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China’s Economic Reform Strategy
* China is a socialist economy, formed when Mao’s Communist forces defeated the Nationalists
in the Civil War 1949.
* Great Leap Forward (1950s):
Attempt to modernise agriculture and industry, but failed leading to famine and poverty,
* Cultural Revolution (1960s):
Further attempts of modernisation, but progressives were critical of Mao’s failed economic
strategy and China’s isolation from the global economy.
After Mao’s death, Deng implemented radical economic reforms between 1978 and 1997:
* One child policy (1979 onwards):
Contain population growth.
* Agricultural reforms (19781994):
Household Responsibility System was introduced.
Households could make their own production decisions and sell surplus output in free markets
once the state quota was met.
This led to increased food production and surplus income was invested in privately run town
and village enterprises, for light manufacturing of industrial goods.
* Open Door Policy (1980):
Special Economic Zones (SEZs) established in the S and E coastal provinces of China.
Attracted foreign investment and TNCs through incentives (e.g. low tax rates, exemption from
import duties, cheap labour and power, less stringent government regulations).
Inflows of foreign capital increased China’s access to export markets, technology and
management skills transfer and substantial employment.
1978 Trade in exports and imports GNP: 10%
1996 Trade in exports and imports GNP: 36%
* Taxation reforms (1994):
Taxes were now collected by the central government (instead of provincial government.
Improved efficiency and finance infrastructure spending.
Targeted tax evasion and avoidance, since there were major problems encountered in raising
sufficient funds for the government.
* Banking laws (1995):
System of network banking.
Established stock exchanges.
Promoted a more efficient capital market to facilitate saving and investment.
* Cuts to tariffs: (1995):
Encouraged greater domestic efficiency through import competition.
Attracted foreign investment.
1992 Average tariff rate: 41%
1996 Average tariff rate: 22%
2000 Average tariff rate: 16%
2011 Average tariff rate: 8%
Annual Growth in GDP Rates, pre 2000s (from World Bank):
1983: 10.9% (Double Digit Growth)
1992: 14.2% (Cuts to tariffs)
Annual Growth in GDP Rates, post 2000s (from World Bank):
* For the most part of the last decade, China has sustained double digit growth.
* In 2009:
Growth slowed to 9.2% due to the GFC (impacting exports and financial flows).
China’s economy was still strong relative to the rest of world (e.g. USA: 3.1%) who
experienced negative growth in GDP.
* They returned to to double digit growth in 2010 (10.4%) but growth has slowed to 7.8% in 2012
due to reduced exports and consumer spending.
* In terms of nominal value of GDP in 2012, China was the 2nd largest economy.
Reasons for Growth:
* China has moved from planned to free market economy.
* China has moved from rural/agricultural economy to urban/industrialised economy.
* China has contributed substantially to global output, economic growth and trade and
investment as a major world economic power.
* China has moved from being domestic to trade oriented focused, capturing the benefits of
The main drivers of the high economic growth were business investment and net exports.
In 2006, investment spending accounted for 45% of GDP.
Investments were made in infrastructure and financing export industries.
* Large current account surpluses.
* Low net external debt to GDP ratio.
* Large foreign currency reserves.
* Net lender of capital to the rest of the world.
Due to the increased level of economic growth, China has experienced a considerable reduction
* The World Bank estimates that between 1981 and 2010:
China has had 680 million people moving out of extreme poverty.
Accounts for the most dramatic decline over the last 3 decades.
* China’s economy had doubled in size during the 80’s and 90’s, resulting in:
Higher real incomes.
Improvements in material indicators (e.g. real GDP per capita, Current Account Balance)
Improvements in nonmaterial indicators of development (e.g. life expectancy, literacy, HDI)
Income and Quality of Life Indicators
* 1980: 0.407
* 2013: 0.699
* 2013 rank: 101
China’s HDI Indicators 2013:
* Life expectancy at birth: 73.7 years
* Mean Year of Schooling: 7.5 years
* GNI per capita (PPP US$): $7 945
* China has the second largest number of people living under the poverty line, with 128 million
* Inland provinces of China have low HDI values, while the coastal regions have the highest HDIs
& income and employment opportunities.
Distribution of Income
Large geographical disparity in income distribution remains across provinces:
* Per capita incomes:
Higher in urban areas of S and E China.
Lower in rural areas of N and W China.
Higher in S coastal provinces.
The bulk of national income is concentrated in metropolitan and coastal areas:
* Economic and social outcomes in rural inland is lower compared to the urban coastal region.
