximately, $17 billion (McCaffrey, 2016). The
economic depression that was witnessed in 1980 led to a sharp decline in the imports as exports
continue to rise. This had the effect of creating a surplus in the merchandise trade reaching close
to $9.1 billion (Bailey, 2018). However, the surplus was soon eroded by the sharp increase in the
imports, as the imports rose rapidly as compared to the exports. The trade and the current
accounts were responsible for creating deficits, but due to acceleration in inward FDI, the foreign
exchange reserves kept growing.

The joining of China to the World Trade Organization(WTO) in 2001 has contributed to
a rapid increase in the value of imports and facilitated the growth of exports as evidenced in
2006 when FDI inflows surpassed the $60 billion target that was established on an annual basis.
In October 2006, it was reported that foreign exchange reserves surpassed the $1 trillion in the
history of China’s economy (Dlabay & Scott, 2011). In September 2008, the reserved amounted
to $1.9 trillion and remained constant till the end of 2008 when the growth of trade slowed and
the levels of FDI inflows declined (Fogel, 2010).
Exchange rate and China’s currency
China has been associated with manipulation of the holdings of its currency at a low level
artificially. In mid-2008, the currency appreciated more than 20% against the dollar and then
stagnated as the authorities in China were careful about slipping exports (Fogel, 2010). The
continued manipulation of currency by China has been linked to hurting China’s economy. The
reports by the Treasury revealed that appreciating the Yuan could end up being a win-win
scenario for the global economy. The administration of Obama once wanted to empower the IMF
with the aim of improving practices in the currency sector.

Natural resource and factor endowments that create competitive advantage
The Chinese textile industry has been a backbone of the economy for many decades and
this has been attributed to factor endowment and the existence of the market scale. The level of
trade of the textile industry has been reported to increase more than 7 times in the past two
decades. It is estimated that in 2005 exports from the textile industry accounted for 15.4 % of
total exports in China and more than 20% of the global gross exports in textiles (Fogel, 2010).
The production and exportation of products from Chinese textiles are the largest across the
globe. However, the textile industry in China is not without challenges and difficulties, for
instance, excessive reliance on resources, a technology that is ranked as low and a trade structure
that is indisposed. The imposition of trade sanctions against textile products from China is
healthy as it casts tight restrictions on the competitive advantage of the textile industry from
China bringing on board suggestions.
The global competitive advantage of China
In light of the connection of factor and global absolute advantage, the progress of the
textile industry relies upon and is facilitated by costs of labor and technology. In comparison, it
is crucial to state that the garment industry is labor oriented whereas the textile industry
specifically the chemical fiber segment is sort of capital and technology intensive (Fu & Tao,
2012). The textile industry in China displays economies of scale and cost impacts in the
distribution of materials, costs associated with labor, compatibility of up and downstream and
this translates to a stiff export competitive edge. However, it has been noted that developed
economies are investing and adopting modern technologies into their textile industries and the
benefits associated with cheap labor in third world nations gets crippled by constant
improvements in productivity in developed economies. As such the textile industry in developed

nations continues to reap great profits while at the same time production gets reduced. In this
context, the comparative advantage of the textile industry in China will be evaluated.
China’s competitive edge in textile industry
The competitive advantage that is exhibited by China in the present day in textile market
relies to a large extent on the firm industrial ground and cheap costs. Compared to the overseas
competitors, the textile industry in China displays a competitive edge in the following sectors
that are projected to exist in future.
The factor endowment
The substantial supply of key inputs such as labor and associated materials is vital for the
textile industry in China. Among the factors, the most crucial advantage is labor. There are two
primary characteristics of the labor force in China, one is its low wage and the superior quality.
The median education of employees in China is one decade which is the average of developing
nations and around four years gap in comparison to the developed nations through the wage rate
in China falls below that of other nations (Fu & Tao, 2012). As witnessed in 2005 the wages in
textile market in China accounted for about 1/18 as compared to England and 1/21 of that paid in
the United States. China has received many economic bonuses from the textile market without
losing its comparative advantage in labor supply and such an advantage is a propelling force for
the textile market’s further progress. The other trait is China’s sustainability. The growth of
urbanization and improvements in higher education in China will create room for more robust
but low-priced labor force for the textile market. Thus, the increase in the human stock will
ensure supply of employees and technological support needed for the future progress of China’s
textile sector.

