The Chinese economy, in a state of autarky since the days of Mao Zedong experienced some radical transformations after Deng Xiaoping took over in 1978. From being an excessively centrally planned economy it matured to a more open economy from his time and is now the growth engine for the world economy for the past ten years. Driven by rapid economic growth and rising incomes, the standard of living has risen and consumer goods such as cars and television sets which were once reserved for the elite are now within the grasp of the common man. Between 1978 and 2002, the amount of goods passing through Chinese ports had increased ten fold and the number of foreign visitors to the country had crossed over a million.
China, the fourth largest country in terms of size after Russia, Canada and the USA is now the world’s second largest economy after the USA if adjusted for differences in cost of living (purchasing power parity differences) although it is only about 10% of the US economy in dollar terms. Tremendous comparative advantage in terms of cheap labour and low production costs has given Chinese goods an edge over others in the world markets.
The rapid transformation of the Chinese economy in the wake of its liberalization policies after 1978 can be understood by analyzing certain sectors of the economy in through the years of 2000, 2004 and 2005; we have put in a detailed chart showing some key components of the Chinese economy:
|
2000 |
2004 |
2005 |
Population growth (annual %) |
0.7 |
0.6 |
0.6 |
Gross National Income( GNI), Atlas Method in current $US |
1.2 trillion |
1.9 trillion |
2.3 trillion |
Per capita GNI, Atlas Method in current $US |
930 |
1500 |
1740 |
Gross Domestic Product (GDP) in current $US |
1.2 trillion |
1.9 trillion |
2.2 trillion |
% annual GDP growth |
8.4 |
10.1 |
9.9 |
% annual inflation rate |
2.1 |
6.9 |
3.8 |
Market capitalization of listed companies (% of GDP) |
48.5 |
33.1 |
35 |
Merchandise trade(% of GDP) |
39.6 |
59.8 |
63.8 |
Workers remittances and compensation of employees received ($US) |
6.2 billion |
19 billion |
22.5 billion |
Data for the past three years reveal that the country has been maintaining a high growth rate in the GDP of around 8% to 10% annually. The upward trend in the country’s GDP, GNI as well as the per capita GDP reaching a high of around $1700 in 2005 has been continually maintained throughout the year 2006. Increase in merchandise trade showed the tremendous growth in the country’s exports in the recent years. China has also been successful in stabilizing inflation rates after it reached a high of around 7% in 2004. The rise in Chinese worker’s remittances from abroad gas also contributed to a growth in the country’s GNI.
One of the defining features for the Chinese economy came on the 11th of December, 2001 when it became a member of the World Trade Organization or WTO. The Chinese accession to the WTO meant that Chinese economy opened up more to the rest of the world and its trade with Japan and the ASEAN nations (Association of South-East Asian Nations) increased rapidly. China drastically reduced its tariff rates from 16.7% in 2001 to 12% in 2002 and significant steps for reducing the number of items on its import license or quota which was 300 in 2002 are presently underway. Notably, India’s exports to China quadrupled from less than 1% in 1995 to more 4.5% in 2003.
With more free movement of goods and services in the area, China’s neighbours were exposed to a much larger market which had a substantial effect on the reduction of production costs. This also resulted in greater flow of foreign investment to China. China had attracted Foreign Direct Investment (FDI) to the tune of US $ 44 billion in 2001 and the corresponding figure for 2002 rose to $52.7 billion.
As a measure of its sheer growth in the global economic Diaspora, the contribution of China as a part of the global economy has increased from 11% in 2000 to over13% in 2004 which in turn, dwarfs the share of the economies of Japan, France and the UK.
The share of the country in world trade has grown even more rapidly. China’s share of world exports was at around 6% in 2003 from the level of 4% in 2000 with the corresponding figure for imports rising from 3.6% to 5.7% between 2000 and 2003.
The Chinese economy is currently facing one peculiar problem in the decline of its employable workforce in the recent years. With the government able to keep its population growth at 0.6% successfully adopting the “One Child Plan”, the government fears that old age pensions and other benefits will put a severe strain on the country’s growing national output. One of the other emerging problems for the Chinese economy is its continuing reliance towards a largely fixed exchange rate system. This certainly makes counter-inflationary monetary policies less flexible. So this issue with the possible restructuring and reform of the banking system could make the Chinese economy even stronger.
But growth with inequality and questions whether the Chinese economy will be able to sustain this rapid growth seem to be unceasing. With the booming development of the coastal cities coexisting with the hard, poor life still prevalent in the rural areas, the trickle down effect of globalization has been negligible. Between 1988 and 1995, China experienced the highest ever growths in income inequality ever monitored by the World Bank. Per capita urban incomes were 2.2 times higher than in rural households in 1990 which increased to 2.6 in 1999 and further to 2.8 in 2000. This has mainly been ascribed to rural unemployed not being able to find jobs owing to their lack of technical skills and education. With illiteracy falling in the second half of the 1990’s, the growth of “human capital” is set to increase.
In the event of a general slowdown of the US economy with a sluggish growth in the Asian powerhouse Japan too, it remains to be seen whether the Chinese economic boom will burst like a bubble in the long run. With the Chinese Stocks facing bullish growth in the event of relative socio-economic stability in the Chinese economy, China is sure to become the investor’s choice in the next decade.
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