The economy of China is one of the fastest growing economies in the world with “an estimated annual growth rate of 10 percent per annum from 1978 to 2005,”, as Naughton stated (34). China has the highest population in the world, with an estimated 1.3 billion people, according to the 2004 census. Due to its rapid economic growth, it has managed the fourth position globally beating financial giants, such as France and the United Kingdom. It is the third largest trading economy after Germany and the United States of America. However, most of its citizens are still living in abject poverty as a result of high population, lack of educational facilities, unemployment, and low living standards.
The living conditions of Chinese citizens range from extreme poverty to relatively prosperous; a position the government is working towards improving by promoting industrialization, use of alternative energy sources such as coal and introduction of the modern information economy. There are two main factors which have influenced business growth in this region over the years. First is the monetary system, which controls lending, and a second factor is a culture and religion, which determine morals and behavior among the citizens.
The monetary system used by the People’s Bank of China (Central bank of China) is different from the standard method used in advanced economies. China applies several policy tools, which are not simultaneous, and this makes it impossible to determine the specific monetary policy instruments in use. The main agenda of the central bank is to regulate interest rates, which in turn affect lending. However, there are other elements, such as administrative and discretionary instruments, that affect the quantity and course of credit by commercial banks (Laurens and Maino 11). This implies that the monetary policy used by the People’s Bank of China cannot be entirely defined by interest rates in the short run. It is considered as a tool for fine-tuning the rates of interest and the amount of money in circulation. Interest rate is an essential factor in business growth since most entrepreneurs rely on borrowing as a source of capital.
Since the mid-1990s, the Chinese government has focused more on building the money market, and this has resulted in the development of an effective monetary policy and a robust foreign exchange market. It has also concentrated on the liberalization of interest rates through a gradual procedure. This happens because of the risks faced by the financial sector requiring a step by step process to allow for risk identification.
The gradual approach also enables the government to integrate other policies, such as encouraging savings to ensure that investing is still possible even when borrowing policies are stringent. The People’s Bank of China has implemented this policy of liberalizing interest rates in phases. First, it has withdrawn restrictions on significant transactions and lifted loan ceilings to increase deposits, withdrawals, and borrowing. Second, it has liberalized treasury bonds and market operations between banks.
The People’s Bank of China liberalized major markets for government securities and adjusted refinancing rates in 2004. It encouraged borrowing at commercial and industrial levels by reducing interest rates and simplifying the process of administration. This step encouraged local industries to grow and enabled them to employ high-level technology, increasing production efficiency. At this point, China started exporting its goods since production exceeded local demand while the export market demand was high, especially in African countries (Kelley and Shenkar 87). Technology enabled them to produce at lower costs, and the high export market demand increased their revenue, giving them a competitive advantage that raised their trading position to third place globally.
Besides the monetary policy, culture and religion have also played a role in the growth of business in China. Religion has not been a dominant factor here, but citizens have embraced a way of life based on Confucian’s school of thought (Barro and McCleary 11). Activities, such as going to places of worship on specific days, do not exist since they practice spiritual rituals in their day to day lives. This has made China a homogenous society with no divisions along religious lines. The primary considerations are a person’s social character and moral behavior. This lack of internal divisions has worked for the good of the economy by ensuring social stability.
However, some cultural activities hurt business growth, a good example being the Chinese New Year, which causes lag in business at the beginning of each year. These celebrations typically take place towards the end of January or at the beginning of February and can be considered as the most remarkable family events. The official holiday runs for three working days, a time during which most businesses remain closed since the employees travel up country to be with their families and friends. Production levels at this time go down with margins as high as 20 percent. However, this is inevitable since it is a cultural event with ancestral origins believed to have a positive impact on people’s lives.
Barro, Robert J, and Rachael M. McCleary. Religion and Economic Growth, Cambridge, Mass: National Bureau of Economic Research, 2003. Print.
Kelley, Nelson L, and Obed, Shenkar. International Business in China, London: Routledge, 2003. Print.
Laurens, Benard, and Rodolfo Maino. China: Strengthening Monetary Policy Implementation, Washington, D.C.: International Monetary Fund, 2007. Print.
Naughton, Barry. The Chinese Economy: Transitions and Growth, Cambridge, Mass: MIT Press, 2007. Print.