China’s Economic Reforms
The Chinese economy is among the fastest-growing economies in the world, and it currently stands among the top world economies with the once known superpowers such as the US. The Chinese economy has been on a trajectory growth with a constant average annual growth from 1978 to 2005 of 10%. IN 2019, China’s economic growth was at 6.0%, which is the lowest growth since the 1992 first quarter (Tan, 2020). The Chinese economy has experienced a long development process since 1949 since the PRC founded. The process started with revolution and other processes like Maoism, Socialism, and the gradual economic restructuring and fast economic growth. The reforms put the country’s economy on the world record of the fastest-growing economies. The Corona Virus threat, however, threatens the constant economic growth in the current year 2020 due to the disruption of normal economic activities and trade business that determine economic performance.
Among the factors that aided the chines economy to grow at a higher rate was the shifting of public resources to private ownership, which improved the management of the resources, and the massive utilization of resources. The privatization of public resources and the adoption of a market-oriented economy improved economic performance. In 2018, the Chinese private sector contributed to 90% of job openings, with a total of 80% of urban dwellers benefiting from job creation. The private sector also contributed to 70% of innovation, and the Chinese are currently the industrial powerhouse in the world. The Chinese private sector also contributes to 60% of the national GDP (Bank, 2018). China is focused on investing in its human talent to achieve being the world’s leader in manufacturing in the Made in China 2025 blueprint and also the green development leader. The impeccable Chinese economic growth has attracted massive investment all over the world, and the Chinese also enjoy large exports in the world, which contributes to the stabilization of their currency.
The history of Chinese industrialization
The Chinese economy breakthrough in 1978 and major changes that have shaped the current economy was also made during the later years. The Chinese economy underwent significant transformation thought the years before its breakthrough in 1978. The Chinese economy had rich human resources, good education level by 1978. The socialism ideology had neglected the market needs, and the post-1978 reforms led to a rise in small-scale businesses. There was a rapid growth in household-owned businesses because there was an existing market gap that needed to be filled. The old economic centers also experienced speedy growth, and the traditional market-based organization systems were revived. The revival of market-based systems brought the downstream and upstream producers’ coordination of small-scale specialized firms. The traditional Chinese economy placed importance in cross border ties, and the systems were revived after 1978. The economic system also revived the Special Economic Zones (SEZs) (Naughton, 2007). The Taiwan and Hong Kong economic growth between 1960 to 1970s can be attributed to the revival of the traditional Chinese economy.
The integration of human resources and other resources led to growth in foreign trade growth and the development of firms in Hong Kong and Taiwan. The traditional economic system was used to jumpstart the Chinese economy by relying on the small-scale business. The SEZs were revived by Deng Xiaoping to speed up economic growth, and they embraced a market-friendly rule which promoted the wider transition of the Chinese economy. The traditional economy shaped the transition from plan to market economy. The PRC modified the Big Push Strategy in 1979 after discovering the enormous unexploited opportunities in the export and manufacturing markets. The country went back to utilize the opportunities with the Taiwan and Hong Kong businesses.
In 1961, the Chinese government realized there was a need for changing economic actions, and 20 million workers were taken back to the countryside to restructure the rural sector. It introduced the crisis control policies where the households were tasked with the production of agriculture produce to feed the nation. Small factories were also closed down to concentrate on efficient production in the small number of plants, and their control was centralized to restore order in production. The reforms managed to achieve more output, and China entered the world grain market again as a net food exporter. By 1963, China had shifted from Crisis management to another set of policies that focused on long-term developments. A Five-Year plan to raise the living standards was initiated to correct the former policies that had caused deteriorated living standards both in the city and countryside (Naughton, 2007). Previous policies concentrated on clearing forest building factories and mines, and water control projects, and they had destroyed valuable land. The Big Push strategy was reestablished in 1964, and it focused on building railroads and factories, especially in the southwestern provinces, as a way of promoting the high tide of production. The Big Push Strategy was then followed by the Third Front, which dominated economic construction.
