Political System of China
Political Economy and Foreign Direct Investment
The political, legal, and economic systems of a nation are interdependent. These schemes interrelate and affect each other, and in the process influence the overall economic well-being of the country. This paper is a comprehensive review of these systems in China and how they impact on the benefits, costs, and risks associated with conducting business in this particular nation. The political system of China shapes its economic and legal structures, and their combined effect subsequently influences the country’s attractiveness as a destination for Foreign Direct Investment (FDI).
China’s Constitution provides that “The People’s Republic of China (PRC) is a communist nation under the societies’ democratic autocracy controlled by the aristocratic and grounded on the coalition of workforces and rustics.” According to it, national power belongs to the people of China. There exist people’s congresses at various levels of the government who represent the citizens in exercising their state power. The China’s political system is constituted by the organizations of multi-party cooperation, regional and cultural sovereignty, people’s congresses, and self-governance at the central level of society. The people’s congresses in this arrangement play four primary functions, namely, removal of officials, administration, legislation, appointment, and making decisions on the most important political issues. These fundamental purposes of the congresses are the primary reflection of the manner the Chinese societies execute their supremacy as rulers of the nation through the people’s legislative body system (Hayes, 2012).
In 1949, the People’s Republic of China (PRC) government replaced the original legal system with the modern Chinese socialist legal system. The current law enforcement scheme of China is founded on the PRC Constitution. It is made up of a chain of command of written bylaws, administrative orders, and principles. The Constitution officially specifies that political supremacy is implemented by the general public, from the bottom upwards, through representative societies’ legislative bodies from the regional up to the provincial and state levels. Policymaking and supervision procedures in China are sometimes exceptionally centralized and characteristically identical and at other times exceedingly decentralized and diverse in nature (Clarke, 2008).
The socialist market economy of China is ranked the second largest economy by nominal GDP and the leading by purchasing power parity in the whole world. This economic system employed by the People’s Republic of China is established on the ascendancy of the open-market economy and the state-owned sector. It traces its foundation in the Chinese economic reforms initiated under Deng Xiaoping, a Chinese statesman and a revolutionary. The sociopolitical justification is that China is still in the prime phase of socialism and as such it has to become accustomed to capitalists systems in order to prosper. As a result, it is said to have an economic system that merges elements of both capitalism and socialism (Coase, 2012).
Legal System of China
For the last few decades, China’s Gross Domestic Product (GDP) has increased by nearly 30% annually, and this rate surpasses those of developed countries. Unlike the majority of the Western nations, many of the businesses in China are managed by the government, which also has a robust regulatory supremacy over privately owned companies. According to Coase et al. (2012), though many perceive this control is overly deterring, it assists China in developing in a way the government sees as most valuable
In the recent years, China has emerged a leading receiver of world’s destination of Foreign Direct Investments (FDI). FDI in this country accounts for about 4.1% of national tax income, 27% of the value added production, and approximately 58% of overseas trade. In line with UBS AG estimations, the net share of Japanese, USA, and the European Transnational Companies (TNCs) in total Chinese exports was roughly 11% in 2009 (Chen, 2011).
FDI might have stimulated China’s GDP mainly by increasing industrial output, creating employments, capital formation, and contributing taxation revenue. At the beginning of 2009, the ratio of gross fixed capital generation to FDI had upsurge from 3.45% to 6%. During this year, the global ranking of net exports in China had intensely augmented by a volume of about $1,429 billion and more than a half were added by foreign investment enterprises (Buckley, 2009).
There are several benefits which accrue to a foreign investor in China, one of the largest economies in the globe. According to Zeng, & Eastin, (2011), investors in this nation are able to capitalize on the anticipated transitioning period. In the near economic future, China is expected to propagate into consumer-oriented economy paying less emphasis on savings. China is undertaking to emerge more of a free-market economy and by doing so convert into more investment friendly for foreigners. Therefore, foreign direct investors would acquire significant benefits by jumping in in the course of this economic transference.
