Over running from the Central government located in Beijing

Over the last four decades, China went through a
remarkable economic transformation, which shifted the country from one of the
world’s poorest states to the second biggest economy in the world (The World
Bank 2017) and the world’s export leader (Statista 2017). Considering China’s
significant role in today’s global economy, the goal of the research is a
diagnostic Chinese political, economic and social environment.

The study will start with an overview of the Chinese
political and economic system including the description of China’s macro
development with an emphasis on the importance of international cooperation and
foreign investment. In chapter 4, China’s social aspects with be discussed,
included the dynamics of the population and labour force, the education system
will be described along with the intellectual property rights issues. The
following chapter will include an enunciation of the current problems faced by
China related to the resource scarcity.

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2. 
Political
system

According to the Chinese Constitution, the People’s
Republic of China (PRC) is a one-party socialist republic run by the Chinese
Communist Party since 1949 (CCP, ChinaOrg 2010). Similar to other political systems, the
political system in China consists of four key pillars which are the executive
brunch, the judicial brunch, the legislature and the military. Nonetheless, a
particularity of the Chinese system is that the CCP has a firm control over all
of the aforementioned political institutions (Lawrence and Martin 2012). Second, there is a significant level of state
penetration into the society embodied by a highly hierarchical administration running
from the Central government located in Beijing down to the city neighbourhood
and natural village levels (Li 2010).

The legislative brunch is embodied by the National
People’s Congress which meets annually responsible for making the laws.
Additionally, the institution is in charge of appointing the key members of the
executive branch every five years: the president – the head of the state and
the prime minister – the head of the government. However, in practice, the
ultimate power of decision belongs to the CCP, which makes the key decisions
before they pass to the legislature and exercises its authority over both the state
and the government (Dumbaugh and Martin 2011).

The Chinese judicial system is again
controlled by the CCP and the two main entities within the judicial branch are
the Supreme People’s Court and the Supreme People’s Procurator. One of the main
issues that China is currently facing is the rule of law versus the rule of
man. In other words, the party officials are interested in enforcing their own
decision in the case of a legal problem (Zweig 2016).
It is not surprising that China is ranked among the last countries for human
rights risk (Relief Web 2016) and is currently “the world’s top executioner”
according to Amnesty International (2017).

Finally, the current state of
military in China can be described by Mao Zedong’s (1954) two quotes:
“Political power grows out of the barrel of the gun” and “Our principle is that the Party
commands the gun, and the gun must never be allowed to command the Party”. In
other words, the CCP recognises the importance of the military in order to
maintain the power and controls it directly through the Military Affairs
Committee (MAC) and through allocating the necessary financial resources
through the Ministry of finance and the State council (Zweig 2016). Currently,
the Chinese People’s Liberation Army is the largest army in the world and
counts more than 2.1 million people (Dillinger 2017).

There are several critical
shortcomings of the PCR’s political system. Firstly, the country has been ruled
by the CCP since the establishment of Communist China, which shows it as an authoritarian
country, where expressed dissent against power is penalized. Additionally, the
flow of information is strictly monitored and monopolised. And finally, a
report made by Transparency International (2017) presents China as the 79th
out of 176 countries in terms of lack of corruption and transparency in 2016
and shows a high degree of corruption in China.  

3. 
Foreign
relations and international cooperation

Since 2012, Xi Jinping started changing the PRC’s
foreign policy by shifting from the Deng Xiaoping’s philosophy of avoiding the
attention of the international community to shaping the international
environment to suit China’s interests (Levy 2008). As an emerging superpower, China
is currently very influential and has an extended international network. PRC is
a member of various international organisations, where it holds key positions
such as charter member of the United Nations (UN), permanent member of the UN
Security Council, etc. (Permanent mission of the People’s Republic of China
to the UN 2016).

