GROWTH DRIVERS AND CHALLENGES IN THE ECONOMY OF CHINA.
Introduction
The report shows some of the growth drivers and challenges in the economy of China. China is among the highly rising country in the economic sector even to date; hence my best selection for the report discussion. In four decades, the economy of China had grown from a lowly developing country to a chief economic power. In the year 2019, as from the GDP (PPP) growth per capita, China was positioned 73rd, with a GDP of about $14.3 trillion. The country was worth $23 trillion from its natural resources, primarily core and other scarce earth metals.
We are going to look at some of the drivers and challenges affecting the C hina’s economy over a certain period of GDP (Gross domestic product) growth. China’s economy as from the year 2015 to around 2019 (when china’s economic growth rate was classified among the best in the word). China’s GDP rose at an annual rate of around 10%. This step was defined by the World Bank as “Among the fastest unrelenting expansion in the history of the economy’s growth and has raised approximately 800 million people from poverty”. From 2018, the private economic sector had accounted for nearly 60% of the GDP growth; the sector was also liable to 70% of the innovation. Chinas swift rise in the economic sector has increased due to the bilateral economic association with the U.S.A (United States of America).
Our report will cover the background information of china in the economic sector. Discuss some growth drivers and challenges china and how they have affected the GDP growth rate in the economic sector of China. We will later do our analysis based on the data available in the report discussion to come up with some policy recommendations to the government.
Background
Back in the year 1979, when economic restructurings in China were introduced, and China’s economy rose substantially faster. On average china has doubled the size of the economy in factual terms every eight years. But global economic slowdown started in the year 2008 and which had some significant influence on the Chinese economic growth. This led to nearly 20 million migrant employees moving back to their home countries after losing their jobs. This resulted in GDP growth and financial crisis, which led to a substantial fall in GDP.
Growth performance in the economy of China as from the year 2008 to 2014
As observed in the figure below sourced from the World Bank’s database in the year 2008 to 2010, china’s GDP growth rate averaged to around 9.7%. However, the GDP growth rate deteriorated slowly in the next years. From the year 2010 to 2014, the GDP had declined from 10.6% to 7.3%, as seen from fig 1.1 below, according to World Bank statistics.
Fig 1.1: Showing the GDP growth rate as from 2008 to 2014
It’s clearly evident from fig 1.1 that china’s economy has been slowing down continuously from 2010 to 2014, which led to many economists giving warning and predictions that the economy could go down further in the coming years. This could happen if China and the United States of America continued putting penal economic actions against each other, for example, tariff hiking, which resulted from U.S. measures under section 301 and making China retaliate against their action. Much of these droppings have occurred because the tailwinds which supported China’s quick convergence were gradually decreasing. The demographic dividend was diminishing; for example, the one-child strategy has caused their working-age population to drop since 2010. The total factor productivity (TFP) has reduced substantially Comparing with the average in GDP growth of about 10% during the 1990s and 2000s. Cross-country educations point to some threshold that may be leading China to an economic drop, and at a particular time, the GDP per capita is likely to decline. China may be approaching that threshold.
Data analysis
Growth performance for the period of 2015 to 2019 as from the World Bank database.
Fig 1.2: Illustrating the GDP growth rate from 2015 to 2019
The above data shows the world’s bank measure for china’s GDP growth rate from the year 2015 to 2019. It’s evident from the data above that the GDP growth rate has declined from 7.3% in the year 2014 to 6.9% in the year 2015. The GDP later declines in the year 2016 with a rate of 6.7%, making an average decline of about 0.4%. It is also noted from the years 2017 and 2018, the growth rate increased by 0.1% (6.8% in 2017 and 6.8% in 2018). The major cause of the decline in the year 2015 was due to unsupportive policies such as a one-child policy that lead to a decrease in labor source. The government of China in 2015 under the (National Development and Reform Commission of 2015) started taking essential steps in reforming the economy, which later led to GDP rise in the year 2017 and 2018 by 0.1%. The government issued strategies to improve the GDP growth in China’s microeconomic environment; these strategies included issuing tools that firms could use and the central bank to tighten the macro-prudential measures in the real estate sector and extend its coverage, which included wealth management products.
Performance analysis
- Growth drivers to the economy of china
Some of the factors leading to China’s economic growth include:
Availability of several trade commodities and natural resources
China has abundant wealth when it comes to natural resources, which are used to fuel its industrial development. Such commodities comprise fossil fuels from thermal plants, which constitutes 80% of all energy consumed in China and also has several hydroelectric power stations, which represents about 17% of all power consumed in China. Nuclear power from several plants located in Zhejiang and Guangdong also constituting approximately 2% of all energy used in china. Moreover, china’s natural resources also include non-metals and metals such as ore reserves, mainly found in provinces such as Gansu, Hainan, Guizhou, southern Sichuan, and Guangdong. The Yangtze is the largest mine reserve, which supplies a large amount of steel and iron.
