The opening of the Chinese economy to globalisation has had significant effects on the country’s level of economic growth. These effects have been primarily due to foreign investment and the operation of foreign-owned companies within China’s borders, as well as changes in China’s economic strategies.
The foremost growth-related effect has been the level of foreign direct investment in China by transnational corporations (TNCs). These TNCs, attracted by the low-cost factors of production available in China, invested great amounts of foreign currency in the Chinese economy. This served not only to bolster the Chinese currency, but also to increase China’s international trade flows.
The presence and operation of TNCs in China also served to increase competition in the domestic market, encouraging all sectors to increase the efficiency of their production processes. As a result of these pressures, much of the Chinese private sector (both locally and foreign-owned) began specialisation in areas of production in which they had a comparative advantage—the most fundamental impact of globalisation and free trade.
The areas in which Chinese exports have become most competitive (areas in which China has a comparative advantage) include coal, processed food, animal agricultural products, textiles, clothing, building materials and crops. These industries demonstrate China’s strong focus on labour-intensive manufacturing activities, though the increased technology transfer facilitated by globalisation is allowing China to better utilise capital equipment and thus further increase its productivity. This substitution of capital for labour however, made possible by globalisation, may adversely affect the Chinese workforce in the future if capital replaces labour to a significant extent.
Whilst specialisation has led to a more productive economy, it has also meant that China can no longer produce all the goods for which there is demand. Accordingly, China has had to relax trade restrictions and its protectionist tariffs in order to satisfy domestic demand. This necessity to import goods saw China’s current account go into deficit for a brief period immediately following its trade liberalisation, though it has managed to maintain a surplus since.
The net result of China’s economic liberalisation has been an average growth rate of 10% between 1978 and 1995—far higher than the average international growth rate during the same period, with its economic output (based on Gross National Product [GNP]) now ranked number seven in the world. If Chinese authorities continue along the lines of current policies, and adhere to World Trade Organisation (WTO) The Impact of Globalisation on China’s Economic Growth and Development 3 policies in the future, the Chinese economy will continue to grow, and effectively move to a market-based economy by 2005. Predictions are that China’s economy will grow at…