Academia de Studii Economice, Bucureşti

World’s Republic of China –

friend or foe?

Miroiu Alexandra

Moțoi Coramia

Munteanu Mădălina Ioana

Neguț Alexandra

FABBV, Year 1

Group 1509

2010
 Capitalism is an economic system in which the means of
production are privately owned and operated for a private profit; decisions regarding supply,
demand, price, distribution, and investments are made by private actors in the free market;
profit is distributed to owners who invest in businesses and wages are paid to workers
employed by businesses and companies.
There is no consensus on the precise definition of capitalism, nor how the term should
be used as an analytical category. There is, however, little controversy that private ownership
of the means of production, creation of goods or services for profit in a market, and prices and
wages are elements of capitalism.
Today's form of capitalism grew out of a particular environment. The technologies of
the industrial revolution demanded large-scale operations — steel mills, for example, rather
than anvils — and that created a new need to aggregate, well, capital. That's not today's
problem. With scarcity of capital no longer the constraining factor on global growth, and
nations ranging from Party-controlled China to the market-crazed United States trading
together, the world needs an economic system that drives and disseminates innovation
globally, and does not privilege capital as if it were still scarce.Today's financial services
industry, in fact, was the mechanism for reducing the excess returns to land as the leading
economies switched from agriculture to industry.
Chinese buyers have accounted for a tenth of cross-border merger and acquisition
deals by value this year, bringing new energy and capital to struggling companies but also
leading to concerns that policy, not profit, would drive decsions. Such concerns led to
Australia and Canada creating obstacles for China's state-supported firms.
The fact that China have already accounted for a tenth of cross-border deals is a real eye-
opener for what could potentially be happening in the coming years.

Should the West be worried about Chinese firms buying up businesses which are
owned by the state, this could really be for any time of businesses, including sporting clubs
like in football.
In the paragraph ” The notion that capitalists should allow communists to buy their
companies is, some argue, taking economic liberalism to an absurd extreme. But that is just
what they should do, for the spread of Chinese capital should bring benefits to its recipients,
and the world as a whole”,The Economist still places its confidence in capitalism as is,
apparently. That shows up in its “to be sure” paragraph allowing that no one should desire too
much Chinese ownership: “The idea that an opaque government might come to dominate
global capitalism is unappealing. Resources would be allocated by officials, not the market.
Politics, not profit, might drive decisions.”

Let’s put two objections on the table to that phrasing:

1. Are we so certain that profit, not politics, should drive all decisions?
To refuse to question that, we think, is to cling to a dying Washington Consensus. In
theory, of course, it is legitimate to see profit as the measure of value creation for society —
but that would be true in practice only if externalities were all fully priced, antitrust were
thoroughly enforced, and regulation wholly protected the interests of the population. In real-
world market-based economies, profit as the sole yardstick leads to transfers of value from
individuals to corporations. If you want an economy to serve the best interests of flesh and
blood participants — not just paper ones — the profit motive needs to be accompanied by
priorities placed on common goods like social justice, sustainability, or health.

2. Is it necessarily true that in profit-driven economies, politics is excluded by the

perfect working of the market?
This is another Washington Consensus tenet. But stop and consider for a moment the
subsidies paid to the corn industry in the United States (let alone the demand for corn
ethanol), or the oil depletion allowance, the decision to prosecute or protect Microsoft, or the
structure of the financial services industry. Is it possible to claim these are not driven by
politics?
We’re not trying to take the opposite position from The Economist and claim that the
global economy should be dominated by a Beijing Consensus of state-directed capitalism. Our
point is simply that state vs. market is a false dichotomy. The decisions taken by Chinese
companies don’t all emanate from Beijing. As The Economist documents, they respond to
markets in many ways. And US companies don’t strive for perfect competition. Meanwhile,
in Singapore, a different kind of state-dominated capitalism has made different tradeoffs.