The Cultural Revolution was them launched in 1966 by Mau. The Cultural Revolution Era refers to the period between 1966 to 1976. In 1971, there was an economic problem, and agricultural production was outpaced by industrial growth because most of the resources and human power were directed to the construction, and there was light output and to support the projects. Unfavorable political events further worsened the economic situation. The situation was put under control later in 1972 after China and the US relaxed their international relations, and the Chinese leadership could now concentrate on addressing the emerging challenges in the economy (Naughton, 2007). However, political struggles under the leadership of Mao prevented the complete change of Chinese policy to address the economic challenges, and this was noted by a fall in the level of investments.
After the death of Mao in 1976, Hua Guofeng, the new leader, concentrated on rehabilitating the economy, and moderate decentralization and investment were maintained, and key sectors were rehabilitated. Guofeng framed a 10-year plan which was aimed at large scale projects, mostly in heavy industry, which totaled 120 projects (Naughton, 2007). The projects included five new ports, ten new oil fields, ten integrated steel mills, 30 large power plants. The investments were based on the capacity of rapid growth in the Chinese economy and the availability of funds from petroleum earnings to import western technology. The project, however, came to lapse on its weight due to unexpected obstacles in developing oil fiends, and the large contracts signed by Chinese agencies with foreign suppliers. The contracts were too much for an economy that was less open to the outside world.
The 1980s-decade experienced increased performance in the state-enterprise due to effective monitoring, improved incentives, and increased competition. There was no need for privatization during this period because there was still the capacity to enhance the state-sector. Transactions during this period also started being pinned at market prices even for the state to nonstate sectors. However, the Chinese economy adopted a functioning market away from the command economy by the mid-1990s. The change differentiated China from other socialist economies. China’s economy experienced a significant shift in the 1993 institutional set up that was compatible with the market economy. The massive shift of the state sector created a fair market competition, and that contributed to increased economic growth. The second phase of economic restructuring saw steady economic growth until 2003, when Zhu Rongji stepped down (Naughton, 2007). The Chinese economy continued to be liberalized, and it has become open to trade and investments based on market systems.
The Size of China’s Economy
The question of how big is the China’s economy is a debate that goes beyond the current status to the question of when it will overtake the largest economic power in the world’s, the United States. Economists have been debating about the actual size of China’s economy. In 2018, The figure was derived by measuring it using the nominal exchange rates in US dollars and it totaled to $13.4 trillion. The GDP per Capita was $9608 in nominal dollars which equated to 15.3%of per capita level in the US. From that figure, china’s economy was estimated by the IMF to be 65.3% of the United States economy (Congressional Research Service). The economists argued that converting China’s economy using the nominal exchange rates did not reflect the actual size of the economy because it excludes the differences in the prices of goods and services in those countries. The Nominal exchange can only mirror the price of foreign currencies against the US dollar. The prices of goods and services in China are much lower as compared to the US, which means that the value of China’s economy could be much huger than the figure derived by the IMF.
According to economists, the estimate should consider the purchasing power parity (PPP), which could reflect the exchange rates based on the definite purchasing power relative to the dollar. The economists further argued that based on PPP, china’s economy overtook the US in 2014 based as indicated by the IMF data. This decision was made after adjusting the price difference to the 2018 China’s GDP, which placed it at $25.3 trillion based on PPP from $13.4 trillion based on nominal dollars. China’s economy share of global GDP increased from 2.3% in 1980 to about 18.3% in 2017 based on PPP as compared to the US share of global GDP, which declined from 24.3% to about 15.3% base on PPP. The country’s 2018 nominal per capita GDP was also raised from $9608 to $18110 using the PPP measurement, which came to 28.9% of the US nominal per capita GDP (Congressional Research Service). Considering that China is the leading manufacturer in the world, rapid economic growth is expected to continue, and the living standards are likely to take many years to reach the level of the US.
