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A Critical Look at the Chinese Economy

Updated on October 13, 2018
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In the past thirty-five years, prior to the trade loosening and economic reforms were initiated, China maintained guidelines that retained its economy sluggish, highly inefficient, destitute, and comparatively segregated from the worldwide economy. Following the establishment of foreign exchange and investments implementation of free-market reforms that took place in 1979, China has been reported to be one of the fastest-growing recession across the globe with the gross domestic product (GDP) rise estimating 10% through 2013 (Morrison, 2014).

Recently, China has developed as a dominant economic and trade power. Currently, it is the second-largest recession worldwide, second largest destination of Foreign Direct Investment (FDI), largest trading economy, the largest holder of the foreign trade inventory, as well as the largest manufacturer globally (Zhang & Chen, 2017).

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The economy of China was adversely afflicted by the worldwide economic catastrophe that started in the year 2008. Notably, the crisis led to a decline in the imports and FDI inflows and a significant number of Chinese workers lost their jobs. Besides, the crisis led to a slower growth of GDP. Consequently, the Chinese government reacted by the implementation of an economic stimuli package worth $586 billion and loosened the monetary policies to offer various incentives as well as increase the bank lending thus boosting economic consumption.

These policies enabled China to effectively curb the salient global reduction in interest of the products from China whilst a significant number of the leading economies in the globe experienced stagnant or negative economic growth. From 2008 up to 2014, the real GDP of China has an average growth of 9.6% (Morrison, 2014). In the last ten years, the economy of China and the Chinese industry have undergone immense historic changes, thus bringing modernization, development, and innovation to the country.

Great Wall
Great Wall | Source

The Causes of Economic Growth in China


The rapid economic of growth of China has been attributed by the economists to two primary factors including the faster productivity growth and the intensive capital endowment (Morrison, 2014). Notably, the large-scale endowment was funded by large foreign investments and domestic hoards. These two factors seem to have worked simultaneously. Furthermore, the economic reforms resulted in increased efficacy within the recession. Consequently, the volume of output was boosted and the resources required for additional investments within the economy were increased.

To begin with, China has typically sustained a higher rate of hoards. After the reforms were established in 1979, domestic hoards as a percentage of GPD approximated to 32% (Breslin, 2016). During this period, the Chinese savings were accomplished by the Online Enrolment Systems (SOEs) profits which were utilized by the domestic investment central government.

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The economic reforms, which comprised of the economic production fragmentation, resulted in considerable growth in the savings of the Chinese households together with the corporate hoards. Consequently, this has led to China economy having the highest gross hoards converted as a percentage of GDP as compared to other economies. The magnificent level of hoards has enabled China to considerably upgrade the economic development.

Before the reforms of 1978, approximately four of every five individuals from China worked in the agricultural sector. After the reforms, roughly by 1994, either one or two did. Reforms extended the property rights in the rural areas and motivated individuals to come up with non-agricultural businesses in the countryside. Bigger prices for non-agricultural goods also resulted in more productive organizations and increased effective utilization of labor. These factors motivated many employees to abandon agriculture.

The emerging faster growth of rural enterprises induced millions of individuals to move from traditional agriculture and participate in higher-value-added manufacturing. As a result, this boosted the economic growth of China.

Great Wall
Great Wall | Source

A good number of economists argue that productivity gains, that is, increased efficiency, have also played a significant role in the fast economic growth of China. Notably, advancements in productivity were as a result of reallocation of resources to more beneficial areas. These included the areas that were predominantly controlled by the state including the trade, agriculture, and services (Morrison, 2014).

The post-1978 reforms granted the enterprise managers greater autonomy. These managers gain more freedom in setting their personal production goals, appreciate the best workers and fire poorly performing employees, sell some goods in the private market at competitive market prices, as well as retaining some part of the earnings from the firm for future investment.

Further, the reforms granted greater rooms for private production ownership. The enterprises that were privately owned created job opportunities, earned the country foreign currency through foreign trade, paid state tax, supplied much-wanted consumer goods, and granted the national economy resiliency and flexibility that it had not achieved before. As a result, this boosted China's economic growth.

