Chinese Economy’s Growth and Its Sustainability

Subject: Economics
Pages: 5
Words: 1147
Reading time:
4 min

The current economic growth experienced in China is nothing short of phenomenal. With GDP growth rates of up to 9% and GDP of US $6.9 trillion by the end of 2007 in purchasing power parity and the US $ 3.4 trillion in exchange rate terms, China has come of age and occupies the top three with Japan and the USA. Per capita income, too, has not been left behind, growing at the rate of 8% per year for the last 30 years. This has considerably reduced poverty levels, but with a negative side effect of creating income inequalities throughout the country and with the bulging population, the nominal per capita income is considered among the lowest in the world at the US $ 2000. China’s GDP has increased exponentially since the 1970s as a result of reforms and economic liberalization.

China’s massive growth can be traced back to 1978, after years of state control was finally relaxed. To bring the country back to economic prominence, the formation of rural enterprises was encouraged, the creation of private businesses, and liberalization of trade and investments. The government also invested heavily in the education of the population and industrialization. These strategies paid off, and in several years, China became the sleeping giant no more.

The post-1970 economic period saw real growth rising from 6% to 9% a year. Several reasons have been put forward to try and explain the phenomena. The IMF, for instance, has done research on this matter and named capital accumulation as the sole force that drives growth. Capital accumulation is the growth in the state’s capital assets such as infrastructure, factories investment in the transport and communication sector. These coupled with higher productivity have led to the explosive growth witnessed. With trade liberalization, the desire for profits pushed the growth figures higher and higher due to the market orientation.

By opening its doors to the world, China has increased its levels of investment with the influx of foreign direct investment. This liberalization has raised the annual exports by 19% p.a fuelling growth in home industries. Price reforms in the economic sector have led to higher confidence levels from the public and producers, thus acting as an incentive to produce more. With the witnessed growth in China, it is expected to tip the economic balance of many of her neighboring and partner states. Major financial imbalance is looming between the United States and the East Asian states and the major oil-producing countries. China and a host of other East Asian countries are drilling a current account deficit of almost 2% of the world GDP in the US economy.

With successful management of these trade imbalances, costly adjustments to the world and the Chinese economy will be avoided. The immense growth in China’s exports to the world signifies an economy at its peak. This will have an impact on the economies of countries, developed and developing competing with it. With the influx of the home market by Chinese products, many domestic industries will be forced to close shop or go offshore. This would stoke the fire to the current anti-globalization and protectionism debate and force China either to dump their exports or to cut down on production for fear of lack of markets to sell.

With the growing population, per capita income would fall below what it stands today as a fall in exports will definitely lead to a cut in output. Proponents of protectionism will pile pressure when the global economy slumps, leading to geopolitical and economic tensions characterized by competition for energy and natural resources and growing worries about the climate. China being a major consumer of energy and a major polluter of the environment, will bear the brunt leading to cutbacks in production and an eventual economic slump.

Currently, there are challenges to the Chinese economic growth path acknowledged by the government. These problems are a non harmonized economic structure and lack of motivation for independent innovation. The latter is evident in numerous patent wars that have involved numerous Chinese manufacturers accused of infringement of intellectual property from their western counterparts. They argue that Chinese firms can only wait to copy the efforts of others and cannot come up with original work. Uncontrolled environmental pollution also worries China, with 16 of the top 20 most polluted cities in the world.

Linfen City in the Shanxi province topped the world’s most polluted cities list this year. With serious unemployment stifling the growth of the economy, serious gaps have emerged, leading to income stratification and inequalities between the rich and the poor. In development, urban and rural China are stark contrasts of each other, with massive underdevelopment taking place in the rural areas while the exact opposite is the norm in the urban areas. These problems are a handful for the Chinese government and distract it from the goal of economic development as an urgent response is needed to contain these before the gains in the economy can be realized.

The continued vulnerability of the Chinese economy to global trends is the Achilles heel that will hurt the Chinese economy. China’s exports account for close to half of her GDP. With changing global trends and fluctuations, the economy of China will suffer from the ripple effect created by these markets. With reference to Singapore and South Korea, recession in key export markets can lead to a slowdown even if the trade-driven growth strategy is effective. This would be catastrophic for China, given her dependence socially and politically on rapid economic growth.

The rapid economic growth has piled inflationary pressures on China. The state political and monetary authorities are wary of the current overheating of the Chinese economy. The high economic growth rates cannot shield inflation; hence with a growth rate of close to 10%, inflation has crept to almost 7%. The continued growth poses a challenge to the monetary authorities since with inflation and subsequent export overpricing leading to a fall in demand; the economy is an export-dependent will register a fall in growth. The increase in the exchange rate has not had any effect on the Chinese trade deficit.

The staggering trade surpluses with foreign countries have made it difficult for the monetary authorities to dampen the exchange rates, an action that was the norm before economic liberalization. Previously the Chinese monetary authorities purchased dollar-denominated securities in large quantities. Disparities in the two countries’ interest rates make the Chinese rates unattractive as they are on a downward trend as opposed to the US. The effect is further worsened by the weakening of the dollar, discouraging the purchase of dollar securities. This shows the vulnerability and the unevenness of the Chinese economy and revaluation being out of the way, the future of growth witnessed in China is uncertain.