Munteanu Mădălina Ioana

Why China is different

In the modern era, China's influence in the world economy was minimal until the late
1980s. At that time, economic reforms initiated after 1978 began to generate significant and
steady growth in investment, consumption and standards of living. China now participates
extensively in the world market and private sector companies play a major role in the
economy. Since 1978 hundreds of millions have been lifted out of poverty: According to
China's official statistics, the poverty rate fell from 53% in 1981to 2.5% in 2005. However, in
2006, 10.8% of people still lived on less than $1 a day (purchasing power parity-adjusted). In
the 1949 revolution, China's economic system was officially made into a communist system.
Since the wide-ranging reforms of the 1980s and afterwards, many scholars assert that China
can be defined as one of the leading examples of state capitalism today.
China's foreign trade has grown faster than its GDP for the past 25 years.China's
growth comes both from huge state investment in infrastructure and heavy industry and from
private sector expansion in light industry instead of just exports, whose role in the economy
appears to have been significantly overestimated. The smaller but highly concentrated public
sector, dominated by 159 large SOEs, provided key inputs from utilities, heavy industries, and
energy resources that facilitated private sector growth and drove investment, the foundation of
national growth. In 2008 thousands of private companies closed down and the government
announced plans to expand the public sector to take up the slack caused by the global
financial crisis.In 2010, there were approximately 10 million small businesses in China.
The PRC government's decision to permit China to be used by multinational
corporations as an export platform has made the country a major competitor to other Asian
export-led economies, such as South Korea, Singapore, and Malaysia.China has emphasized
raising personal income and consumption and introducing new management systems to help
increase productivity. The government has also focused on foreign trade as a major vehicle
for economic growth. The restructuring of the economy and resulting efficiency gains have
contributed to a more than tenfold increase in GDP since 1978. Some economists believe that
Chinese economic growth has been in fact understated during much of the 1990s and early
2000s, failing to fully factor in the growth driven by the private sector and that the extent at
which China is dependent on exports is exaggerated.
International trade makes up a sizeable portion of China's overall economy. The course of
China's foreign trade has experienced considerable transformations since the early 1950s. In
1950 more than 70 percent of the total trade was with non-Communist countries, but by 1954,
a year after the end of the Korean War, the situation was completely reversed, and trade with
Communist countries stood at about 75 percent. In 1965 China's trade with other socialist
countries made up only about a third of the total.
Since economic reforms began in the late 1970s, China sought to decentralize its
foreign trade system to integrate itself into the international trading system. On November
1991, China joined the Asia-Pacific Economic Cooperation(APEC) group, which promotes
free trade and cooperation the in economic, trade, investment, and technology spheres.
China's investment climate has changed dramatically with more than two decades of
reform. In the early 1980s, China restricted foreign investments to export-oriented operations
and required foreign investors to form joint-venture partnerships with Chinese firms.
Foreign investment remains a strong element in China's rapid expansion in world trade
and has been an important factor in the growth of urban jobs. In 1998, foreign-invested
enterprises produced about 40% of China's exports, and foreign exchange reserves totalled
about $145 billion. Foreign-invested enterprises today produce about half of China's exports
(the majority of China's foreign investment come from Hong Kong, Macau and Taiwan), and
China continues to attract large investment inflows.
China’s high savings will spur deals. Companies often have surplus cash and banks
surplus deposits. Today those savings are recycled into rich countries via sovereign-wealth
funds and the central bank, which act as portfolio investors, buying mainly bonds. But China
may and probably should diversify. That shift will be accelerated by China’s political aims: to
acquire inputs, such as raw materials, labour and land; to build up technical and commercial
expertise; and to gain access to foreign markets.
Public announcements of such deals are something of a charade. Wooden Chinese
executives insist they are acting on purely commercial grounds. Western bosses hail a new era
of co-operation. Yet these transactions are tricky partly because of cultural differences and
partly because of the role of the Chinese state. There have been fiascos. In 2005 CNOOC, a
Chinese oil firm, withdrew a bid for Unocal, a Californian producer, after American
politicians kicked up a stink. In 2009 Rio Tinto, an Anglo-Australian mining firm, withdrew
from a deal to sell a series of minority stakes to Chinalco, a Chinese metals firm. Rio’s
shareholders opposed the sale but many reckon that the Australian government did, too.
 Outward foreign direct investment is a new feature of Chinese globalization, where
local Chinese firms seek to make investments in both developing and developed countries.