Currently,
the relations between China and the U.S. can be considered the world’s most
influential bilateral relationship. Since 2009, the U.S.-China Strategic and
Economic Dialogue (S&ED) is held yearly and gathers together
representatives from both countries to discuss the a variety of issues
regarding energy, economy, environment, etc. (CSIS 2009). Additionally, China
is one of the EU’s main strategic partners. According to the EU-China Country
Strategy Paper (2008-13), China and EU are addressing the following issues
together: “EU-China policy dialogues; global concerns such as climate change,
the environment, and energy; human resources development” (European Commission
2010).

In the last decade, China focused on strengthening its
relationships with big emerging economies such as Russia, India, Mexico and
South Africa. Additionally, PRC is successfully broadening its influence in the
developing countries from Central and South Asia, Africa and Latin America by
establishing economic, military and cultural relations. On the other hand,
China has a number of unresolved territorial disputes with its neighbours. One
of the most critical is the dispute over the Paracel and Spratly islands with
Taiwan, Vietnam, Brunei, Malaysia and the Philippines, which are believed to
have a great amount of resources such as oil and gas. Further, China has a
historical conflict with Japan which involves a dispute over the Senkaku
islands and a frontier dispute with India. (CIA 2017)

The PRC is the global leader in infrastructure
investment. Between 1992 and 2011, China’s investment in infrastructure counted
on average 8.5% of the GDP, outperforming European Union and United States
taken together (Woetzel
et al 2013). Although many
economists criticise the quality of the infrastructure and claim that the costs
surpass the advantages of the projects
(Financial Times 2016), China will continue investing heavily in
infrastructure projects as depicted in Figure 1.

The most significant infrastructure initiatives are
the Silk Road Economic Belt and the 21st Century Maritime Silk Road,
known as One Belt One Road (OBOR), which was introduced by Xi Jinping in 2013. OBOR
has the potential become the biggest regional collaboration platform and will
reach 65% of the global population and around one-third of the global GDP (Ma Zecha 2016). The physical road is designed to connect China and
Europe all the way from the Pacific Ocean to the Baltic Sea, while the maritime
“road” will link the Pacific Ocean and the Mediterranean Sea (Weissmann 2015).

4. 
Economic
overview

4.1
Economic system

The Chinese economic system is a hybrid which includes
both socialist and capitalistic aspects. On one hand, PRC is ruled by the CCP,
which exercises its authority over the government and the army. On the other
hand, since 1978, the party adopted a number of fundamental reforms that
allowed the country to move from planned economy to the market system. Some of
the crucial reforms that changed China are the decollectivization reform in the
early 1980s, the financial and fiscal reforms and the opening of the markets
international trade and investment (Berglee 2012).

There are two main tools used by the CCP to direct and
control the economy. First, the State-Owned Assets and
Supervision Commission (SASAC) of the State Council “performs investor’s
responsibilities, supervises and manages the state-owned assets of enterprises
under the supervision of the Central Government” (Bloomberg 2017). Second,
the five years plans are economic initiatives formulated by the CCP, which are
submitted at the People’s Congress which takes place every 5 years. (McMillan
and Naughton 1992).

4.2 Macroeconomic overview

As of April 2017, China is the world’s
second biggest economy measured by nominal Gross Domestic Product (GDP) and the
first measured by the Purchasing Power Parity (PPP) (Statistics Times 2017), as
well as the fastest-growing economy in the world until 2015 (Abrams 2015). In 2016, the
inflation rate amounted to 2%, while the unemployment rate equaled 4% (Focus
Economics 2017). Both values are reasonable in comparison with other major
countries.

Currently,
China is “world’s leading trader of goods” (Nikkei Asian Review 2017).
Since 2001, PRC has been a member of the World Trade Organization (WTO 2017)
and established 14 Free Trade Agreements (FTAs) with various countries such as
Singapore, Switzerland, Chile, ASEAN, etc. (Export 2017). Since 1980s, China’s
exports and imports grew from a very poor level to the world’s leading exporter
and the second exporter after the U.S. in 2016 (Focus Economics 2017).

