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Effect Of China And Its Revaluation Of Yuan

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Impact of China on Global Economy

Presently, China is without question one of the largest and fastest growing countries in the world. This had inevitably led it to become the most speculated economy as well. This is due to its large population size, its comparative advantage in production, and its ability to offer tremendous economic opportunities. All of this in turn gives China the capability to attract foreign investors and firms. Although after the end of World War II it has been America who is named as the world's strongest and most influential economy, China is rapidly closing the gap as we move into the twenty-first century. Nevertheless China's rapid expansion has attracted its trade partners to force China to revaluate its currency; one of the main drivers of such force comes from the United States. All of these factors are vital in enabling us to portray the complex mechanism of the Chinese economy; three of the most crucial issues are China's rapid growth in term of economy, its tremendous comparative advantage, and last but not least the recent revaluation of the Yuan.

Firstly, Let's take a look at the growth and opportunities in Chinese economy and market. China is a rapidly rising global economic power. But without the foundation we would never be able to climb to the top, so let's take a look at the history of china economy first. Since 1978 the People's Republic of China government has been reforming its economy from a Soviet-style centrally planned economy to a more market-oriented economy but still within a inflexible political framework of Communist Party of China control. This is called "Socialism with Chinese characteristics" and is one type of mixed economy. To this end the authorities have switched to a system of household responsibility in agriculture in place of the old collectivization, increased the authority of local officials and plant managers in industry, permitted a wide variety of small-scale enterprise in services and light manufacturing, and opened the economy to increased foreign trade and foreign investment. The government has emphasized raising personal income and consumption and introducing new management systems to help increase productivity. The government also has focused on foreign trade as a major vehicle for economic growth. The result has been a quadrupling of GDP since 1978. As the result, today the economy of China is the second largest in the world as measured by purchasing power parity, with a GDP of US $8.092 trillion. When measured in USD-exchange rate terms, it is the seventh largest in the world, with a GDP of US $1.649 trillion (2004). However, China's huge population of 1.3 billion results in a relatively low per capita income of $6,193 at PPP. As of 2005, China is regarded as the fastest-growing major economy in the world. Overall growth has averaged a robust 7% to 8% for more than a decade, with some markets expanding much more rapidly. When Beijing entered the World Trade Organization (WTO) in December 2001, it undertook to remove most of the remaining barriers to the operation of foreign firms inside China by 2006. The resulting flow of investment into the country has given rise to glowing predictions in international financial circles that China is emerging as the new industrial dragon of world capitalism. As China becomes more open in term of their policy and trade it create many opportunities for firms to tap-in and get a share of the world's largest market. Some of the fastest growing industries in China are; China's auto market, for example, passenger car sales jumping 82% year-over-year. Yet China's auto industry is still in early stages with strong growth projected for years ahead. Also China is the world's largest telecommunications market with some 280 million mobile subscribers and 270 million wire line subscribers. New wire line subscribers are being connected at close to two million per month while mobile subscribers are growing at four million per month, overall at 14% growth rate. These are just some example of the growth of Chinese market. Therefore no wonder why China is such an attractive and promising market for both domestic and foreign corporations to try to be part of its prosperity.

Secondly, let's take a look at comparative advantage of China. The first advantage that China has is very obvious, that is the huge and cheap workforce. Being the most populated country in the entire planet, China has well past one billions in population size. With this magnificent number, it allows China to be able to gain advantage over every other country in the world. Because due to law of demand and supply, since there are many workers who are willing to supply their labor and with limited demand of such workers, it will creates a surplus of labor, thus reduces the wages each workers will receive. Also with such high number of labor, China also has higher labor-to-capital ratio when compare to other economy. But this gradually changes to become a more knowledge intensive economy as China begin to open its country and Chinese people become more educated. Another point that should be address is that with China low wages per worker, it allows China to produce the same amount of output with lower input when compare to other manufacturer countries. This kind of advantage in terms of economic is called "absolute advantage". All of these are why many foreign firms trying to invest and shift its production into Mainland China. But this is only half of the story; another important rationale is that with the most populated country in the world, it is also a country with largest demand in the global economy. If any firms could be able to penetrate through thick wall of rules and regulations, such firms could then enjoy and have a slice of the world's biggest demand pie. Beside the advantage in demographic, China also has another important advantage that many other countries jealous. That is being listed in the top five largest countries; it has vast resources available for its production. When combine with



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