L1-China&39;s Economic Conditions(14)

living in the inner rural regions of China, has become another source oftension. A number of protests in China have stemmed in part fromfrustrations among many Chinese (especially peasants) that they are notbenefitting from China’s economic reforms and rapid growth, andperceptions that those who are getting rich are doing so because they haveconnections with government officials. Protests have broken out overgovernment land seizures and plant shutdowns in large part due toperceptions that these actions benefitted a select group with connections. A2005 United Nations report stated that the income gap between the urbanand rural areas was among the highest in the world and warned that this gapthreatens social stability. The report urged China to take greater steps toimprove conditions for the rural poor, and bolster education, health care, andthe social security system.

!

The lack of the rule of law in China has led to widespread governmentcorruption, financial speculation, and misallocation of investment funds. Inmany cases, government “connections,” not market forces, are the maindeterminant of successful firms in China. Many U.S. firms find it difficultto do business in China because rules and regulations are generally notconsistent or transparent, contracts are not easily enforced, and intellectualproperty rights are not protected (due to the lack of an independent judicialsystem). The lack of the rule of law in China limits competition andundermines the efficient allocation of goods and services in the economy.

Outlook for China’s Economy and Implications

for the United States

The short-term outlook for the Chinese economy appears to be positive, but it will likelybe strongly influenced by the government’s ability to reform the SOEs and banking systemto make them more responsive to market forces, to fully implement its WTO commitments,and to assist workers who lose their jobs due to economic reforms (in order to maintainsocial stability). Global Insight, an economic forecasting firm, projects that China’s realGDP will average 8.0% over the next five years, indicating that China could double the sizeof its economy in less than 10 years.6 The Economist Intelligence Unit projects that Chinawill become the world’s largest exporter by 2010 and the world’s largest economy by 2020.China’s rise as an economic superpower is likely to pose both opportunities andchallenges for the United States and the world trading system. China’s rapid economicgrowth has boosted incomes and is making China a huge market for a variety of goods andservices. In addition, China’s abundant low-cost labor has led multinational corporations toshift their export-oriented, labor-intensive manufacturing facilities to China. This processhas lowered prices for consumers, boosting their purchasing power. It has also lowered costsfor firms that import and use Chinese-made components and parts to produce manufacturedgoods, boosting their competitiveness. Conversely, China’s role as a major internationalmanufacturer has raised a number of concerns. Many developing countries worry that

6

Global Insight, China: Interim Forecast Analysis: Economic Growth, December 15, 2005.