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Chinas Economic`s

Chinas Economic`s

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Chinas Economics
For various reasons, China has always been an important country in the world.With its increasing large population, it was determined by other countries that is has a lotof economic potentials. In just one decade and a half, China has transformed itself from agiant that use to live in poverty into a wealthy powerhouse to the world economy. Withone-fifth of the world¡¦s population, China is now producing 4% of world merchandiseand a proportion of global production. It has also one of the world¡¦s oldest and mostinfluential civilizations. China has established three approaches to the world economyand they are establishing an alternative socialist system (1950s); isolating itself from thesystem (the 1960s to mid 1970s); and participating in the system again from the 1970s.China¡¦s economic system was quite similar to Soviet Union¡¦s because it is central planning system. However, after the 1950s, this central planning is broken into regional planning by different provinces in China. In another words, China has changed from acentrally based country in a regionally based country, in which different provinces produces different goods and servies. This change has encouraged the development of small enterprises, which are the main driving forces of Chinese growth. In 1978, Chinahas liberalised its economy and start participating in the world economy. With its newmarket reforms in every sector, China¡¦s door has opened its economic door to foreigninvestors and freer trade in special economical zones. Beginning in 1994, China'seconomic structural reforms have begun new breakthroughs. Major changes have beenmade to sectors like personal enterprises, taxation, finance, foreign investment andforeign trade. At the same time, the Chinese government is speeding up its establishmentof a socialist market economy system. Hopefully, this socialist market economic systemcan be in place by 2010. (Roy 1-5) Major Structural Reforms Reforms already launched:1. Reform of the state-owned enterprises has been furthered. „h Some adjustment andreorganisation have been carried out in industries like textile, coal, oil and weapon-makings. 2. The social security system has made huge changes. „h People established re-employment centres that can help laid off workers to find jobs in other economic sectors.Almost 99% of the laid-off staff and workers who were fired from the state-ownedenterprises are using this re-employment service centre. Reforms to be launched: 1.Financial reforms will be undertaken „h To achieve the perfect management system,sectors like banks, securities, insurance and trust businesses are becoming independentfrom each other for clearer financial supervisions. „h Government is speeding up thereform of state-owned commercial banks, in order for the banks to operate independently.„h In case when companies have bad credit and unpaid debts, banks are reinforcingstrong policies to ensure the quality of bank loans. „h To safeguard financial assets andeliminate corruption of people who have political positions. 2. To increase export tomaximize the economy „h People are expanding export productions. „h People areimproving the development of international tourism to increase non-trade exchangeearnings. (Online) Economic Activity GDP/GNP China must have annual GDP growthgreater than 5% to maintain social stability and political survival. Economic freedom hasincreased China¡¦s prosperity. With its Real GDP of US$960.91 billion, it seems that ishas increased its output by 7.8% from 1997. Within the GDP, primary industry increased by 3.5%, secondary industry up by 9.2%, and tertiary industry enlarged by 7.6%. Thesocial labour productivity rose by 6.9% over 1997. In the first half of 1999, GDP grew at
 
the rate of 7.6%. (Morrison) Beginning in 1979, China launched several economicreforms. To improve the standard of living of farmers, government is now allowing themto sell a portion of their crops on the free market. The government also established four special economic zones to attract foreign investment and boost exports and imports. Thedecentralisation of economic control of various enterprises was given to provincial andlocal governments. This allowed enterprises to operate more freely and competitively,rather be controlled by the central government. Some coastal regions and cities weredesignated as open cities and development zones, which allowed people to experiencefree market reforms and to attract foreign investment. Therefore, the state price controlson good and services were gradually eliminated. Starting from the introduction of economic reforms, China's economy has grown proportionately faster than during the pre-reform period (see Table 1). This Chinese statistic shows the growth of real GDPfrom 1979 to 1998, which is making China one the world's fastest growing economies.According to the World Bank, China's rapid development has driven 200 million peopleout of poverty. Table 1. China's Average Annual Real GDP Growth: 1960-1998 TimePeriod Average Annual % Growth 1960-1978 (pre-reform) 5.3 1979-1998 (post-reform)9.8 1990 3.8 1991 9.3 1992 14.2 1993 13.5 1994 12.7 1995 10.5 1996 9.7 1997 8.8 19987.8 Sources: Official Chinese government data reported by the World Bank, WorldDevelopment Report (various issues), and DRI/McGraw-Hill, World Economic Outlook,various issues. Economists who worries about China's rapid economic growth are mainlyconcentrating on two factors: large-scale capital investment (by large domestic savingsand foreign investment) and rapid productivity growth. These two factors appear tointerdependent of each other. Economic reforms led to higher efficiency in the economy,which boosted output and increased resources for more investment in the economy. Mostof the Chinese are known to have a high rate of savings. When reforms began in 1979,domestic savings as a percentage of GDP turned out to be 32% (nearly as high as Japan'sat the time). Eventually, savings as a percentage of GDP has steadily risen; it was 42.7%in 1998, among the highest savings rates in the world. In U.S. dollars, China's GDP in1998 was $968 billion with its per capita GDP of $769 billion. Such data would indicatethat China's economy and living standards were significantly lower than those of theUnited States, Japan, and Germany. China's 1998 GDP was about 45% the size of Germany's, 23% of Japan's, and 11% that of the United States. Surprisingly, China's per capita GDP was only 2.4% of the United States (see Table 2). The following data showsthat China's per capita GDP is $3,701. However, it falls far below the PPP per capita GDPlevels of some major developed countries. For example, it is only 12% of U.S. levels. TheInternational Monetary Fund estimates that China might surpass the United States as theworld's largest economy in the year 2007. However, even if that does occur, it would takeChina significantly longer time to achieve U.S. standard of living levels. Table 2.Comparisons of U.S., Japanese, German, and Chinese GDP and Per Capita GDP In Nominal U.S. Dollars and PPP: 1998 Country Nominal GDP ($Billions) GDP in PPP($Billions) Nominal Per Capita GDP Per Capita GDP in PPP U.S. 8,500 8,500 31,41431,414 Japan 4,190 2,969 29,860 23,228 Germany 2,109 1,637 26,024 21,376 China 9484,610 769 3,701 Source: DRI/McGraw Hill. World Economic Outlook, Volume I 1stQuarter, 1999, p.A-27. Employment/unemployment By the end of 1998, China'semployment was 699.57 million, 3.57 million more than at the end of the previous year.Of the total, 32.32 million people were in urban private enterprises. In 1998, great
 
