China’s economy

14 Mar

Since the reforms beginning in the late 1970’s, China’s opening up of its market to foreign investors has been a source of economic change and international praise. In 2012, China’s gross domestic product made up 12% of the Worlds GDP, and the country was responsible for 6% of all world outputs. However, following the financial crisis of 2007-2008, which saw a global downturn in the levels of economic growth, the Chinese economy has suffered. However, despite the global downturn in economic productivity, the Chinese economy continued to grow at unprecedented rates; In 2010 the target GDP growth was 10.3% and in 2011 it was 9.2%. However in 2012 the predicted and targeted GDP growth for the country fell to 7.5%, and in the second quarter, although higher than the target, the Chinese economy had a growth of only 7.6% (the lowest in 8 years). Economist Nouriel Roubini argued that this slow down in economic growth, although still significantly higher than that of the America and Great Britain, will have serious effects on the Chinese economy. “China needs to maintain at least a 9 percent growth rate just to handle its growing labor force and move farmers to the urban sector. China may be in for a hard landing,” Roubini writes.

Michael Schuman, writing for TIME magazine has argued that the problems China is facing can be seen in a number of ways across the country “Wind farms have been erected but not connected to the electricity grid. Hundreds of solar cell makers will likely go under. Shopping malls get built where no one shops”. Schuman argues that, in order for China not to fall into an economic recession that would not only challenge the country but will have adverse effects throughout the world economy, newly appointed president Xi Jinping, will have to introduce economic reforms that are as fundamentally important as those undertaken by Deng Xiaoping in the 1970’s. According to Schuman the ‘state-led, investment-driven growth model is running on empty’, and the economy instead needs to become more market-driven and better balanced, with an effective rule of law established. Schuman creates a list of reforms, he argues are needed to be pushed through by Mr Xi, in order to prevent an economic crisis occurring within the World’s (present) fastest growing economy:

  • Scale back on State Enterprises
  • Encourage the country’s consumers
  • Develop a real financial sector
  • Strengthen the rule of law

Whether you agree with Schuman’s suggested reforms or not, depends upon your view of the relationship between the state, the market and the economy. What is important here is that work must be done by the Chinese Government, led by XI Jingping, in order to pre-empt and reduce any severe economic downturns within the country’s economy, to ensure the continued growth to support not just China’s domestic market, but also the worlds.

Sources:

China targets 7.5% GDP growth- http://www.china.org.cn/business/2013-03/05/content_28130136.htm

China’s economic growth slows to 7.6% – http://www.guardian.co.uk/business/2012/jul/13/china-economic-growth-slows-gdp

Can China’s New Leader Prevent an Economic Crisis? – http://business.time.com/2012/11/07/can-chinas-new-leader-prevent-an-economic-crisis/

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2 Responses to “China’s economy”

  1. db7g09 March 15, 2013 at 6:53 pm #

    I propose a number of solutions to this decrease in GDP. One obvious solution for China is to transform more of its still primarily rural populace into consumers without triggering unmanageable inflation, which would alleviate the problem of industrial overproduction capacity and China’s dependence upon exports for growth. Another enormous step forward would be to modernise its agricultural sector which would reduce the country’s dependence upon agricultural imports, but of course that would result in the displacement of large numbers of very small scale farmers who likely would move to the cities and, at least in the short term, increase the unemployment situation.

    If China can avoid making the huge expenditures regarding “defense” which are plaguing countries such as the U.S. with deficit budgets that will amount to an important advantage in achieving growth while engaging in inflation-reducing fiscal restraint. Part of the problem concerning that is the need to secure energy supplies needed to fuel its industries and the increasing appetite for energy on the part of the country’s increasing middle and wealthy classes.

    They key to this drop in GDP may be over-investment in businesses and the stock market. Il Houng Lee, Murtaza Syed, and Liu Xueyan, in their 2012 IMF Working Paper, have argued, “the challenge is to engineer a gradual reduction in China’s mass investment to a path that would maximize social welfare. Based on cross-country regressions, lowering China’s investment by 10 percentage points of GDP over time would bring it to levels consistent with fundamentals. Otherwise, vulnerabilities will continue to build, and decrease GDP further. To the extent that elevated levels of investment during the post-crisis period in China were somehow abnormal and necessitated by the sharp external slowdown, the challenge now is how to return to a more “normal” level of GDP without compromising growth and macroeconomic stability.” But what is a normal level of GDP in todays world? Obviously, reaching the level itself should not be the only goal, but it should be accompanied by reforms that would raise productivity and efficiency, while ensuring that the fruits of China’s remarkable growth are shared more equitably across different economic agents, in particular ordinary Chinese households. International experience shows that these are prerequisites for sustainable growth in any country.

    Sources:

    Il Houng Lee, Murtaza Syed, and Liu Xueyan ‘Is China Over-Investing and Does it Matter?’ (2012) IMF Working Paper, WP/12/277, available at: http://www.imf.org/external/pubs/ft/wp/2012/wp12277.pdf.

    ‘China’s Falling GDP’ – 16 April 2012 –
    http://seekingalpha.com/article/500861-china-s-falling-gdp [accessed 15 March 2013].

    Clement, Tan, ‘China shares fall ahead of GDP data, pull Hong Kong lower’ – 16 January 2013 – http://uk.reuters.com/article/2013/01/16/markets-hongkong-china-stocks-idUKL4N0AL4N620130116 [accessed 15 March 2013].

  2. timhaythorne March 20, 2013 at 7:41 pm #

    The list of reforms suggested by Schuman are good, but I think there can be more added. From the list, the development of a ‘real’ financial sector is a critical but fair suggestion. Thus far in its miracle journey, the Chinese economy has relied heavily upon export industries and huge cash injections into stimulus projects, but these options are highly unsustainable.

    Due to it’s labour intensive industries, Chinese economic policy has had rather narrow vision with regards to future planning and has refused to alter its direction. Since the financial crisis, international trade has fallen and countries have tuned to domestic production where possible to satisfy consumer demand in a way that aids supply. China has paid and will continue to pay for this until full recovery is restored to international trade.

    Instead, the Chinese economy should become more flexible, and this can start with the development of an efficient financial sector. Obviously, this relies upon higher levels of education and skilled work than labour-intensive production, however with increasing numbers of students seeking higher level education abroad, this should be no problem in the long term.

    With a domestic financial sector, this can lead to an international service sector. Aided by Mandarin and English being spoken more and more across provinces, there is certainly an opportunity for growth here. This is just one example of a more flexible economic strategy, but a number of these pathways combined could be just enough to push China through this relative slump.

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