One of the essential drivers of the
PRC’s economic growth has been the vast amount of Foreign Direct Investment
(FDI) inflow into China. There are two major tools used by the Chinese
government to attract FDI from around the world: the Joint Venture (JV) law and
the establishment of Special Economic Zones (SEZ). The JV law involves a number
of attractive conditions for the foreign companies through which they can
benefit from tax breaks and is especially profitable for big investments (Shi et al. 2014). Further, China “established SEZs along the
coast at strategic port cities” (Berglee 2012) as depicted in Figure 2, where
the foreign companies can profit from the cheap labour and production, as well
as loose tax rates. Therefore, through the aforementioned tools, China managed
to build international partnerships that are beneficial for both parties and attract
new technologies from different countries that boosted up the Chinese economy
(Berglee 2012).

5.  Social aspects

5.1       Population
dynamics and labour markets

As of December 2017, PRC’s population
numbered 1.412 billion people or 18.67% of the global population (Worldometers
2017). In order to address the problem of the rapid growth of the population
related to social and economic scarcity, the Chinese government introduced the
one-child policy which restricted the family size to one child only with some
exceptions. The policy came into force in 1979 and was changed in 2015 into a
two-child policy due to aging population issue (Berglee 2012).

Currently, more than 58% of China’s
population lives in urban areas (Worldometers 2017). The high degree of
urbanisation has been driven by the establishment of SEZs on the south-eastern
coast, which attracts people looking for a job from all over China. Therefore, as
suggested in Figure 3, most of the population is concentrated in the big cities
on the south-eastern coast of the country. As an example in Shanghai
Municipality, the population density reaches 3,700 people per km2, while in Tibet Autonomous region,
the population density equals 2.44 people per km2
(World population review 2017).It
was estimated that between 1990 and 2015, the rural-urban migration which
counted 200 million people caused the urban population to increase from 26% to
56%. The Chinese internal migration is considered one of the biggest in the
world’s history (Farrar 2015). A measure used by the Chinese
government to manage internal migration is the household registration system
introduced in the 1950s called hukou. The hukou system is limiting the internal
migration by preventing the migrants from receiving the same privileges as the
urban population including access health care, social security, free education,
unemployment insurance, etc. Therefore, the hukou system is a fundamental
driver of social inequality, discrimination and rural-urban disparity in China (Scheineson 2009).

Following 2011 when the Chinese labour
force reached its maximum point and equalled 925 million, the working-age
population started decreasing and is expected to fall to 830 million in 2030.
Some of the reasons for this change are the one-child policy and the aging
population. Subsequently, since the labour force supply has been decreasing, the
wages have been increasing by about 10% annually since 2011(Yan 2016).
Since 2007, the average salaries in the manufacturing industry increased from
around 2500 to 5000 euro annually. Additionally, the salaries of the unskilled
labour have been growing faster than the salaries of the skilled labour force. Therefore,
the companies face difficulties to maintain their competitive advantages dues
to a rapid increase in production costs. The China Employer-Employee survey
conducted in 2015, interviewed more than 500 manufacturing companies in
Gyangdong. The survey revealed that the biggest challenge for the company
growth is the rising labour wages, followed by lack of technical-skilled labour
and innovation (Coursera 2016). Therefore, if previously China was
considered a cheap labour country, currently it’s the Chinese companies who
actively investing overseas (Yan 2016). 

5.2     
Education
system

The PRC’s education system is the
biggest education system run by the state in the world. According to the
compulsory education law issued in July 1985, the six-year primary education
and three-year secondary education are free of charge and mandatory for all the
Chinese citizens. Further, the pupils are required to pass the senior high
school entrance examination called Zhongkao. According to the test results and
their personal preferences, the students have the chance to attend either an
upper secondary school which lasts 3 years or a vocational middle school. The
students attending the upper secondary school have the choice between social
and natural science orientation, which determines the test category they will
have to pass in order to enter the college – Gaokao. The college entrance
examination is critical and creates a lot of pressure for the Chinese students
since it decides whether they are allowed or not to continue their studies. Once
the students pass the Gaokao, they are able to obtain their Bachelor, Master
and Ph.D. degrees (OECD 2016).

