Term Paper on "China Since the Beginning of the 1980s"

Term Paper 8 pages (2324 words) Sources: 5

[EXCERPT] . . . .

China

Since the beginning of the 1980s, with Deng Xiaoping's reforms that reduced state participation in the economy, encouraging private initiative and the development of private businesses, the Chinese economy has grown at staggering annual rates, often reaching 10% GDP growth annually. While at the beginning this could have been justifiable with the low GDP that China was starting from, as a consequence of the Communist experiments that took place under Mao (the Great Leap Forward and the Cultural Revolution), the growth rates in the last years have remained unchanged. This shows more of an economy basing its growth of solid instruments and policies rather than just a one time wonder.

In the 1st quarter of 2007, the Chinese economy grew at an estimated rate of 11.1%, higher than previous estimations and higher than the 10% threshold it has grown with over the last decades. The economic growth was stimulated mainly by investment in fixed - assets and exports.

If we compare some of these figures to macroeconomic variables from the same period of 2006, we notice that all have significantly improved. As such, while the GDP had grown at a rate of 10.2% in the 1 stquarter of 2006, it has now grown with 11.1%. At the same time, exports grew with 27.8% in Q1 of 2007, compared to 26.6% in Q1 of 2006, this supporting a small drop in the growth of fixed-asset investment. The utilized foreign investment almost doubled in, from 6.4% in 2006 to 11.6% in 2007. The net trade surplus totals $46.4 billion in Q1 of 2007, the equivalent of 99.1% annual growth from the precedent period.

These excellent figures obviously show an economy on a constant move upwards. The question that needs to be asked here is whether this economy is sustainable. This will also help us reach a conclusion on where such a growth (or one close to it) can be expected over the next 20 years as well. In order to answer this, we need to have a look at the business environment in China, one of the most important sources of growth, as the main attractor of foreign investments.

As previously mentioned, the economic performance over the last decades can be motivated by governmental policies that gradually turned over to market forces previously exercised controls over market mechanisms. A large deregulatory wave give way to a progressive liberty in the industrial and services sector, leading to complete renouncement to price regulation in 2000. At the same point, individuals were given governmental permission to create and own limited liability corporations, while at the same time introducing competition law, encouraging foreign investment, abolishing different state monopolies etc. More and more, the Chinese market began to look like a normal market economy, with liberalized economic entities competing in a regulated market, but a market where the market forces were free to act on the economic mechanisms.

2004 and 2005 brought about several other laws that increased private economic presence in key sectors such as the transport industry or the financial services industry. The formerly state-owned enterprises were also privatized so as to be able to compete as private economic entities on the market. Others were restructured, while the employees were schooled and motivated in order to be able to be competitive on the labour market. These educational policies were directed at a governmental level, so that the young employees would be more and more educated, more and more productive.

These are strong arguments in favour of the idea that the Chinese economic growth is not only enthusiastic, but also sustainable. They are arguments in favour of the idea that the Chinese government has created the appropriate market mechanisms that encourage private initiative, foreign investments and that these are, agreeably, the measures with which economic growth is encouraged. At the same time, the government seems to be involved at all levels of the society by promoting educational measures and boosting the HR quality.

If we look beyond internal arguments for Chinese economic growth in the next 20 years as well, the regional perspective is also very encouraging. An integrated Asian economy that would comprise all the dynamic economies in Eastern Asia, South - East Asia and Southern Asia, such as India, Taiwan, Singapore or South Korea, along with China, will most likely increase integrated cooperation on the flow of technology and capital, as well as merchandise. This will likely have an effect comparable to that generated by the European Union in its economic growth.

All these seem to indicate that China can maintain a sustainable economic growth over the next 20 years. However, there are important macroeconomic malfunctions, as well as potential problems that may come up.

When discussing macroeconomics sustainability, we are also discussing monetary stability. The first measure helpful in these cases is the inflation rate. This has gradually decreased from the mid-90s, when it was reaching 6%, to around 4.5% in the first half of 2005. Nevertheless, the consumer price index (CPI), the most relevant indicator in inflation formation, has shown a worrying increase from Q1 of 2006 to Q1 of 2007, from 1.2% to 2.7%, despite the fact that core inflation remained low, at less than 3%.

Some sources say that this was a distinct governmental measure to help boost rural income and that the government did not react, since core inflation was virtually unchanged. In my opinion, this is not necessarily the case. The consumer price index rose most likely due to a steady consumption growth that has followed a constantly ascending trend over the last years. While this is not yet the most important agent of growth, it is a stimulus of potential inflationary growth.

It is obvious, at this point, that for a sustainable growth, China will need to pay extra attention to the danger of its economy overheating. An economy that is overheated will translate into higher prices, unbalanced macroeconomic processes etc. Despite a sound and stable financial and monetary policy, some of the indices fluctuations have raised eyebrows about monetary management. The fact that there is a more or less fixed U.S. Dollar to Chinese Yuan exchange rate (it is variable, but within a certain segment and with very low fluctuations) removes a very important instrument for a government: the capacity to devalue its national currency in order to face inflationary pressures.

The consistent trade surplus, especially with the United States, brings in a large amount of U.S. Dollars. Positive to a point, this can lead to a blockage if the respective funds are used simply to build up national reserves, as is the case with China at this point.

The economic growth generated so far over the last decades has also brought increasing problems on a social and development level. Despite a consistent support from the government, not all the Chinese individuals have seen their revenues increase at the same rate. This has increased social discrepancies around the country, with a very rich layer arising in coastal areas, like Shanghai, and much poorer regions in the rural areas of Central China, for example.

The labour market needs to be further liberalized for a sustainable, profitable economy, but this will not smooth discrepancies in any way. The current liberalization on the labour market has given way to a constantly ascending migratory trend towards the big cities, which is also something that needs to be carefully managed to avoid overpopulation of these urban areas.

Further more, for a sustainable growth, one cannot omit the environmental protection, where the Chinese seem to still have important problems to handle. As such, the Chinese economic boom is reported to be polluting the seas and skies of East Asia. According to the article mentioned, "77% of 500 pollution outlets monitored by the administration discharge more pollutants than permitted, an 18% increase from the first half of 2006."

This is a direct cause not only of the different industries, but also of the increasing number of vehicles, brought about by an overall increase in the population's revenues and living standards. In Beijing only, 1200 vehicles are added every day. This is something going on in every major city of China.

Finally, there is something to be taken into consideration that runs the risk of occurring in almost every developing country: the risk of a market bubble. In China, this manifests itself on the stock market. The Chinese are important investors on the stock exchange, also because investment options are relatively limited. An increase in the tax on stock trades by the government by three times its initial value, on March 30, 2007, has led to an overall drop in the stock exchange index with 6.5%. This comes to show that the stock exchange is still very much under the potential effect of governmental measures and that any changes in policy can lead to effects on the stock market. Similar bubbles may occur on other markets as well, with destabilizing effects on the Chinese economy.

Going back to the question initially asked, on… READ MORE

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