Last Updated 08 May 2020

The Economy of China

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China has a socialist economy ruled by a communist based government. In the past 50 years the Chinese economy has left the former centrally planned system which was largely closed from international trade to a more market orientated economy introducing globalisation. China now has a rapidly growing private sector and has become one of the major countries in the global economy.
China’s economic Growth and development

Key Indicators for China’s Economic Growth

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China’s economy for the past 30 years has experienced consistently large amounts of economic growth and development. The Chinese economy was averaging growth rates of 9.58% between 1989 and 2018. This large amount of growth has begun to decrease with their economy increasing 6.5% year-on-year in the September quarter of 2018. When measuring for GDP by purchasing power parity (PPP) in 2014 China became rank 1 for the largest economies, with China accounting for 16.3% of world GDP and has seen an increase to 18.23% in 2017. (Wikipedia, 2018)

China has also seen significant improvements in their living standards has experienced economic development. In relations to The Human development index (HDI) China has been on a steady increase in its economic development, the Chinese economy was granted an index of 0.502 in 1990 and has since improved this to 0.752 placing their economy in rank 86 for 2017.

China’s increase in HDI is a good indicator that there has been quality of life improvements in their economy. Life expectancy at birth has increased from 69 years in 1990 to 76 years in 2018, the poverty headcount ratio at national poverty lines has decreased from 17.2 in 2010 down to 3.1 in 2017 and China’s Gross national income (GNI) per capita has increased from $330 USD in 1990 to $8690 USD in 2017. (Programme, 2018)

How can we account for this growth & how has globalisation played a part?

A major reason for China’s large increase in economic growth and development is their economic reform strategy. This strategy was introduced in 1978 by Deng Xiao Ping, he implemented a range of economic reforms which were designed to improve the economic performance of China’s economy.

This included agricultural reforms which led to dramatic increases in food production and a rise in farmers income creating an almost critical mass impetus to rural development town and village enterprises. The implementation of the Open-door policy in 1980 was also a factor to increasing economic growth in china, this policy involved foreign trade and investment with special economic zones. Because of this policy, trade in exports grew from 10% of GNP in 1978 to 36% of GNP in 1996. (Amadeo, 2018), (Lu, 2018)

Asides from the economic reform strategy there were other government strategies put in place to increase economic development. An education reform was introduced in 1985 this reform made the basic education for children a necessity while also making basic forms of education free, the effect of this was large as it increased literacy rates from 68% to 95% in between 1983 and 2010. China has attempted to reduce its negative environmental impacts by offering incentives that encourage the use of renewable energy rather than fossil fuels. (Lu, 2018)

Negative impacts to the growth

The large growth that the Chinese economy has experienced has not been entirely positive. The high amount of government spending caused a total debt to GDP ratio of 260%, The consumer debt created as a result of this caused an asset bubble in the economy. Due to the growth rates consumer safety was significantly lowered with the people of china complaining about their pollution issues, food safety and inflation.

There is no doubt that globalisation has had large impacts on China’s economy however globalisation has both presented positives and negatives. With some of the positives including large increase in human capital, quality of life has improved in terms of poverty and education and significant increases in economic growth and development. Some of the negatives accompanied by globalisation include the Gini coefficient increasing from 0.30 in 1980 to 0.45 by 2016 and there were major impacts to the environment with an increase in land, air and water pollution in the country.

Trade, Investment and Transnational Corporations

Agreements and partnerships with China

China joined as a member of the world trade organisation (WTO) on December 11th, 2001. This move helped to signify China's deeper integration into the global economy. China’s membership in the WTO has provided their economy with many benefits. (bxgq131, 2012) A big benefit would be the access to multilateral protection reductions for exporters tariffs, as a result of these reduction meant that China were able to boost their trading volumes, significantly in their machinery, metals and textile sectors.

In response to these benefits of joining the WTO their textile sector grew by 220% between 2001 and 2007. Although by joining the WTO China opened their market to more foreign competition domestic industries, products and enterprises struggled to compete with more intense import competition. (BrainScape, 2018)

China is also a part of many bilateral free trade agreements. China’s Free trade agreement partners include ASEAN, Singapore, Pakistan, New Zealand, Chile, Peru, Costa Rica, Iceland, Switzerland, Hong Kong, Macao, Taiwan, Korea and Australia. Bilateral agreements benefit China as they increase trading with the other country and successful companies Will be hiring more staff. Consumers of China also benefit from the lower cost of imported goods for example with the Australia China free trade agreement (CHAFTA) 95 percent of Australian exports to China are tariff free. However, these trade agreements can cause SMEs to file for bankruptcy as they can not compete with intense foreign competition. (Amadeo, 2018)

Transnational Corporations involvement with China

China’s resources are used by Transnational corporations during their production process (TNCs). The possible reasoning for this and why TNCs may even use more of China’s resources in the future is because of the "Made in China 2025 Plan". This plan aims to increase the domestic content of core materials to a total of 40% by 2020 and by the end of the plan reaching 70% in 2025.

This is China’s attempt at increasing their manufacturing, becoming a major manufacturer. China also has a clear comparative advantage in its inexhaustible labour resource. TNCs use China’s labour to lower their cost of production and maximize revenue. (Wikipedia, 2018)

A positive of TNCs involvement in China is the technology transfer that China receives. China have policies that require foreign companies to conduct technology transfer with their economy in order to gain market access into china. Although Some countries accuse China for conducting "forced technology transfer" or "intellectual property theft" as a result of this.

