Current economic processes in China essay

In the first decade of this century, a very dynamic development of the Chinese economy was observed: the average annual growth rate of GDP in 2001-2011 was on average greater than 10% (The World Bank, 2013). Even in 2009, i.e. in the most acute phase of the global economic crisis, this indicator reached 9.2% (People’s Republic of China and the IMF, 2013). As a result, China has become the second largest world economy after the U.S., mainly due to the increase of its share in the world trade, global markets for certain goods and capital flows. In particular, China’s share in the world trade over the past three decades has increased nearly 10-fold up to about 9%, while its share in the world GDP has increased from less than 2% up to 13% based on purchasing power parity (The World Bank, 2013; China Economy News, 2013).

The growing share of China’s economy in the world trade is based on the increasing share in the foreign trade of all major regions. Today, China is ranked first in the world by export activities. Indeed, about 80% of China’s income is generated by the export of goods and services; export business employs about 20 million Chinese workers (The World Bank, 2013). At the same time, only 20% of industrial and agricultural products are exported abroad; the rest is left for domestic consumption (China Economy News, 2013). Chinese products are highly competitive today. Currently, China accounts for nearly one-tenth of the global demand for exchange commodities and more than one-tenth of world exports of medium-and high-tech goods. China has also recently become one of the major exporters of electronics and IT products, and is a major supplier of consumer electronics and FMCGs. China’s share in these markets has increased from 15-30% to 30-45% in the last 5 years (China Economy News, 2013).

However, the increasing integration of China is not limited to its own foreign trade activities. The changes taking place in China now also have an increasing impact on the mood of consumers and businesses in other countries. For example, the inflow of foreign direct investment (FDI) in China made 7% of gross world FDI inflows in 2010, compared to 1% in 1980. FDI outflow from China is another recent phenomenon: making an insignificantly low share of global outflows in 2004, it rose up to 4% in 2010 (People’s Republic of China and the IMF, 2013).

The research results show that in the short to medium terms, 1% changes in the growth rates of China’s GDP raise the response from other countries’ growth rates at the level of 0.2% in three years, and 0.4% in five years (People’s Republic of China and the IMF, 2013). During the full five-year period, about 60% of China’s growth influence on other countries is passed through the foreign trade channels, while the remaining 40% influence through such channels as capital flows, tourism, as well as general consumer and business confidence. In addition, the analysis of a longer time period (1963-2010) showed that the secondary effects of China’s economic growth get increased over time (China Economy News, 2013). Apparently, geographical remoteness is an important factor of this impact: the closer to China a country is, the greater the influence is (People’s Republic of China and the IMF, 2013). However, the estimates also show that the role of distance is decreasing over time due to the intensification of globalization processes.

At the same time, it is clear that the trade imbalances, rooting to in the politics of the 1990’s and early 2000’s aimed at the state support of the undervalued currency and stimulation of exports, are still present, and the model of export-conditioned growth has already exhausted itself (People’s Republic of China and the IMF, 2013). Thus, the contribution of net exports to the GDP growth equaled to zero or was negative in the last years, despite the continually impressive trade surplus (The World Bank, 2013). Trade conditions are also slowly deteriorating: the real effective exchange rate of the Yuan has increased by 8.4% over 2011-12; and the foreign exchange reserves growth stopped in mid-2012, while the total inflow to the reserves of the Central Bank made only $110 billion in 2012, which is the lowest figure since 2003 (‘China’s Slowdown: the 91st day’, 2013). Meanwhile, China’s GDP growth in 2012-2013 did not exceed 7.8% (China Economy News, 2013; ‘China’s Slowdown: the 91st day’, 2013).