Miroiu Alexandra
Private-Sector Economy

The expansion of the private-sector economy is natural for China, which is striving to
become a market-oriented economy. Pluralistic economic agents are necessary for the
development of a market economy, and a real market economy cannot be established where
there are only state-owned enterprises. There is a need not only for reform of the joint-stock
system of state-owned enterprises but also for participation of private capital in the
privatization of such enterprises, as well as their retreat from areas where they compete with
the private sector. In addition, the private-sector economy provides a huge number of
employment opportunities, and thus contributes to the stable development of Chinese society
and the domestic economy.
During the era of the planned economy, private property was viewed as the root of all
evil. The growth of private companies provides a favorable environment for state-owned
enterprise reform, including privatization.
The development of private companies has created new jobs for the surplus labor of
state-owned enterprises. The private sector was nonexistent during the planned economy era,
but it has expanded rapidly since the shift to market-opening reforms and especially since
Deng Xiaoping's famous speech during his tour of south China in early 1992. In that year,
only 8.38 million people were employed in the private sector in urban areas; as of 2003 the
figure had risen to 49.22 million .Of this number, 25.45 million people are employed at
privately-owned enterprises with eight or more employees, while 23.77 million work at
companies run by individuals - those with fewer than eight workers. (In China, privately-
owned enterprises and individually-owned enterprises are together called private companies,
or the private- sector economy.) Meanwhile, in rural areas, the number of workers in the
private sector more than doubled from 18.62 million in 1992 to 40.14 million in 2003 (Of
these, 17.54 million people worked at privately-owned enterprises and 22.6 million worked at
individually-run businesses). By contrast, the number of employees at state-owned enterprises
stood at 68.76 million in 2003, down considerably from its peak of 112.61 million in 1995.
Thus, the growth of private companies has been absorbing workers affected by restructuring
at state-owned enterprises and the surplus workforce of rural areas. In fact, in 2003 alone the
private sector created 7.83 million new jobs: 6.54 million in urban areas and 1.29 million in
rural areas. When we also consider the fact that many state-owned enterprises and township
and village enterprises are bringing in private capital, the private sector's contributions are
probably much greater than these figures suggest.
Also, the rapidly growing private sector is directly participating in the reform of state-
owned enterprises in the four following ways: First, some private companies purchase a
portion of the stock of state-owned companies as they shift to a joint-stock company. They
may even hold enough shares to be able to assume a leadership role in the company's
operations. Second, some private companies purchase a state-owned enterprise outright. In
this case, the state-owned enterprise continues to exist as a private company. Third, a private
enterprise may absorb a state-owned enterprise through merger. Fourth, the state-owned
enterprises that have been operating in the red for a long time and for which rehabilitation
may be liquidated through legal means so that private businesses can purchase their assets and
use them more efficiently.
Meanwhile, the rise of private enterprise has led to intensified competition; the
monopolistic position of state-owned enterprises is under threat and their profitability is
declining, while the demonstration effect of up-and-coming private businesses despite the
adverse business environment they face stands in sharp contrast to the stagnation at state-
owned enterprises. This is making the public more aware of the need for reform and is a key
factor in keeping conservative forces at bay.

Contacting Chinese Companies

Medium-sized and small companies are more and more trying to benefit from export
to China. However they are hindered by high investment costs and administrative hurdles in
China. Based on the above, the following points are introduced on how a contact can be
obtained and which marketing opportunities are available to companies desiring to enter the
Chinese market.

Automotive Companies
China’s automotive sector is growing at an astonishing rate. Auto makers from all over
the world want to sell in the world’s fastest growing auto market. However, the real winner in
this industry will be China which is fast building an automotive industry of its own with the
help of foreign investors.
Brilliance Auto
Through its subsidiaries, joint ventures and associated companies Brilliance Auto has
become one of the leading automotive manufacturers in China. Brilliance Auto’s operations
are divided into two sections, the manufacture of minibuses and automotive components and
the manufacture of sedans.