Nonetheless, as mentioned earlier,
China’s economic development is inconsistent across the country and the same
applies to the quality of education which differs significantly in the urban
and rural areas. The rural areas, migrant and disabled children suffer from the
poor educational system caused by lack of qualified teachers, poor school
facilities, etc. Additionally, China is struggling with lack of skilled labour
force. Therefore, since 2010, the Ministry of Education focused extensively on
advancing the education quality in the poor areas of the country, mainly in the
western China..  (KPMG 2010). For the
last 5 years, China has been spending more than 4% of its GDP on education (Yan
2017).

5.3     
Intellectual
property rights

Starting from 1980s, China joined
various organisations concerned with Intellectual Property Rights (IPR)
protection, most important of them being the World Intellectual Property
Organisation (WIPO) in 1980. The initial trademark law came into force in 1983,
while the patent law was introduced in 1984. However, the IPR violations are
very frequent despite China’s obligations to enforce its protection in
conformity with the Trade-Related Aspects of Property Rights (TRIPS) agreement.
Therefore, the IP protection is still a major issue in PRC which deeply
concerns international companies. A phenomenon which emerged as a result of
copy-cat products is “Shanzhai”, a Chinese word used to point out product
imitations such as “HiPhone” instead of “iPhone” or “Abibas” instead of
“Adidas”, etc.  (Delios 2010).

The legal experts point out the
difference between the Chinese jurisdiction and those of other countries, which
is one of the reasons of IPR related conflicts in China. One example is the
U.S. trademark system where the “first-to-use” law applies, while in China it’s
the “first-to-file” law. Therefore, multinational companies are advised to
register their trademarks and patents even before they arrive in China in order
to avoid the possible IPR violations. According to the “first-to-file”
doctrine, the first company that registers a trademark in China has the legal
right to use it, even if it was previously registered in other countries. Second,
the companies are advised to train their local staff about the IPR. Since China
is still a young and inexperienced market compared to the U.S. and Western
Europe, people lack the necessary expertise with respect to IPR (Coursera
2017).

6.  Resource scarcity

China’s rapid growth and
industrialization resulted in fundamental environmental issues. China’s
environmental crisis involves water and air pollution, soil erosion, energy efficiency
and deforestation (Berglee
2012).
 In 2014, around 20% of China’s territory
was labelled as “red zones for ecological protection” (Zhaokui 2014). Considering
China’s shortage of fresh water which represents only 7% of the world’s
resources, it was estimated that two thirds of the country suffers from severe water
deficiency (Council on Foreign Relations 2016). Moreover, several reports
suggest that more than 50% of the surface water and 60% of groundwater is
contaminated (Economist 2013, Reuters 2013). Further, the air pollution is
related to the premature death of more than one million people each year in PRC.
According to the CDIAC report illustrating the amount of CO2 emissions by country, China
is the top country responsible for 30% of the global carbon
dioxide emissions in 2014 (Boden et al 2017). The highly polluted air caused
especially by coal consumption results in acid rain and smog, which affects
especially the population of the industrialized cities in the eastern part of
China, who suffer from “significant health complications, including respiratory,
cardiovascular and cerebrovascular diseases” (Council on Foreign Relations 2016).

Currently, the Chinese government is
actively working towards environmental protection. A set of severe laws and
regulations were introduced in the last decade dealing with controlling the water
and air pollution, lessening the degree of deforestation and finding
alternative energy technologies (Council on Foreign Relations 2016). However,
according to the Chinese Ministry of Environmental Protection (MEP) report, 70%
of the inspected companies disregarded the environmental protection
requirements in 2017 (Xinhuanet
2017).
Presently, China is heavily investing in renewable energy and claims to invest
$360 billion in renewable energy from 2017 until 2020. Therefore, environmental
protection is still a critical issue for the Chinese society and the future
economic growth.