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The Chinese Economy and the MNCs Essay


It is factual that China is one of the world’s emerging economies. It is categorized as one of the Asian tigers. This implies that its influence in the international system is felt even by developed states.

Chinese economy is growing at a fastest rate, which has made other players in the international financial system to review their economic policies. This paper analyzes the causes and effects of this new trend.

Financial Times Report

It is evident that Chinese economic and political policies are rapidly shaping the current world financial market. The recent significant step made by Chinese financial system is posing a threat to the World Bank and other global financial systems.

According to the Financial Times, the Chinese Development Bank single handedly gave out $65 billion to governments and companies of the developing countries in the year 2009 and 2010. In the same period, the Chinese Export-Import Bank managed to lend out similar amount to African states and other developing countries in the Caribbean.

Between mid 2008 and 2010, World Bank was able to assign a loan of $ 100.3 billion to borrowers from developing countries. This was aimed at responding to the financial crisis that occurred between mid 2008 and 2010.

However, in the same period China managed to offer loans to Chinese and overseas energy producing companies at affordable interest rates, which ensured consistent production of energy even at times of financial hardships.

For instance, it is notable that China issued huge loans to oil producing countries such as Russia, Brazil and Venezuela. It furthermore lent out considerable amount to the Indian company for the purchase of power equipments. Countries approached Chinese government and companies for loans to finance important projects such as railway construction in Argentina.

This move threatened the position of developed states in the international system, which forced the world financial regimes to engage China in discussions. China was further requested to take an action in order to end the financial crisis witnessed in the years. This proves that China is a force to reckon with in the international financial market (Cheng & Zhou 2007, p. 21).

The issue of financing oil-producing companies in particular threatened the U.S. economy. The US government on the other hand interpreted China’s move to finance oil-processing countries as an attempt to cut it from the world oil market. Although, in the real sense states and individuals from developing countries preferred Chinese financial assistance because of its terms.

The interest charged is affordable to many and some are given preferential treatment. The Chinese lending institutions charge 10% of the total amount borrowed at a period of six months while the IMF demands 20% of the total amount in the same period (Bach, Newman & Weber 2006, p. 501). Most importantly, Chinese assistance is not tied to political and social values such as democracy and transparency.

Chinese government engages in trade with any kind of government or leader. Western aid has conditionality that cannot be met by many. For instance, Iran cannot qualify for aid from the western powers mainly because of witnessed cases of violations against human rights (Naughton 1993, p. 495).

Causes of Chinese Success in the International System

It is uncontestable that the Chinese economy is expanding at a very high rate as compared to other economies. Its rampant growth is largely attributed to the large volumes of exports. However, the country also imports high volumes of raw materials from other countries. What puts China in an advantaged position is the production of cheap goods that have dominated many foreign markets.

The cheap products have given other foreign products stiff competition. The Chinese economy is greatly endowed with cheap labor, which enables most Chinese companies to run their operations at affordable costs. As a result, China has been able to achieve strong competitive advantage at the global market.

The purchase of foreign businesses and government bonds has also placed the Chinese economy in an influential position worldwide. For instance, the Chinese government was able to purchase the U.S (Pettis 2005, p. 28). Treasury bond after the U.S. government found itself in a large budget deficit. Similarly, China purchased the Greek bonds after the government encountered hiccups in the economy.

Europe is said to be the largest market for the Chinese products. However, many countries saw it wise to collaborate with both developing countries and fastest growing economies with an ultimate goal of mutual benefit. The recent economical policies put forward by Chinese officials are alleged to focus on furthering Chinese businesses in other countries.

In addition, the Chinese government is looking forward to stabilize its currency as well as internationalizing it. This will definitely have negative effects to the U.S. currency and economy (Cai 2006, p. 627). The government decided to hedge its currency to reduce the influence of international financial crisis to the economy (Clarke 2003, p. 498). Hedging implies reducing or managing danger.

This is carried out through taking a stand in the upcoming market that is contrary to the one in the existing market with the aim of reducing or preventing hazards linked to price variations. This guarantees stability to both borrowers and international businesspersons.

In the beginning of 1990s, China was relying heavily on agricultural sector for its economic improvement. However, large portion of workforce left the rural areas in search of employment in urban centers (Wu 2005, p. 441). Today China is gradually leaving the industrial based economy towards manufacturing and service based economy.

This has largely been influenced by the fact that China is strongly embracing modern technology as well as value chain. This has consequently led to production of high quality products similar to those ones from superior economies. Recent researches indicate that China is the third largest trading nation in the world. China relies heavily on exports of manufactured goods for growth of the economy.

