China Market Economy

October 13, 2010Economic Systemsby EconomyWatch


China, the fourth largest country in area after Russia, Canada and USA has experienced manifold changes in its economic system which has seen it become the second largest economy in the world after USA if measured on the Purchasing Power Parity (PPP) scale. But still considered as an emerging economy as per capita incomes fall in the lower-middle level, China is making its presence felt in the global stage by taking big strides in opening up its economy to international trade.

Essentially being a closed economy since the days of Mao Zedong, the Communist state of China experienced a transition from a planned economy to a market economy when Deng Xiaoping came to power in 1978. Since then, China has seen a more than ten fold increase in its GDP (Gross Domestic Product) from that year. But the question still remains at large whether the Chinese economy has been able to shed off its previous image of excessive state controls and moved to a stage of total efficiency in its market economy.

A recent study showed that the Chinese economy has achieved a level of 73% marketization of its economy judged by the parameters perceived important by the USA and the European Union. The stability of the equity market and the stock exchange scenario, the interest rate and currency are some of the features that prove the country has been doing well on the economic front over the last quarter of a century. The increased autonomy given to the State Owned Enterprises (SOE’s) and freeing them from the clutches of excessive government control is also a positive sign that the economy is picking up. That the domestic private enterprises are also doing well is evident from the fact that most of them are now listed in bourses in the cities of Shanghai and Shenzhen in southern China. Another feature essential to the improved performance of the market economy in China has been the removal of monopoly from the traditionally government controlled sectors such as telecommunication, electricity supply, railway transportation and civil aviation and allowing for more domestic and foreign equity participation. Besides, the diversified banking system and sale of equity of state-run banks to foreign investors in international exchange and bond markets show that China is on path to rapid economic expansion.

China is now the investor’s destination with more and more foreign investors coming to the region because of its socio-political and economic stability. Stable interest rates have also meant that 'capital flight' is now minimal from the Chinese economy. Foreign investment has produced millions of urban jobs and institutional infrastructure which gas helped in domestic technological innovation. China is now the one of the largest exporters in manufactured electronic goods and textile products. Internet usage has grown so rapidly that internet users crossed 100 million in 2005. As a mark of its improved performance, China also revalued its currency by 2.1% against the US dollar in July 2005 and moved to a new exchange rate system which references a basket of currencies. China also had the largest recorded current account surplus in 2006 of nearly $180 billion.

But the effect of the market economy in China is still only restricted to consumer goods whose prices are market determined with the remaining still in the purview of a planned economic system. More so, the labor market not yet totally regulated with many inter-state controls on the movement of labor still present. Wage rates are not totally market determined and issues like Intellectual Property Rights protection are inadequate for supporting technological innovation. China needs to adopt the policy of market economy 'heart and soul' as one Chinese government official said.

The tragic feature of the Chinese economy is the presence of 'surplus labor' in rural areas. Agriculture still employs about 45% of the population with only 12% accounting for its GDP share. Growth with foreign capital has been limited to coastal provinces with the government failing to sustain the rural poor. About 10% or 130 million of the Chinese population still lies below the poverty line. Industrial production is rising at the healthy rate of 22% with inflation rate at consumer prices being restricted to 1.5%.

The challenges that thus lie in front of the Chinese government is to check the increase in rural unemployment with large areas of arable land falling prey to industrialization and ensuring sufficient job creation for new entrants to the labor-force and people laid off from state enterprises. The Chinese economy has been accused of corruption prevalent among government officials who think they are superior to the common man. Efforts should also be taken to check the environmental deterioration-especially air pollution, soil erosion and steady fall of the water table in areas of North China.

Thus as the Chinese premier Wen Jiabao said recently that 'market economy can exist within Socialism too, the socialistic ethos should be upheld such that every individual gets his due share in this era of one sided economic prosperity.'


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