* Coastal areas are located near Special Economic Zones (greatest employment and income
Beijing (one of the three richest cities)
Tianjin (one of the three richest cities)
Shanghai (one of the three richest cities)
* Coastal regions have large ports and harbour cities, being the centre of industry, trade and
* In 1990s, annual growth rates (averaging 13%) for coastal regions were 5x the level of China’s
slowest growing north western regions (e.g. Tibet, Xinjiang).
Millenium Development Goals:
* China is one of the few countries progressing well with the MDGs.
* However, in income, education and health, only some parts of China will achieve progress,
leaving behind the vast W inland areas.
China’s International Trade
* In 2012, China contributed to 14.7% of world GDP.
* In 2012, China was the leading world exporter, with 9.8% share of world exports.
* In 2012, China’s exports outstripped imports by $149 billion (aka trade surplus)
* Since 1994, 65% of China’s export growth has come from Western companies setting up in
China, with TNCs accounting for about 54% of China’s total exports.
Reasons for China’s higher share of imports and exports
* China is able to process higher value added goods (e.g. ICT equipment, machinery and
* pre. 2005: Undervalued currency when government had kept the RMB undervalued to the US
dollar to maintain price competitiveness of exports.
Composition of Chinese trade:
* Exports are dominated by manufacturers.
* Top exports for China:
Electromechanical products (57%).
Labourintensive products (e.g. clothing, textiles, footwear, furniture, plastic products, bags and
* Main importers of raw materials, energy and capital goods.
* Top imports for China:
Electromechanical products (43%)
Crude oil (12 percent of total imports)
Iron ore (5 percent)
* China accounts for:
10% of world consumption of resources.
25% of world demand for steel.
35% of world demand for iron ore and coal.
20% of world demand for aluminium, copper and zinc.
Major Trading Partners
* Major export markets:
* Around ½ of China’s exports are sold in the Asian region, North America and Europe.
* Major import markets:
Australia (resource exporter)
Brazil (resource exporter)
Saudi Arabia (resource exporter)
China’s Membership in WTO
* Membership began in 2001 Doha Conference.
Recognised China as economic superpower.
Opened massive domestic market to global exporters.
China had access to other countries’ markets.
* Diversifying of export base including more value added ETM and service exports.
* Attracting more foreign investment for domestic service sector.
* Encouraging more innovation and use of ICT in domestic economy.
Cost of membership:
* Higher structural unemployment due to high import competition (e.g. retail, finance,
telecommunication, motor vehicles).
* China must abide by WTO’s rules for free and fair trade.
e.g. intellectual property, including copyright, patents, licence fees and royalties.
Revaluation of the Renminbi (Chinese currency):
* In 2005,
China was pressured by the US to revalue the RMB.
China abandoned its peg (fixed exchange rate) against the US dollar.
* China adopted a managed peg against a basket of selected currencies of China’s major
Flexibility in setting its exchange rate
Assistance to People’s Bank of China in controlling monetary conditions and inflation.
Trade and Investment
* In 2012, exports account for 27% of GDP.
Between 200308, the value of Chinese exports grew by 30% per annum.
Growth reflects the expansion in the processing of goods that have been imported from other
* In 2013, imports account for 25% of GDP.
Some imports have been subjected to value adding and reexport.
The rest of the goods are for domestic use.
There is therefore, a growing importance of Chinese domestic demand as a future source of
Domestic Demand and Investment:
* Domestic demand includes household consumption and business investment, financing
growth in China’s productive capacity through:
Factories, industrial complexes and technology parks.
Retail shopping malls.
Commercial office complexes and residential development.
* Between 200308:
Chinese domestic demand grew at an average annual rate of 15%.
Annual investment growth averaged 19%.
* There has been an increased amount of investment in the development of urban areas.
Result of the rapid increase in urbanisation.
Investment has led to increased efficiency of manufacturing sector.
* In the 2nd half of 2008, the Chinese government announced a 4 trillion RMB to boost public
infrastructure investment to support economic growth.
Foreign Direct Investment and Multinational Corporations
Foreign Direct Investment:
* Remains a key driver of Chinese economic growth.
* FDI has supported high growth in domestic consumption and investment:
Opening the domestic market to foreign competition.
Surge of foreign investment during 2008 for the Beijing Olympics.
* As of 2012, China is the largest recipient of FDI, receiving US$250 million.
* Main sources:
Manufacture goods for export and for sale to China’s growing middle class (e.g. Beijing, Hong
Kong, Guangzhou, Shanghai).
* The rapid rate of economic growth has led to high resource use.
* China is experiencing severe environmental problems.