Through this, the state has experienced a 25% rise in GDP in the last twenty years. Of the total GDP, sixty percent comes from exports. China has co-opted even the most powerful states in its development agenda, especially those from the EU. Chinese trading terms have attracted the western powers forcing them to welcome Chinese MNCs in their financial systems.

In the recent arguments, it is claimed that China is growing first because of the soaring levels of exports. In fact, China has been accused of dumping goods low quality to other countries (Wu & Chen 2001, p. 1246). Often, the growth of general economy through exports undervalues the wellbeing of the domestic economy. China is now embracing consumer consumption, which is an advantage to its domestic economic growth.

China is also blamed for its high level of investment in consumer goods. The data acknowledges that about 40 percent of GDP has been made by investing in finished goods (Taylor 2002, p. 211). This kind of investment is not safe to the economy since many people prefer saving their finances to spending them in unnecessary goods.

The government understood this trend and acted accordingly by restricting private and public companies from manufacturing for local markets (Ye 1992, p. 127). This encouraged many companies to produce goods that would meet international standards. The only option for local companies was to produce for goods for export

Effects of Chinese Domination

Although China is doing very well in the export market, the country currently imports raw materials, expertise, capital goods as well as intermediate goods from a number of trading partners (Xiao & Sun 2005, p. 45). The trading partners enjoy doing business with China because of excellent prices to their raw materials. Consequently, China does not earn substantial profits in its imports and exports trade.

Nevertheless, China is not only regarded as having much exports in the world but also has a high level of imports, which puts it in fourth position worldwide (Tseng & Mak 1996, p. 153). China faces this consequence as result of engaging in trade with many states.

As it has happened in the past, China continues to experience steady flow of Foreign Direct Investment to its economy. According to statistics, it is approximated that non-financial FDI increased from US $60.3 billion in the year 2005 to US$ 63 billion in the year 2006 (Meyer & Nguyen 2005, p. 73). This represented an increase of four and a half percent within two years.

The state has capitalized on this increase to build up more financial relations with other states. Japan is alleged to be the largest investor in Chinese economy followed closely by Taiwan while EU ranks in the third position, with its heavy investment being in the technology sector (Zhu 2001, p. 31). However, China has significantly invested in other countries mostly in ICT, telecommunication, oil and industrial sector.

Accordingly, the percentage of investment in Latin America is much higher as compared to that in Asian region. In particular, the largest investment of Chinese FDI stock is in Germany followed by Spain, UK and Denmark. Generally, the GDP of China stands at US$ 3 trillion, which is large though less as compared to sixteen trillion of the entire Europe (Chow 1993, p. 123).

Conversely, China buys some products from Europe. This means that in case the Euro is to stabilize, Europe has to monitor the movement of the Chinese economy. Certainly, China is shaping the world economy. Comparatively, the Chinese companies are making imperative investment in Africa.

For instance, the Wu Yi Company from China has invested in infrastructural development, specifically in the construction of superhighways Kenya. In exchange, the Chinese government and its multinational companies get an opportunity of operating businesses within the Kenyan territory without many obstructions such as imposition of quotas, payment of high tariffs and taxes mostly imposed on foreign commodities.

In most cases, the U.S. economy as well as the European financial system fails to do well. In such an event, China seems to drive the economy through its share increase at the global market. In fact, economic analysts predict that in the next 10 or 20 years China will be one of the feared world economies.

Chinese MNCs

The Chinese market is growing rapidly with a lot of promising restructuring going on in the financial sector. This has no doubt attracted a number of multinational corporations to the economy (Ding 2000, p. 133). These emerging firms in the Chinese market are tagged as second-generation MMCs. In most cases, these businesses come up with several objectives that improve Chinese financial system.

For instance, some target to build a dominant position in the market while others focus on nationwide market and establishment of excellent businesses. However, in this country several MNCs find themselves in great problems of dealing with large number of public entities. Such agencies are set up to regulate the activities of firms. Through this, the government benefits from improved trade in the country.

Apparently, many MNCs always endeavor to manage different business units in different parts in order to ensure value maximization and reduction of costs (Child & Tse 2001, p. 12). This strengthens Chinese economy by diversifying it. The country does not face serious financial crisis in case of recession.

In dealing with local partners, managers are sometimes faced with the challenge of being new in the market. This implies that local partners fail to understand the new commodity, the market and the best mode of distribution channel. Local partners also suffer from sourcing that is, they do not know where to get finances for sustaining business (Delios & Henisz 2003, p. 1158).

Another problem that faces foreign investors in China is inadequate and unskilled personnel. It is near to impossibility to get a trained manager who is willing to be employed by a foreigner in China.