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China's open door policy that welcomed foreign investment also played a key role in the economic transformation of China. The cumulative foreign direct investments in China, negligible before1978, approximately attained US$100 billion in the year 1994. The yearly inflows shifted from <1% as a percentage of the Total Fixed Investment (TFI) in 1979 to 18% in 1994 (Economic Issues 8: Why Is China Growing So Fast, 2018).

The foreign money was used to develop factories, create job opportunities, connect China to the global market, and more important to transfer technology. Moreover, the economic liberalization has boosted exports up to date. Between 1981 and 1994, China experienced intensive export growth. This triggered the growth of productivity in the domestic industries thus promoting the growth of the China economy.

Components of the Economy of China


The China economy was built on low-cost exports of equipment and machinery. Notably, the government put its massive spending into the corporations that were owned by the state to trigger those exports. These companies are the ones that dominate the Chinese industries and include China National Offshore Oil Corporation, PetroChina, and Sinopec. In order to attract workers, China developed cities to surrounding these factories.

Great Wall
Great Wall | Source

This is what resulted in a quarter of the economy of China being in real estate. In addition, the state government financed the railways construction as well as other infrastructures to enhance its economic growth. Consequently, vast amounts of goods including copper and aluminum were imported.

China's Exports


In 2017, China recaptured its position as the largest exporter worldwide. This was marked by its exportation of approximately $2.2 trillion of its production. 18% of China's exports were shipped to the US in 2017. This resulted in a billion trade deficit of roughly $375 billion. China as also promoted trade with African countries, spending on their infrastructure in return for oil (Chow, 2015).

This has contributed to an increase in the trade agreement with the Latin American and Southeast countries. President Obama in an attempt to balance the growing power of China in the American region, he launched the Trans-Pacific Partnership (TPP) agreement that did not include China.

In addition, China performs significant manufacturing for external businesses, including the US companies. These Companies ship unprocessed materials to China and the factory employees produce the final goods and ship them back to the US. Thus, most of the exports from China to the US are technically American commodities.

China also exports electrical equipment and other kinds of machinery. These include equipment for data processing, computers, and medical and optical equipment. Besides, it exports textiles, apparel, textiles, and fabrics. China is the largest exporter of steel globally.

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China's Imports


The second largest importer worldwide is China. In 2017, China imported approximately $1.7 trillion (Chow, 2015). China imports unprocessed materials from Africa and Latin America. These include fuel, plastics, oil, metal ores, and organic chemicals. China is the global largest importer of copper and aluminum globally.

References


Breslin, S. (2016). China and the global political economy. Springer.
Chow, G. C. (2015). China's economic transformation. John Wiley & Sons.
Economic Issues 8 -- Why Is China Growing So Fast?. (2018). Retrieved from https://www.imf.org/external/pubs/ft/issues8/index.htm
Morrison, W. M. (2014). China's economic rise: History, trends, challenges, and implications for the United States.
Zhang, J., & Chen, J. (2017). Introduction to China's new normal economy.

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China's economic growth was triggered by the economic reforms that took place in 1978. Recently, China is the leading exporter as well as the second leading importer worldwide.

Conclusion


Conclusively, the economy of China and the Chinese industry have undergone immense historic changes, thus bringing modernization, development, and innovation to the country. The rapid economic growth of China has been attributed by economists to two main factors including the faster productivity growth and the intensive capital endowment of China has become the leading economically stable nation.

© 2018 Jeff Zod

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    • Erudite Scholar profile imageAUTHOR

      Jeff Zod 

      12 months ago from Nairobi

      China is positioning itself as a world economic power.Look at the forays they have made in Africa.

    • Eurofile profile image

      Liz Westwood 

      12 months ago from UK

      I was told recently that China underwrites a lot of the UK's debt. I have also noticed them financing new power station developments in the UK and have heard that they are big players in hotel financing as well.

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