After more than a quarter century of reform and opening to the outside world China’s economy had become the second largest in the world. The Chinese government has a goal of quadrupling the gross domestic product (GDP) by 2020 and more than doubling the per capita GDP. A widespread market economy mechanisms and some reduction of government role has been evident since 1978. The government fosters a dual economic structure that has evolved from a socialist, centrally planned economy to a socialist market economic system, or a market economy with socialist characteristics.
The rapid industrial development has been achieved by increasing technological advancements, huge foreign direct investment and productivity increases. People’s communes were eliminated by 1984, after more than 25 years, and the system of township-collective-household production was introduced to the agricultural sector. Private ownership of production assets is now legal, although some non-agricultural and industrial facilities are still state-owned and centrally planned. Restraints on foreign trade were relaxed when China acceded to the World Trade Organization in 2001. Joint ventures are encouraged, especially in the coastal special economic zones and open coastal cities. A sign of the affluence that the reformed economy has brought to China can be seen in the number of its millionaires (measured in US dollars), reported as 236,000 millionaires, an increase of 12 percent over two years earlier.
Chinese officials note two major trends that have an effect on China’s market economy and future development: world multi-polarization and regional integration. In relation to these trends, Chinese officials foresee China and the United States’ role in world affairs to be closely tied with one another and as one of high importance. Despite successes, China’s leaders face a variety of challenges to the nation’s future economic development. China must maintain a high growth rate, deal effectively with the rural workforce, improve the financial system, continuing to reform the state-owned enterprises, foster the productive private sector, establish a social security system, improve scientific and educational development, promote better international cooperation, and change the role of the government in the economic system. China has recently become the world’s largest trading nation after the United States.
China has remained a primary recipient of the world’s destination of FDI in recent years. FDI accounts for 27% of the value added production, 4.1% of national tax revenue, and 58% of foreign trade. Over 190 countries from around the world invest in China, which includes 450 of the Worlds Fortune 500 companies. Member Priorities Survey, completed a survey that the majority of US companies invest in China to serve the Chinese domestic market, not export back to the United States.
According to expert’s estimates, the total share of US, European, and Japanese multinational corporations (MNCs) in Chinese exports has been only 11% in recent years. Most exports are from Hong Kong, South Korea, and Taiwan firms. An estimated 75% of Western and Japanese MNSs are in China to sell to the domestic market. The top sources of FDI for China have remained the same over the years. Hong Kong continues to lead the list, followed by the British Virgin Islands, Japan, South Korea, and the US. Member Priorities Survey reported that 81% of firms have operation in China are profitable.
The Chinese National Development and Reform Commission (NDRC) had established a plan to better manage FDI investment in the economy. The plan addressed the relationship between national security investment and foreign investment. It instructs China to gradually relax restrictions on foreign holding of domestic enterprises. Foreign capital should be directed towards high-tech industries, modern service industries, high-end manufacturing, infrastructure development, and ecological/environmental protection. The NDRC is asking for MNC’s to increase investment and setup production, assembly, and training institutions in China. The goal would be to enhance the independence of innovation for Chinese enterprises.
Outbound FDI has also been increasing as China’s economy continues to grow and prosper. Xinhua News Agency reported that China’s outbound direct investment reached $73.3 billion in recent years. The majority of Chinese outbound direct investment came from overseas acquisitions. Hong Kong and tax havens, such as the Cayman Islands and the British Virgin Islands received 81% of the total outbound investment.
The top sources of outbound FDI from China are costal and border provinces. Fujian, Guangdong, Heilongjiang, Jiangsu, Shandong, Shanghai, and Zhejiang account for 62.5% of China’s outbound FDI. The service sector received 50% of the Chinese FDI, 23% targeted manufacturing, 22% covered wholesale and retail, and 17% was invested in the mining industry (Foreign Investment in China). China’s foreign exchange reserves were minimal in 1978, but it was enough to cover requirements with a very small import. In the 1980s, export contributed to the rise in reserves to $17.4 billion. The economic slowdown in the early 1990s created a sharp fall in imports, while exports contsinued to rise. This created a merchandise trade surplus reached $9.2 billion. The surplus was eventually eroded when imports rose faster than exports. In 1993, the trade and current accounts created a deficit, but the acceleration in inward foreign direct investment (FDI) kept foreign exchange reserves increasing.
As long as China pursues social and economic reforms, its economy will keep growing rapidly. One of important reforms is the privatization of State-owned enterprises (SOEs). Over the past 10 years, 27 million workers laid off from SOEs have found jobs in the private sector. The second is the fact that China has opened up to the outside world, welcoming all kinds of foreign investments and gradually opening its banking sector. The second is the fact that China has opened up to the outside world, welcoming all kinds of foreign investments and gradually opening its banking sector. The third factor is education and technology support. The central government has invested a huge amount of capital and human resources in developing education and technology. The final factor is urbanization which proved to be a vital driver of market demand and produced massive investments in infrastructure. China's urbanization drive aims to turn 45 percent of the rural population into urban residents.