Although a number of challenges exist in respect to MNCs investment in China, the government came up with a few organizational policies to ensure good performance of MNCs (Guo & Han 2004, p. 96). MNCs have collaborated with government to strengthen the country’s global market.

The third idea was to ensure that an efficient external relationship is established among MNCs by coming up with a powerful Chinese corporate center whose responsibility would be formulation of policies and eventual implementation. Finally, the MNCs were to have close and strong control on the perceived weak joint ventures.

The MNCs were to have shares in weak businesses and have a right to propose good members of staff to such investments, as well as offering external support. Most of the MNCs investing in China have to follow the Chinese corporate values in order to flourish. For the past few years, it was commended that majority of MNCs with investments in China did very well partly due to good performance of Chinese economy.

Specifically, China contributed about 10 percent of the global revenues mostly derived from the 180 multinational corporations (Fernando 2007, p. 367).

The government decided that almost the entire MNCs in China would have to reform their businesses by coming up with rules that are more favorable to issues pertaining to investment and reposition themselves in the market by employing a global strategy (Cushman 1985, p. 306). The country benefited from MNCs’ efforts because many investors were willing to enter the market.

Chinese products are no longer facing stiff competition from other products in the world. China is no longer focusing on producing cheap products but also paying much attention on producing quality products through employment of advanced technology in the production processes.

Hardly will an organization flourish in its domestic market without having the corporation of the Chinese multinational corporation. It is however fascinating to note that several companies in china are state owned. If a company is not owned by the state then most probably, the government influences its operations through regulations and legal systems (Bach, Newman & Weber 2006, p. 507).

The unique feature that characterizes Chinese multinational corporations is its concentration of ownership. Family members own most of the Chinese MNCs. This has been assumed to have great effect on the performance of the Chinese corporations.

For instance, the Chinese companies such as the Chinese Development Bank in which family members own majority shares outperform other companies in the world due to strong corporation among shareholders. This in turn transforms the company’s performance to new heights of success (Child & Rodrigues 2005, p. 390).

In addition, Chinese companies generally employ the Japanese corporate governance style in their management. This kind of corporate governance always looks on the benefits of the organization to its stakeholders. The stakeholders comprise of shareholders, managers, employees, customers and the government itself.

The idea behind this is to encourage each partner to work hard towards the overall performance of the organization. Certainly, value maximization does not encourage managers to pursue a goal of maximizing profit. This automatically prevents managers from fulfilling their selfish interest and consequently increases share value maximization on the side of shareholders.

Therefore, Chinese companies encourage both profit maximization and share value maximization. This guarantees cooperation between shareholders and managers, which further ensures the wellbeing of customers and employees. There is no doubt that this has been the driving force behind the success of Chinese MNCs (Deschandol & Luckock 2005, p. 32).

It is obvious that great deal of issues should have automatically attracted MNCs in China while at the same time promoting Chinese firms elsewhere in the world. It is certain that the high level of population assures any firm of the large size of the product market. A large market ensures that manufactured products are easily disposed off (Zhan 1995, p. 89).

On the other hand, the Chinese financial institutions are preferred by most MNCs as far as capital financing is concerned. Perhaps the low interest rates offered by Chinese lending institutions as well as the long-term basis for full repayment of loans could have attracted large number of MNCs in China.

In addition, most MNCs find it impossible to operate in a country, which have political policies that interfere with their smooth operations (Boisot & Child 1996, p. 620).

Conclusion

Diverse policies have promoted investments of Chinese firms in other countries. For instance, the “Go Global” policy has strengthened interactions between China and other trading partners. In particular, within the African continent China was able to form the Forum for China Cooperation. This has consequently improved the style in with which China is doing business with its African partners.

The connection between Africa and China is furthermore strengthened by the established investment fund which is has a budget of approximately five billion US dollars. This simply promotes more Chinese investment in the African continent.

Similarly, the National Development and Reform Commission (NDRC) that was set up to regulate and harmonize Chinese economy and its subsequent industrial policy has successfully come up with strategies that enable domestic firms to easily access loans.

This is interpreted as an attempt to finance “Going Global” strategy. Transparency, liberalization and technological advancement shown by Chinese government and its investment firms have significantly led to soaring rate of outward investment.

Finally, it is evident that liberalization of trade as well as government support continues to promote MNCs operations in the domestic market while promoting domestic firms’ investment abroad. It is therefore evident that China is re-shaping the world financial market through several means.

Many developed countries have come up with policies aimed at countering the influence of China in the world market. Chinese corporate governance is attributable to its popularity. It should be noted that even though China is powerful economically; it remains a third world country. Many resources in the country belong to the state implying that many are languishing in poverty.

List of references

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