The second superiority stems from the availability of materials. China is ranked as the
laeding producer of cotton, yarn and natural fiber in the world due to the unique nature of her
agriculture and superiority in its inputs. Though abundance in natural fiber and the growing
chemical fiber sector makes China’s textile industry enjoy advantaged superiority that has been
manifested in more than 10 million tons of fiber output (Fu & Tao, 2012). China is also ranked
as the number one global producer of cotton and consumer and China’s cotton accounts for more
than 25% of the global gross production (Fu & Tao, 2012). With regards to the production of
cloth, China has been dominating the market as the leader since 1985 and the production of other
products is well above the average compared to other nations.
China trade policies
The government of China directly advocates stringent enterprise opposition to trade and
investment protectionism (OECD Observer, 2012). As displayed ten years ago during the Asian
crisis, the state established a strong position towards outward retrenchment during the period of
economic depression. A transparent and sustainable investment system is one of the comparative
advantages exercised by China. Such a crisis is an avenue to upgrade the trade system. As
enterprises exhibit on how to adopt investment decisions to the global depressions, states seize
the opportunity of revising their investment policies to take into account a pile of achievements
while at the same time identifying pending hurdles and obstacles.
The government of China has made massive strides over the past few decades in
establishing laws and regulations that promote the responsible conduct of business operations.
As such that was behind the remarkable expansion of FDI inflows in the past few decades. Some
of the steps entailed the laws that China adopted in 2006 that entailed the acquisition of local
firms by foreign investors, the enterprise tax law that targeted income which saw abolishment of

fiscal incentives for FDI in 2008 (OECD Observer, 2012).Also, it is in the same year that saw the
establishment of China’s first intellectual rights law, the anti-monopoly law and the latest version
of the catalog which guides investment by foreign firms.
The policies and regulations on protecting the environment are other perfect illustrations
of improvements. In preparing their review, the OECD team made visits to four textile industries
that were located in South China. The four textile industries are excellent illustrations of what
gets done by firms in understanding the necessity of responsible business operation. Significant
development has also been established in the conservation of energy and in constructing a
sustainable economy. Laws regarding labor have also progressed and are more open. A perfect
illustration is the current Labor Contract Law.
These are all fundamental fulfilments, however, there is no room for complacency. There is
some task that is still vital to be done. The review has gone a notch higher by adding
recommendations that will help China make better utilization of foreign investment. However,
government security screening frameworks with regards to foreign investment projects are still
not open and clear (OECD Observer, 2012). It is important for investors in the manufacturing
sector to gain more clarity on how the new property law will be implemented.
Close collaborations and working with the OECD and other relevant stakeholders will
help in keeping the global investment regime transparent and this will help China’s FDI to assist
in global recovery and in development of China. China’s participation in the liberty investment
process that was hosted by the OECD was crucial and marked China’s effort in establishing
liberalization of China’s markets (OECD Observer, 2012). The multilateral process helps states
in monitoring changes in policy formulation that are proposed or initiated by other nations and
also establishes discipline for measures that are restrictive.

The issue of unemployment in China
The rate of unemployment in China has decreased to 3.89% in the initial quarter of 2018
from 3.9 as witnessed in 2017. However, in years such as 2002, the rate of unemployment
reached an all high of 4.3%. High unemployment rates are as a result of huge population and also
due to lack of formal jobs that can accommodate all the willing and able persons. In China, the
rate of unemployment evaluates the number of individuals that are actively seeking for a job as a
proportion of the workforce. The rate of unemployment is still high as China faces hurdles as the
economy moves on with structural reforms as per the ministry of labor. The ministry of social
security in an announcement revealed that it needed to create more than 10 million jobs.
However, the need to create more jobs still faces a lot of pressure.
Solutions
The government of China is encouraging people to establish self-employment by starting
their enterprises. This can be achieved by reducing taxes and loan availability for some people
based on certain terms and conditions. Encouraging an entrepreneurial culture has the benefit of
improving the standards of living of particular individuals.
Encouraging business enterprises to absorb laborers, more so the small enterprises in the
service industry and labor-intensive enterprises and this can help ease the pressure on job
markets. Insurance subsidies for certain levels more so when they recruit people from urban
centers that are vulnerable.
Political factors
In accordance with the Constitution of China, China is a socialist government that is
under the democratic dictatorship that is dominated and run by the working class and grounded

on cooperation by employees and peasants (PESTLE Analysis, 2015). The state is a composition
congresses by people and a system of a political party that enhances a multi-party cooperation
and political consultation ruled by the leadership of Communist Party of China. The kernel and
primary framework of the political system is composed of the systems of people’s congress, the
autonomy of regional ethnicity and governance at the grass root.
Government
The government of China is made up of a multi-party system that cooperates with the
consultation of political systems under the leadership of CPC. The system is tasked with the
responsibility of ensuring that CPC is the sole political party in power. With the acceptance of
leadership by CPC, the other political parties also engage in participation entailing discussions
and management of affairs of the state in conjunction with CPC. Political consultation in this
context means that under CPC’s leadership, all partners and representatives from all areas in the
country can partake in negotiations of the nation’s primary policies and critical matters in
politics, economic and social affairs before a decision is reached. Political consultation assumes
the form of conferences by Chinese People Political Consultative forum. Political negotiation is
the most fundamental political and organization form of multi-party consultation system.
Human rights
According to reports by the department of state on the human rights practices and global
religious freedoms, it has been noted that the well archived and continuing abuses of the
violation of fundamental human rights of internationally identified culture that stems from both
the intolerance dissents of the authorities and inadequacy of legal frameworks that safeguard
fundamental freedoms and rights (Fogel, 2010). Some of the reported abuses entail arbitrary and