China, a nation of over 1.3 billion people, has strong economic fundamentals in the form of fast GDP growth, substantial foreign direct investment, cheap labor, a stable domestic currency and low government debt. The growth rate is sustainable in future and the private sector is driving growth. China needs a more flexible exchange rate system to support a stable macroeconomic environment. The finance sector needs further reforms and solid public finances could permit tax and expenditure reforms. China has just about crossed the one trillion dollar mark of its forex reserves. It needs to realize that its domestic demand should be substantially improved to thwart the ill effects of the rising reserves, on the back of a falling dollar. It needs to undertake radical labor reforms to ensure better pay for its hard working labor force so that, they could add to the domestic demand. China is gradually shifting from export of labour intensive and less advanced manufactured goods to more technology intensive goods. Banking sector fragility poses perhaps the single biggest threat to its macroeconomic stability and long-term growth and the Chinese government has rightly made banking reform a top priority. Foreign strategic investment has the potential to be a very effective way to improve the banking system. China’s insurance market is still at a stage of relative immaturity, despite rapid economic growth in recent years. Chinese entry into the fray of mergers and acquisitions is of recent origin. Its outbound FDI efforts are principally in infrastructure and manufacturing sectors. China has emerged as a hot favorite for foreign direct investment. The factors that positively contributed for this transformation are: the huge market in china, its workforce, resources and liberalization of trade by the government.
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