Research Paper on China Economy

“China can only go from strength to strength.”
(Tom Elliott, JP Morgan Fleming’s strategist)

China is a developing country and a major world trading power. For the last half a century, Chinese industry and economy have undergone immense historic changes, bringing development, innovation and modernization to the country. In 1949 New China had to start almost from scratch, because nearly all of the industrial products we imported to the country and the state of affairs in all the branches of industry remained incredibly unstable. Thus, the same year, Chinese government realized an amazing large-scale project – the development of China’s industrial sector. Some of its branches like metallurgy, mining, energy producing industries, airplane and automobile industries were strengthened, others, including petrochemicals, computers, telecommunication equipment, instruments, meters, and aeronautics were built up from nothing. The development of the whole industrial structure was thoroughly planned and as the result the levels of production raised considerably. Though the levels went up the industry required reforms and development of government policies. That’s why the turning point in the development of the country was the actual implementation of the policies of reforms and opening to the outside world which started in the year of 1978. The industrial reform provided enterprises and companies with more rights at the same time giving the owners of these enterprises more profits. The other innovations were the extension of independent operations and implementation of the enterprise contract responsibility system, which improved the operation procedure of enterprises, influencing the enterprise itself, its workers and staff. This system gave a perfect chance for people to take the initiative and show their creativity. The next step in the industrialization of China was introduction of foreign capital and opening to the outside world. This resulted the establishment of many Sino-foreign joint enterprises and wholly foreign-owned companies and actually brought modernization to the enterprises (both in their management and their equipment), at the same time attracting more capital to the country.

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In order to create a stable, balanced and effective economic structure, China’s policies also supported the priority development of light industry, developing of second and tertiary industries and increasing the amounts of import for high-quality consumer goods. The substantial disproportion or imbalance, existed among different industries (among primary, secondary and tertiary industries), was significantly reduced, owing to the correct steps in the government policies. These policies had an unexpected effect – the growth of the secondary and tertiary industries along with the primary ones. Actually, many economists do think that the growth of the secondary industry became the base for rapid development of China’s National Economy.

International trade and economic reform have helped 200 million Chinese to raise out of poverty since 1978. During the 21 years of reforms China gained the experience and technology which increased the level of Chinese industry and made achievements in the construction of the world’s economy. In the past year, the China’s official GDP growth rate was 9.7%, but some economists argue that this rate could be as high as 13%. For the last three years, one third of global economic growth (considering purchasing-power parity) was solely China’s contribution. The enormous economic growth created the favorable environment for establishing new trade links. Chinese commercial ties expanded significantly over the last couple of years. Economists say that for the next 20 years China can forestall Japan and become the world’s second largest trading nation. And by the year of 2030 Chinese Economy could be the Biggest Global Economy. But to realize this, China has to make sure that the liberalization of the economy continues, the currency is stable and the financial system is modern and meets the demands of society and, of course, the country complies with international norms for protecting property rights.

The development of Chinese international trade influenced the economies of the other countries which supply China with various types of commodities, actively importing Chinese products. Economists noticed that China’s Imports increased considerably driving the development of the trading partners’ economies. Here are some examples.

According to the statistics, the E.U. was the first largest trading partner of China (leaving behind the US and Japan) in 2004. Since 1978, the E.U.- China Trade has increased for more than 30 times and was about € 175 billion. It’s remarkable that there’s a growing concern of the E.U. leaders over the fact that the E.U.- China bilateral trade actually created the E.U.’s biggest bilateral trade deficit with China (approximately €78.5 billion in 2004).China also enjoys the status of the second largest exporter (after the U.S.) to the European Union.

Chinese Exports to E.U. reached the share of 11 per cent out of all the exported commodities.

Sino-US bilateral trade is one of the most important economic ties in the world. China and USA established the formal diplomatic relations 26 years ago, leading the way into the new era of fruitful international cooperation in different spheres of economy. Total trade with U.S. (export and import) has the immense growth from $2.5 billion at the beginning to $169.4 billion in 2004. This year from January to October the growth in U.S.–China trade was $127.3 billion, Economists consider that the trade increased by 26.2 percent year on year. China today is the third largest trading partner of the United States of America, whereas U.S. is China’s second. The U.S. Imports from China include various manufactured articles (such as toys, games, etc.); office machines; telecommunications equipment, sound recording, and reproducing equipment (such as telephone answering machines, radios, tape recorders and players, televisions, VCRs, etc.); footwear; and electrical machinery. It necessary to underline that American Exports made China the 13th largest market abroad for U.S. goods. The U.S. Exports to China include, transport equipment (mainly airplanes and their parts), electrical machinery, office machines (e.g., computers), general industrial machinery and equipment and oilseeds.