Fig 1.3: Major Chinese merchandise imports in the year 2017/2018; Sourced from world trade atlas.
From the fig 1.3 above and fig 1.4 below; we will list China’s top imports and exports using HTF (Harmonized Tariff System). Major imports include electrical machinery, equipment, nuclear reactors, ores, etc.
Major exports include boilers, plastics, furniture, and vehicles.
Fig 1.4: Major Chinese merchandise exports 2018
Foreign Direct Investment (FDI) and special economic zones (SEZs)
China’s investment and trade reforms and incentives have led to surges in Foreign Direct Investment. This flow has been a chief source of china’s rapid growth in trade, economy, and productivity gains. Foreign investment in china was exhilarated in the first phase of economic growth. They located six special economic zones and 14 open cities where government control and relaxation of regulation created a more friendly business environment. These were designated zones where Trans-National Corporation (TNC) was offered incentives like reduced tax rate in setting up manufacturing operations. Taiwanese TNC, EUPA who specialized in manufacturing coffee machines around Xiamen, which was one of the open city employed approximately 25,000 workers.
Generally, in 2010 there were approximately 445,244 (FIEs) foreign-invested enterprises who had already registered in china, recruiting more than 55.2 million employees, accounting to 15.9% of the urban labor force. As shown in Fig 1.5, these FIEs accounted for a substantial share in China’s industrial gains. With the level rising from 2.3% in1990 to higher as 35.9% in the year 2003, but later fell to about 25.9% in the year 2011. FIEs were also responsible for a substantial level in the foreign trade sector, accounting to about 58.3% of their exports in the year 2005 and 59.7% as imports though the level fell to 41.7% and 43.7% in the year 2018, respectively.
Fig 1.5: Industrial yield by foreign-invested firms as per national output share from 1990 to 2011.
China’s substantial appetite for energy
China has been under rapid economic growth fueling more demand for energy, such as coal and petroleum. With this demand becoming a factor for consideration and in determining global power prices. China has been experiencing development in the energy sector since 1990 with new and many nuclear and hydroelectric plants being introduced. China overtook the USA in the year 2009 with the highest power consumption in the world as compared with the year 2000 when china used to consume half of the total energy the USA consumed. China has also been trying to embark on coal energy, which is based on China’s coal reserves and also importing from other countries such as Indonesia and Australia.
According to EIA (U.S Energy Information Administration) prediction, china by 2035 will be consuming 70% more power as compared with the USA. From world statistics, China is ranked as the second of oil products with 9.8 million (bdp) barrels per day in 2011 after the U.S.A, which was a rise as compared to 1997 3.9 million bdp. Fig 1.6 indicates China’s oil imports from 1997 to 2012.
Fig 1.7: china oil import as from 1997 to 2012, sourced from the (US. EIA)
- Growth challenges to the economy of China.
- are some reasons inhibiting the growth of China’s economy.
- currency
- do not allow their currency to glide instead, they only purchase a large number of dollars in order to keep their rate within a certain level. Though the (RMB) renminbi has been appreciating against the dollar, by around 40% in figures since the reforms were in 2005. Some professional analysts have been contending that it may stay highly undervalued. China’s undervalued currency makes its exports cheap, and their imports very expensive than would be under the floating exchange rate. Therefore for them to sustain their exchange target rate, their government must buy a foreign currency like the dollar in enlarging their money supply. This leaves the government with difficulties deciding whether to use monetary policies to combat inflation. Many economists and analysts were arguing on how China’s policies have limited competition and growth in the private sector by causing over-capacity of industries, therefore, affecting markets by reducing the prices of some factor costs like water, capital, and energy.
- System failing to allocate credit according to market principles.
- The banking system of china is controlled by the central government, which only ensures that credit or capital flows only to the industries regulated by the government. The interest rate is usually lower compared with the private sectors where they are allocated low capital but with a high-interest rate. This discourages most of the privately-owned industries, with many analysts contending that the banking system lacks rationing ability in the allocation of capital according to their market principles.
- unrest
- year many protests over many issues, such as government corruption, pollution, and landslides. More so, the poor and those living in rural also protest over the frustration of them not benefitting from the reforms and growth.
Conclusions
- the above report:
- It is clear that China is among the countries experiencing the highest GDP growth rate in the world
- China’s economy has grown over the years influenced by some drivers: such as their demand for energy supply, FDI, and the availability of trade commodities and natural resources.
- China’s economic growth has been caused by; some problems in the banking system on the allocation of capital, public unrest from frustration due to pollution, corruption, and land degradation due to mines.
- recommendation
- from my analysis in the report, it is clear that the government should:
- The government should set up policies that encourage foreign investment and trade to attract foreign investors.
- The government should invest more on its natural resources just like china has done
- The government under the central bank should ensure that the capital is rationally allocated according to the market principles and with friendly interest rates even to the private sector.