Another positive of their involvement to china’s economy is the foreign direct investment (FDI) inflow TNCs provide. (Dehua, 2018). TNCs involvement do pose negatives to the Chinese economy, they create an increase in volatility in the Chinese market and therefore also creating financial contagion.

China’s FDI

As mentioned in the positive impacts of TNC involvement China does experience FDI inflow. With the China receiving just over 136 billion USD in FDI inflow for 2017, an all-time high. Placing them as the second largest FDI recipient according to the "2018 World Investment Report". (Santander, 2018)

A case study on Apple shows its involvement in China. The case study mentions that "Apple’s products were assembled in China through suppliers such as Foxconn and Pegatron" therefore using Chinas resources during Apple’s production process. As well as mentioning that Apple is a contributor to China’s FDI inflow. (ICMR, 2015)

Financial Markets

Position on free-flowing capital and funds

China’s approach to liberalisation of capital flows has been a slow and gradual process lasting roughly a decade prior to 2014. There were removals of several restrictions and during 2010-2014 multiple government reforms were introduced. The decision to liberalise capital flows introduced multiple benefits. This movement of liberalisation helped Chinese market participants diversify risk meaning market participants can protect their financial positions, market participants will receive the benefits due to liquidity and a more stable market as well as manage financial investments with greater efficiency. (McCowage, 2018)

Although these were benefits to the liberalisation of capital flows, outflows had eventually surpassed the inflows in late 2014 this change in capital flow created drawbacks for the Chinese economy. Due to the trend of increase in China’s outflows there was a greater amount of capital leaving their economy than entering.

The decrease of inflows and increase of outflows caused quantitative easing of monetary policy and the depreciation of Renminbi (RMB). (Investopedia, 2018). With the Chinese currency depreciating other nations saw China as a less appealing nation to invest in therefore decreasing consumer confidence. In august 2015 Chinas outflows accelerated even further as a result of the People’s bank of china deciding to allow the renminbi to become market determined. (McCowage, 2018)

In response to the capital outflows China decided to halt the liberalisation process of capital accounts in 2017. This procedure was successful in reducing the intensity and increasing of outflows from the Chinese economy. The renminbi began to appreciate against several currencies including the US dollar.

By 2018 conditions for China had stabilised causing policy makers to reduce controls on the capital account and therefore begin to allow the Renminbi to become market driven once again. During the mid-2014 to early 2017 period nearly 1 trillion USD in capital was flowed out of China, Showing the mass amounts of capital outflows China was experiencing during the period. (McCowage, 2018)

How has China been connected to the greater global economy in terms of finance China has been connected to the global economy in terms of finance through the Forex. Specifically, through the Chinese currency renminbi. When China’s outflows began to exceed their inflows the Forex market was greatly impacted as the RMB began to decrease in value on the market and investments from other nations declined. This shows us how they are dependant on the global economy.

Financial policies the Chinese government has been implementing

In response to the increase of capital outflow Chinese government policies were introduced in the attempt to control capital outflows and encourage inflows. These government policies are specifically Tightening restrictions and affected several types of capital such as FDI, banking-related and portfolio. These restrictions succeeded in reducing the trend of increasing outflows.

The international business cycle

Parallels between the global economy’s performance and China’s performance

The global economy and China have parallels in regional alignments and the global financial crisis’ effects. With the increasing of integration between economies there is also an increase in the transmission of economic conditions (weebly,2018). Closer economic integration makes economies engaging in trade experience higher levels of growth, but this economic integration also makes economies more exposed to downturns in the global economy.

In the mid-2000s as a result of both China and the United states experiencing upswings this caused the global economy to achieve its fastest growth rates in 30 years. Another example of china’s parallel with the global is when China’s shanghai stock market depreciated by 7% in a single day and the Europe, Asia and United states markets followed suit at the beginning of 2016.

The international business cycle has impacted China negatively in relations to the Global Financial Crisis (GFC) and the Asian Financial Crisis (AFC) and has impacted positively through the increase of trade it brings to China’s economy. China’s rate of growth measured by real GDP dropped to 9.2% in 2009 from the GFC as it decreased China’s exports as well as foreign investment.

As a result of the AFC the Chines economy much like the GFC had a drop in real GDP. China also say a large decrease in their exports to Asian economies, exports decreases varied from 6.7% with Japan to a massive 36.4% with Indonesia (Hai, 1999). A major positive of their integration to the international business cycle is the increase in trade it entails, it is because of this large increase in trade that the Chinese economy has had large growth in real GDP.

How can we account for this synchronisation?

We can see the synchronisation of China and the global economy through the financial markets. For example, fluctuations of currencies on the forex will affect the global economy not just domestic economies.

Macroeconomic policies

On the 9th of November 2008 the Chinese economic stimulus plan of 4 trillion RMB was announced by the State Council of People’s Republic of China. This stimulus plan was created to combat the impacts of the GFC on the world’s largest economy. This macroeconomic policy is considered a success. Although China saw a decrease in growth of 6% in the 4th quarter of 2008 and 1st quarter of 2009 the economy’s growth rose to over 8% in the 2nd quarter of 2009 and then further to 10% in the 3rd quarter of 2009. (Wikipedia,2018)

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