The slowdown of the Chinese economy in the last 2 years is quite an expected trend though, being a result of the reduced demand and income, investment crisis and foreign conjuncture fluctuations. The fact is that the most important driver of China’s GDP in recent years was FDI. In 2012, the share of FDI was over 50% on the Chinese market mainly (China Economy News, 2013; (‘China’s Slowdown: the 91st day’, 2013). This is one of the reasons of China’s economic miracle together with the low cost of labor. A huge part of the Chinese population lives below the poverty line (The World Bank, 2013), and this fact places in question the purchasing power of Chinese people and their private investments. It is precisely a huge safety margin in salary spending and low ecological standards that mainly contributed to the fact that in last few decades many TNCs transferred their businesses to China.

However, when the credit multiplier began to shrink quickly in 2007, the demand it previously formed melted away. This uncovered a number of problems: excess capacities, their low loading, rising overheads costs. The difficulty with sales in Europe led to a decrease in investment efficiency, and the unemployment issue forced many developed countries to generate orders for returning workplaces in the United States. In addition, China passed through the global crisis of 2008-2009 fully relying on investment stimulation by injecting funds through the state-controlled banking system (‘What caused China’s cash crunch?’, 2013). The strategy was successful in terms of supporting growth rates, but at the same time it only strengthened the contribution of domestic investment to GDP and heated up the real estate market (‘Economic reform’, 2013).

The current slowdown in the Chinese economy seemed to stop in the second half of 2012, and the growth remains high enough on the background of economic problems in other countries (China Economy News, 2013; Kazer, 2013). The rate of economic growth in China exceeded the planned 7.5% in January-September 2013 with the economy demonstrating increased momentum for the further growth in recent months. Macroeconomic indicators have improved, as well as the indicators of market expectations. In the second quarter of 2013, the industrial production increased by 9.7 % against the expected 8.9% (China Economy News, 2013; Kazer, 2013). However, this was once again achieved by the expansion of public investment and the soft policy of the Central Bank. The share of state investment into GDP generally rose up to 72.1 % in 2012 against 33.2 % in 2000 (‘Economic reform’, 2013). On the one hand, this speaks for the extremely high level of savings and the scales of the investment process, and on the other hand, shows a very limited possibility for major expansion of domestic consumption. Thus, at the end of the first decade of this century, the share of domestic consumption in China’s GDP was one of the lowest not only in comparison with developed countries, but also among developing countries. In 2010, it made only 33.8 % of GDP, while this indicator reached 53.7% in Thailand, 61.9 % in India, and52.5% in the Republic of Korea (The World Bank, 2013).

Without derogating the achievements of the Chinese model of economic growth which among other effects reflected in a noticeable increase in the standards of living, we should still recognize that population incomes have always significantly lagged behind the growth of the GDP. Equally important is the circumstance that the capital-intensive industries, traditionally involving the major part of investments, with all other things being equal, create fewer workplaces than labor-intensive industries, for example, the service sector (‘Economic reform’, 2013). In addition, the massive scales of capital construction stimulated by the interests of the local authorities, often produces excess capacities in some industries (steel, cement, aluminum production, etc.), which hinders China from fulfilling of the task of reducing energy consumption (‘China’s Slowdown’, 2013). Thus, the mitigation of existing serious imbalances between the scales of investment resources and the volumes of consumption remains one of the most urgent problems of modern China’s economic strategy.

Indeed, in the last 30 years, the Chinese government was conducting the growth model often called the model of “managed capitalism”, where the economic growth is based on exports and investments, and the government controls the relationships between banks and industrial enterprises, and supports the undervalued exchange rate to promote foreign trade rates (Smith, 2010; ‘What caused China’s cash crunch?’, 2013; Dreyer, 2010). However, the model of managed capitalism, along with rapid economic development has accumulated a number of imbalances. In addition to the well-known external imbalances in form of foreign exchange reserves accumulation and trade surpluses, there are also some less obvious internal imbalances like increased state presence in the economy, increased the share of public investment in GDP together with excess lending, and financial repression in the domestic capital market through establishing artificially low deposit interest rates (‘What caused China’s cash crunch?’, 2013; ‘Economic reform’, 2013; Smith, 2010).