The actual state of things of Sino-U.S. bilateral trade in 2005 is shown in official documents. The growth in Sino-US bilateral trade caused terrific imbalance – the existence of the U.S. trade deficit with China.

A great number of U.S. economists consider that the reasons for such deficit are Chinese restrictive trade and investment practices. These factors create political issues which influence the Sino-U.S. bilateral trade. The U.S. threatened China several times to apply sanctions in order to get rid of China’s trade barriers ( such as high tariffs; pervasive non-tariff barriers; non-transparent trade rules and regulations; trading and distribution rights; investment restrictions) and violations of U.S. Intellectual Property Rights (IPR). Though some of the reforms eased political tension, the market access and IPR pirates remain extremely acute problems for the U.S. companies in China.

According to the Chinese Ministry of Commerce, over the period of January-May 2005, China managed to reach 10 billion US dollars in trade with Russia. This amount is up 29.7 per cent compared to the same period last year. Since 1999, bilateral trade had an annual growth of 30 per cent. In 2004 bilateral trade amount reached a record figure of 21.23 billion US dollars.

China-Kazakhstan trade increased 12 times and was nearly 4.5 billion US dollars in 2004 from 1992’s 368 million US dollars, according to the Ministry of Commerce. During the first five months of this year the trade amount was 2.27 billion US dollars. This figure is up 25.5 per cent compared to the same period last year.

China’s growing economy influences the world’s markets of commodities. An incredible demand of Chinese economy for base metals, minerals and fuels made the world’s prices for these commodities extremely high. On August the 12, 2005 commodity prices reached their highest point in 24 years as crude oil, petrol and copper rose to records and the cost of natural gas immensely increased. According to some of the economists China experience the shortage in several basic commodities including timber, oil, and others. China’s demand for metals to realize such projects as construction of bridges, buildings, car production brought the prices of iron ore and coal to a record level. The Chinese Import of iron ore rose by 45 per cent compared to 2004 and copper Imports rose by 40 per cent compared to 2004. This demand made the prices for copper rose to a six-year high and even nickel rose to a 14-year high.

Nevertheless China consumed in 2005 one fifth of the world’s copper supplies mainly for the construction of the power lines. The construction of China’s power generation capacity, modern railroads and highways and, of course, construction of infrastructure of the 2008 Beijing Olympics, all these will influence the economy in the nearest future, increasing demand for such commodities as oil, coal, steel, copper and rubber. Today, China consumes raw materials as soon as they are extracted and processed, causing record profits to various companies involved in such business activities. Though experts predict the slow-down in China’s economy, the demand for raw products from various parts of China is still as high as before. Chinese economy cannot be self-sufficient even in all the food products. China has the growing need for grains and oilseeds. It has also become one of the world’s largest Importers of soybeans and it will soon become a significant grain Importer, influencing the world’s commodity prices in some of the food products. Thus constant demand for soybean products in China remains a key factor in the world soybean market. The analysts say – “the Dragon is hungry” and it gulps down all the resources available at the commodity markets.

China’s Authorities try to diversify Chinese economy in order to slow down extremely rapid development of some industrial segments ( e.g. from construction to cars) and reduce the demands for several types of the commodities, controlling the excess production. Thus Chinese demand for oil is only 2 per cent higher than in 2004, the demand for the cement is flat and the country’s demand for aluminum declined by 5 per cent this year. All these political and economic measures of the government directed towards an effective economic growth and elimination of hidden barriers for the development of Chinese economy.

U.S. Foreign Trade Section, U.S.- China trade balance., <http://www.> (2005, December 4)
(China’s Economic Conditions. CRS Issue Brief IB98014.)
The Economist (on-line edition, May 13th 2004), The great fall of China?, <>(2005, December 4)
China Government Directory. Introduction to Chinese Industry, <>(2005, December 4)
(Wayne M. Morrison, IB91121: China-U.S. Trade Issues.
Foreign Affairs, Defense and Trade Division, April 13, 2001. p. 1- 10)
(China Effect Convulses Commodity Markets Financial Times. Published: November 15 2003 p. 17)

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