The value of China’s manufacturing in 2016 was 49.2% more than that of the US when estimated on a Gross value-added basis. The value of manufacturing contributes to about 28.7% of the GDP in China as compared to 11.6% in the US (Congressional Research Service). The Deloitte firm ranked China as the most competitive manufacture in the world while US ranked second in its 2016 Global Manufacturing Competitiveness Index. However, the ranking was predicted to fall lower than the US by 2020 based on China’s predicted slowing economy and the US level of investment and talent. This prediction was backed up by the World Economic Forum (WEF) annual report in 2018 that ranked China’s Global Competitive Index at 28th position out of 140 economies, and the US was ranked in the 1st position (Congressional Research Service). For China to continue leading in manufacturing competitiveness, it has to address the issues of technology advancement to reach the levels of the US and increase its innovation levels.
Changes in labor cost advantages and wage in china
China’s manufacturing power has been backed up by enough human resources and relatively low wages as compared to other countries. The competitive advantage is decreasing, and in turn, it is increasing the manufacturing costs due to a decrease in the working-age population in the country. The average monthly wages in China increased by 263% between 2007 and 2018(Congressional Research Service). The US firms based in China noted that the increasing labor costs are the second most challenge facing them in the American Chamber of Commerce in China in a 2019 Business Climate survey. Data indicates that a unit labor production cost in China was 42.3 of the US in 2000, but the cost has increased to 75.5% of the US level by 2018.
The contribution of Foreign Direct Investment (FDI) to China’s economy
China conducted investment and trade reforms that encouraged foreign direct investments since 1990s. The changes led to a massive trade and economic growth and productivity gains. By 2010, china recorded 445,244 registered foreign-investment enterprises (FIEs) which increased the employment opportunities to 15.9% of urban labor force. The level of industrial output also increased from 2.3% to 35.9% between 1990 and 2003. However, this figure decreased in 2011 to 25.9%. In 2005, the FIES contributed to 59.7% of imports and 58.3% of Chinese exports but there has been a decrease in 2018 to 43.7% and 41.7% respectively (Congressional Research Service). China was ranked second in the world as the largest recipient of FDI after the US in FDI inflows which totaled to $139 billion in 2018. China’s level of FDI outflows decreased in 2017 and 2018 from a notable peak of $196.1 billion in 2016 following tight scrutiny of foreign investment by the government on projects that were considered as nonbeneficial (Congressional Research Service). The Chinese government is focusing on FDI outflows and inflows that helps to improve technology, get access to IPR, and technical know-how.
The liberalization of trade in china
China is known to be a world’s trading power since it carried out economic reforms and liberalization of trade and investment. China is a net exporter. China exported merchandise worth $2.5 trillion and imported merchandise worth 2.1 trillion in 2018. The figure indicates a significant increase in foreign trade comparing the level of imports that amounted to 18 billion and exports valued at $14 billion in 1979 (Congressional Research Service). Chinas major import commodities are components and parts of products that are later assembled to make finished goods. The components are many computers and electronic products, which are later exported. In 2018, china’s major imports included equipment and machinery, ores, and mineral fuels. The main exports in 2018 included furniture, vehicles, plastics, and machinery and equipment. The value of the finished products when they are exported is usually higher than the value added to the products by the Chinese worker.
Conclusion
Chinas use of past policies accelerated its growth significantly. However, the recent years ranging from 2017 have registered a significant decrease in their efficiency that has been caused by an imbalance in the economy, overcapacity in industries, substantial pollution, increasing income inequality, and an inefficient financial structure. The Chinese government is, therefore, working towards developing a new growth model that can handle a sustainable healthy growth in the new drivers of the economy. There is a need to change the existing policies to avoid falling into a middle-income trap that involves stagnated economic and living standards growth. The country’s failing systems can be observed by the data that shows indicates a decrease in all the aspects of the chines economic growth. China has not liberalized its market economy completely, which makes it be a socialist-market economy. The market forces are only used in a few areas of the economy to increase growth. Complete liberalization of the economy could be among the top consideration that the country should consider when carrying out its reforms.