Thus, the statement that China will have to refuse from investment model of development in the near future leaves no doubts and is broadly supported not only among world economists but also among Chinese authorities. However, it is still unclear how long it will take China to cure from the investment doping, as soon as the post-crisis stimulus package only exacerbated the bias. In the medium term, internal imbalances will come out on the forefront, including low consumption of households. Still, despite the problems in the balance sheets of banks and the real estate market in the short term, a moderately stable fiscal situation, large reserves, and the desire of authorities to ensure a smooth period of political leadership change favor for the non-crisis scenario in case of the increase in government spending . Otherwise, in the long term, the proceeding economic growth slowdown, growing inefficiency of public investment and worsening demographical situation may significantly complicate the task of correcting imbalances.

On the other hand, despite the existing problems of socio-economic development particularly relating to the decrease of economic growth rates in the past two years, the Chinese government is already taking progressive steps for improving the living standards of the population. In particular, at the end of 2011, the minimum level of monthly taxable income was increased from 2 to 3.5 million Yuan (China Economy News, 2013). In 2011-2012, practical measures to support the private and individual sectors of China’s economy included a significant reduction in the tax burden for small and medium-sized enterprises. For example, the tax rate was reduced twice on the income of companies with the amount of annual tax payments not exceeding 30 thousand Yuan (People’s Republic of China and the IMF, 2013). More than 100 administrative fees totaling 36 billion Yuan were canceled for private companies in 2011, and another 20 fees were canceled in 2012. Since the beginning of 2012, China also reduced import tariffs on 730 kinds of products, including advanced equipment, key components, raw materials and energy products (People’s Republic of China and the IMF, 2013; China Economy News, 2013). At the same time, the amount of state funds allocated to support small and medium enterprises in technological innovation and improvement increased significantly in recent years; public funds are also directed on the improvement of product quality, energy efficiency, reduction harmful emissions into the atmosphere, and expansion of markets, etc. (The World Bank, 2013).

Thus, in the past three years, the volume of Chinese investment in the economy of the European Union has exceeded the total capital investment of the European states in the PRC (China Economy News, 2013). This autumn also featured a historic, but long-anticipated event: the United States stopped being the largest importer of oil, and now yields to China, as soon as in September China imported by 6 million barrels more oil (‘China overtakes US’, 2013). In general, taking the PPP into account, the Chinese economy, according to IMF forecasts, could overtake the U.S. economy in terms of GDP in 2016 (People’s Republic of China and the IMF, 2013). The tasks of increasing the total power of the country and its international competitiveness were announced already at the XVI Congress of the CPC. Basing on the implementation of the strategic objectives of the “third step” of modernization and solving the problem of building the “society of affluence” (Xiaokang Shehui), by 2020 the Chinese government is planning to increase the gross domestic product by 4 times compared to the 2000 rate (China Economy News, 2013).

In fact, facing temporary difficulties or not, the issue of improving the competitiveness of the Chinese economy has never been losing its relevance for over three decades of constant reforms and transformations. Global economic competition aggravated in recent years, as well as complicating financial and economic situation in the world economy encourage China to seek for a model of sustainable economic development using its locational and resource advantages, to find ways to attract foreign investment and technology, and to modernize production for creating more competitive goods and services on the international market.

Conclusion

In general, China’s current economic strategy is focused on addressing a wide range of tasks of international and domestic level. The need to maintain social and economic stability associated with returning and maintaining stable economic growth and creation of a corresponding number of new workplaces, now surely involves the need for the strong growth in investment into the national economy. At the same time, the need to improve the standards of living and social protection of the Chinese population requires a substantial increase in the domestic consumption rates and relative slowdown in the public investment process, combined with a significant increase in capital efficiency.

As a result, the success of the contemporary economic policy of China mainly depends on finding the optimal balances between current and long-term objectives, between public and private interests, between external and internal factors of development. However, theexperience of balancing economic policies accumulated by China during its history combined with the clear political will of the Chinese government focused on the major reorganization of the foundations of social and economic order in the country, allows us to look on the future of the Chinese economy with a degree of optimism about the prospects of the new economic policies.