June 4, 2013China Economyby EW World Economy Team

China Economy

China is a communist nation with a socialist market economy. It is the world's second largest economy by nominal GDP and the largest by purchasing power parity, according to the International Monetary Fund (IMF). However, given China's tight control over disclosures of economic information and its tendency to fabricate information about its overall economic health, most question the accuracy of the IMF's figures. Moreover, China receives criticism for unfair trade practices, artificial currency devaluation, intellectual property theft, corporate protectionism, and local favoritism.

Despite the criticisms, China has had an average growth rate of 10 percent over the last 30 years, making it the world's fastest-growing economy. Due to the communist/socialist nature of China's government and economy, the public sector dominates the national economy. However, a burgeoning private sector has begun to develop and gain a more prominent role in the economy. China is a global manufacturing hub, and it is both the largest manufacturing economy and the largest export economy in the world. China also features the world's fastest growing consumer market and has become the second largest importer of goods.

China is a member of the World Trade Organization, as well as a signatory to several free trade agreements including the China–Australia Free Trade Agreement, the China–South Korea Free Trade Agreement, ASEAN–China Free Trade Area, as well as free trade agreements with Switzerland and Pakistan.

Economic History

China has one of the oldest cultural identities in the world, but is a young nation in terms of its current economy and government structure. The nation was an empire with a largely feudal economy for many centuries. China had a largely isolationist policy throughout much of the 19th century thanks to negative encounters with Western powers like England and the United States. As a result, China lagged behind much of the world during the industrial revolution, putting it at a significant disadvantage during the early years of the 20th century.

The Communist Party of China came into existence in 1921 and slowly came into both political and physical conflict with the sitting government. Japan invaded China on several occasions, and occupied portions of the nation during the Second World War. By this time, nationalist forces had long been in conflict with communist party members in China, but the two sides had agreed to work together to fight the Japanese. Unfortunately, numerous skirmishes continued to break out throughout the war. Stalinist Russian forces invaded portions of the country to attack the occupying Japanese, and retained control of some of these regions after the war. America attempted to negotiate a compromise with regional spheres of control overseen by Russia and the US (much like East and West Germany), but the hostilities between the two Chinese parties had grown so heated that such a compromise was impossible. The final conflicts described as the Communist Revolution began in 1946 and ended in 1949.

Thanks to earlier policies of isolationism, years of invasion, occupation, and revolution, China's economy was in a shambles for much of the 20th Century.  Before 1978, the rest of the world often overlooked China as being too economically frail to survive.  However, in 1978 and 1979, the Chinese government began a series of reforms that opened the economy and they have led to economic growth at an astounding rate since that time.

Since that time, China's economy has grown tremendously. It has become an industrial powerhouse, starting with relatively low-wage sectors like clothing and footwear and moving, in the 21st century, to increasingly sophisticated products like computers, pharmaceuticals, and automobiles.

Current Economic Situation

China's astounding growth may have been enviable, but is unlikely to continue at such a frantic pace. To reach its current economic goals or continued industrial growth, higher standards of living and more equal living standards must exist across different regions; China needs to sustain an annual growth rate of 8 percent for the near future. However, no nation has ever been able to sustain growth at such rates for so long.

In an effort to achieve that goal, China had to liberalize its banking sector to open the possibility of a true capital market. This, of course, runs contrary to the traditional communist model, but has started to lead to the goal of reducing income inequality. Nevertheless, the liberalization has had its problems, with billions of dollars' worth of nonperforming loans raising the probability of defaults. The government largely resolves these problems with infusions of government funds, but such a model is unsustainable.

China also suffers from regional inequality. Some areas, particularly along the coasts, have benefited from more infrastructure and economic development than rural and agricultural areas. To prevent widening inequalities between these regions, the government has instituted development districts intended to address the particular needs of each region. China has four primary regional plans, each with a unique geographical focus, as well as a foreign investment plan designed to benefit the nation as a whole.

China currently has a number of infrastructure development projects underway. These include plans to expand and improve its electrical grid, provide greater access to water to support urban development, and to expand transmission of natural gas across the nation. The country has also announced plans to create high-speed rail systems and other transportation infrastructure to support a new "Silk Road," making foreign trade with nearby neighbors even easier than it is today.

However, some analysts have noted a slowdown in construction, leading many to question whether China may be facing the end of a housing bubble similar to the one that led to the crash of the US housing market in 2008 and the global recession of 2009. Given the size of the Chinese economy, such a collapse could have serious implications for economies around the world.

Economic Forecast

Despite significant support by the national bank of China—People's Bank of China—and some tentative signs of stabilization, China's economy appears weakened over the last few years. The main causes of this slowdown appear to be the weakening construction and property sectors and a slow and quiet reduction in public works spending. The government has taken significant measures to keep lending as open and available as possible, but this has cut into the nation's spending in other areas.

While economic growth will most likely slow gradually, China will continue to be one of the largest and most powerful global economies. According to FocusEconomics, growth projections for 2015 put the nation at 6.9 percent, but see growth shrinking slightly to 6.8 percent in 2016.

blog comments powered by Disqus