Nevertheless, one can never take too lightly the political risk that can impact on operations of foreign investors. Despite the fact that Chinese economy was unbolted up for foreigners, there exist some ethnic issues that subject international companies into unnecessary costs. Thus, the majority of the foreign investors are turned away by the overly restrictive authorities in this country (Huang, 2003).
The political process in China is seen as trading off the societal paybacks of augmented Commerce and Foreign Direct Investment (FDI) alongside the losses suffered by state-run corporations caused by such liberalization. Since the implementation of more liberal economic strategies in 1970’s under Deng Xiaoping, China has had a stunning accomplishment of a high rate of economic growth and development. However, various economists have questioned the sustainability of the present GDP rates and export growth in China. These experts have inclined to draw attention to the drawbacks associated with the socialist market economy of China concentrating mainly on the incapability of the Chinese government to raise income by levying taxes on the current private economy, and the alterations generated by the country’s dualistic trade system as well as the intensifying non-performing loans challenge in the China’s investment sector. The realism of significant misrepresentations in this country’s economy, and predominantly in its intercontinental trade and foreign direct investment system, is progressively apparent (Naughton, 2007).
Economy of China
The Chinese government has proved itself to be remarkably devoted to both interventionist policy and economic growth. As pointed out earlier, China has remained a socialist nation since time immemorial, with the Socialist party reining the People’s Republic and assuming the system of domineering, one-party state. Over the last three and a half decades, the Chinese government through intervention has socialized the financial system and consisted adjustments have been conducted to suit new conditions and policies and in the process form a conducive environment for foreign direct investors. Under the regulation of China’s political regime, the banks are now more flexible in terms of lending rates; an important aspect in the case of financial crises (Kitanov, 2010).
In 1979, the legal system of China passed the very elementary Equity Joint Venture Law wholly permitting foreign investment activities and contractual joint ventures. This law propagated and formed other concomitant regulations quite different from those under the Company Law. Over the last few decades, decrees regulating FDI in China have been deemed impressive. According to the majority, the laws are over-exploitative because the rules and regulations monitoring the operations of foreign investors are improperly enforced. Therefore, there is the need for the government authorities and law courts to augment people’s trust in China’s legal system (China business guide, 2000).
Conclusion
It is evident from the above discussion that political, economic, and legal systems of a nation function together, influence each other and in the process affect the overall financial performance of the entire nation. Subsequently, the economic well-being of the country determines its capability to attract and retain foreign direct investors who undoubtedly boost it even further. These three factors overlap and integrate to draw out the visible economic configuration of the whole national economy as in the case of China.
References
BBuckley, P. J. (2009). Foreign Direct Investment, China, and the World Economy. New York: Palgrave Macmillan.
Chen, C. (2011). Foreign Direct Investment in China: Location Determinants, Investor Differences, and Economic Impacts. Cheltenham: Edward Elgar Pub.
China business guide. (2000). Singapore: China Knowledge Press.
Clarke, D. C. (2008). China’s legal system: New developments, new challenges. Cambridge: Cambridge University Press.
Coase, R. H., Wang, N., & Institute of Economic Affairs (Great Britain). (2011). How China became capitalist. Basingstoke: Palgrave Macmillan.
Hayes, L. D. (2012). Political systems of East Asia: China, Korea, and Japan. Armonk, N.Y: M.E. Sharpe.
Huang, Y. (2003). Selling China: Foreign direct investment during the reform era. Cambridge [u.a.: Cambridge Univ. Press.
Kitanov, B. (2010). Does Foreign Direct Investment Have an Effect on Economic Development? The Case of Bulgaria. Mu?nchen: GRIN Verlag GmbH.
Naughton, B. (2007). The Chinese Economy: Transitions and Growth. Cambridge, Mass: MIT Press.
Zeng, K., & Eastin, J. (2011). Greening China: The Benefits of Trade and foreign direct investment. Ann Arbor: University of Michigan Press.
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