changes were made in the re-employment program, which enabled 6.09 million laid-off staff and workers of state-owned enterprises to find new jobs. By the end of 1998, theregistered unemployment rate in the urban areas was 3.1% with no significant changesfrom the previous year. The income of people that are living in urban and rural areasincreased steadily, and their living standard continued to rise. With the falling pricelevels, the growth of the per-capita disposable income of urban residents rise 5.8%, andthat of rural residents increased by 4.3%. The registered unemployment rate in the urbanareas is 3.5% in 1999. The number of people laid off in 1997 was 15 million, two-thirdsfrom state owned enterprises. If privatisation of state enterprises continues, it is estimatedthat 15 million more workers would be laid off over the next two years (although theunemployment number may vary in different provinces). In some undeveloped provinces,the ratio of laid off to working labour was 3:1 in 1998. (Morrison) Inflation Inflation hasreached 25.5% in 1994 and has become a prime concern of the government. Therefore,the government has planned a tight credit policy which helped to bring inflation figuresdown to 17.1% in 1995, 8.3% in 1996, and 4.1% in 1997. Due to statistics, the year-endfigures for 1997 shows an average inflation of 2.8% for CPI. This steady drop in inflationduring 1997 was due to large stockpiles of inventory such as wheat and cereals, which produced more competition in the economy. It looks like steady deflation would continuefor the next few years. In 1998, the total retail sales of consumer goods amounted toUS$352.14 billion, up by 6.8% compared with 1997. Despite the deflation, the actualgrowth was 9.7%. (China: Economic Overview) Value of currency During the period of the Asian financial crisis, China has enforced a policy of maintaining the stability of RMB. There has also been a favourable balance in China¡¦s current account for fiveconsecutive years. Foreign direct investments have continued to flow in. All these made it possible for RMB to remain stable in 1998. Now, its exchange rate against the US dollar is at US$1: RMB 8.2789. Unlike HK dollar, value of RMB might change over the year  because RMB is not pegged to the US dollar. Specific contributions From severalobservations, it is known that the fastest growing provinces are Zhejiang, Jiangsu,Guangdong, Fujian, and Shandong. These places are where the state-owned industrieshave fallen most sharply. From 1981 to 1994, the shares of state-owned industry in eachof the five provinces dropped by more than 40% for it was creating a lot of non-stateowned enterprises. On the other hand, in the western regions, the state-owned enterpriseshave experienced a much slower structure reformation. The decline of importance of thecoastal provinces was caused by the fast growth of enterprises in provinces like Jiangsuand Zhejiang. It can also be caused by foreign-invested enterprises in Guangdong as wellas private enterprises in Wenzhou, Zhejiang. The output of these enterprises grew at anannual average rate of 25 %, that is, 14 % higher than that of the state-owned industrialenterprises. The five fastest growing provinces are construction of free enterprise or indirect macro-management because they all attract foreign investments. In contrast, theinland areas lack foreign-invested enterprises and private enterprises. The fasted growth province, Guangdong, has an annual average GDP growth rate of 12%, while Jiangsu andGuizhou grew at an annual average growth rate of 6%. However, this increasingdifference of provinces' growth performance could lead to serious economic and politicaltensions among regions. (Decentralisation and Provinces' Growth Performances)Government production of public goods/services State economy includes all enterprisesthat are funded by governments of various levels. Because of the economic reform,

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