Geely Automobiles
Geely Automobile was the first independent vehicle manufacturer in the People’s
Republic of China. Its parent company is the Geely Holding Group. Geely started out in 1986
manufacturing refrigerators and then moved on to manufacturing decoration materials in
1989. Following this Geely moved onto producing motorcycle parts in 1992 and then
motorcycles in 1994. By 1996 the company had produced over 200,000 motorcycles and
scooters. Geely’s automobile productions began in 1999 and in 2003 it began to export cars.
Geely Automobile was the first independent vehicle manufacturer in the People’s
Republic of China. Its parent company is the Geely Holding Group. Geely started out in 1986
manufacturing refrigerators and then moved on to manufacturing decoration materials in
1989. Following this Geely moved onto producing motorcycle parts in 1992 and then
motorcycles in 1994. By 1996 the company had produced over 200,000 motorcycles and
scooters. Geely’s automobile productions began in 1999 and in 2003 it began to export cars.
Geely was the first Chinese automobile manufacturer to be present at the Frankfurt
Motor Show, where it displayed its range of vehicles in 2005. This was Geely’s first incursion
into a foreign developed market. It is expected that Geely will begin selling cars in Europe
during 2007. Geely was also the first Chinese car company to display its vehicles at the
Detroit Auto Show in the USA. Geely hoped to begin selling its products in the USA in 2008,
in line with the start of the Beijing 2008 Olympics, but its arrival in the US has been delayed
until 2009. This is due to several vehicles failing to pass US crash and emissions tests.
However, Geely has expanded its operations into some foreign markets selling both cars and
motorcycles in Venezuela and Pakistan.

Aviation Companies
The largest airline in China is Air China operating a fleet of over 200 Boeing and
Airbus craft to more than 250 domestic and international destinations. No other airline offers
so many flights to the Chinese capital Beijing, or onward flights to regional points in China.
 Neguț Alexandra

Banking Companies
Banking has become an extremely competitive business in China since the countries
entry into the World Trade Organisation (WTO) and the development of a rapidly de-
centralising market driven economy. This section will provide you with detailed company
profiles for the largest banks in China. Including information on the history of the banks and
future projects and goals.

Energy Companies
With China’s unquenchable thirst for energy the sector has grown dramatically in
recent years. Justin Yifu Lin the chief of the China Centre for Economic Research at Beijing
University claims that China uses 15% of the world’s energy. Sinopec is China’s largest
producer and supplier of oil and petrochemical products and China’s second largest producer
of crude oil. PetroChina supplies the country with natural gas and oil and according to the
Forbes ranking is the largest publicly owned company in China.

Insurance Companies
The insurance industry in China has grown enormously in recent years. Between 1999
and 2000 premium insurance revenues grew by 14.5% to 159.59 billion RMB. According to
the Forbes rankings of the top forty largest companies in China the top ten contains two
insurance firms, China Life Insurance and Ping An Insurance..
Materials Companies
In recent years China’s economy has grown steadily and at a fast rate rate, and so has
demand for materials to produce everything from automobiles to household appliances.
China’s unquenchable thirst for construction has also led to high demand for materials. For
China’s numerous ambitious construction projects it is estimated the country is currently
using half the world’s concrete and a third of its steel supply.

Telecommunication Companies
The telecommunications industry in China has grown exponentially in recent years.
China Mobile is now the largest mobile phone provider in the world with a customer base of
more than 269 million people. The company also has a registered capital of 58.2 RMB and
investment capital of approximately 400 billion RMB. By clicking here you will be able to
view company profiles for the largest telecommunications providers in China.

"The nation's private enterprises are leading the country out of the slowdown, without
government subsidies," said Wei Jie, director of the National Center for Economic Research
of Tsinghua University. He added that "60 percent of these 500 companies have reached or
even exceeded their 2008 earnings, and 30 percent are getting close to that level". However,
Wei pointed out that most private companies in China are in a relatively inferior position
compared to State-owned enterprises. They have heavier tax burdens, face fiercer
competitions and hardly enter upstream industries dominated by State-owned giants.

Conclusion
To sum up, China, currently ranked as the second biggest economy of the world(after
Japan), is stepping up its international mergers and acquisitions activity to take advantage of
the fall in asset values caused by the global financial crisis. Even if investing large amounts
of capital may seem like the main criteria for a good development, China will surely have to
adapt its companies – such as hiring local managers, investing in local research.
By investing in the global economy, China’s interests will become aligned with the
rest of the world’s, leading to an international co-operation. Disconsidering China as a
potential „friend” to the world’s economy would seem like a disservice to generations yet to
come.
Moțoi Coramia