* In 2007, the government commissioned the OECD to conduct a study of the environment. The
report found that unless pollution is controlled through stricter environmental laws:
By 2020, there will be 600 000 premature deaths in urban areas.
By 2020, there will be 20 million cases of respiratory illness.
13% of China’s GDP could be lost (with 7% of GDP already being lost due to acid rain on
crops, medical costs and lost output due to disease & disaster relief following typhoons and
* As of 2012, China has the highest level of CO
China accounts for 29% of the world’s CO
¾ of China’s emissions is from fossil fuel consumption.
* As many as 300 million people are drinking contaminated water every day in China.
* Loss of natural grasslands and forests due to agriculture and industry.
* Loss of topsoil and desertification due to removal of vegetation.
* Loss of lakes and wetlands.
* Shortage of water due to drought and loss of water due to inefficient irrigation systems.
* Inadequate disposal of household and industrial wastes, with 70% of waste dumped into lakes
* High incidence of disease.
Highest rate of chronic respiratory disease.
Outbreaks of SARS (2003) and bird flu (2005) due to pollution and lack of health and hygiene
Response of Government
* Targets have been set for pollution levels.
* Increasing use of hydroelectric and nuclear power instead of coal.
* Establishment of tradable emission permits which gives firms an incentive to reduce pollution
levels by trading excess rights in a market.
* Banning of logging of domestic timber since 1999.
* Environmental legislation (e.g. Environmental Impact Assessment in 2003).
* Increased spending on environmental protection.
* However, did not agree to the size and time of the global reduction pollution reduction targets
for the implementation of the Kyoto Protocol in 2012.
Evaluation of Chinese Government Economic Policy
* The Chinese government has continued to promote policies controlled by Communist party
rule that endorse private property rights, growing business and trade sectors, coexisting with a
large state owned and run enterprise sector.
China has continued to open its economy to market forces by embracing global economic
China has maintained good diplomatic relations with US, despite political differences.
The Beijing Olympics showcased Chinese achievements in sport, culture, science, technology
and economic development.
* China has the political priority of continuing economic development and social stability.
From 200809 China’s top priority was to maintain an economic growth rate of 8%.
They approved a fiscal stimulus package of US$586 billion to counter the GFC, boost domestic
demand and prevent a rise in poverty.
The stimulus package was focused on building rural infrastructure, upgrading public housing,
expanding highways, ports and airports & accelerating the Sichuan earthquake disaster
China also implemented a loosening monetary policy, cutting interest rates and reserve
requirements for China’s banks.
Problems in domestic economy
* Dualistic economy:
Vast inequality and disparity in the distribution of income and employment opportunities.
Growth and development are very dependent on the Special Economic Zones in S and E
provinces, dominated by MNCs through FDI and technology.
N and W provinces are far less developed and rely on which have low value added agriculture
for income and employment.
2012 GDP PPP in Tianjin: US$14 570
2012 GDP PPP in Guizhou: US$3 100
2008 HDI of Shanghai: 0.908
2008 HDI of Tibet: 0.630
* Political and social instability:
Vast inequality has led to political instability and social divisiveness, with a push for democratic
and economic reforms to be implemented by the Chinese government to reduce inequality.
There are widespread peasant revolts in China over a lack of health and education services,
low incomes and a lack of freedom to migrate to cities with opportunities.
Peasants also resent the one child policy because it limits personal freedom and infringes on
tradition and culture.
* Inflationary pressures:
High rates of economic growth has led to continual inflationary pressures.
In 2007 and 201011, high inflationary pressure led to implementing a tighter monetary policy to
raise interest rates and tighten controls on lendings to reduce demand pressures and
speculative activity in the stock and real estate market.
* Agricultural reform:
China is looking to improve the performance of the agricultural sector by establishing a land
rights system, greater funds for farmers and freedom to migrate to cities for work.
* Reform of the financial sector:
There are a large number of nonperforming (almosting default) loans to state owned
enterprises (SOEs), with investment funds not earning market rates of return.
It is difficult for the government to achieve the privatisation of banks and and the broad reform of
the wider financial sector 9e.g. access for foreign banks).
Needs more efficient payment systems (e.g. foreign exchange, electronic funds transfer, ATM
* Reform of fiscal policy:
There is widespread tax avoidance and an ongoing problem with budget deficits.
Tax reforms and more efficient spending programmes (e.g. cutting subsidies to SOEs) are
* Reform of SOEs:
SOEs are inefficient and are heavily supported through subsidies and loans from the central
bank (People’s Bank of China), increasing budgetary pressures and inflation.
Over half of SOEs recorded losses, outstripping the profits made by the other SOEs.
Bureaucratic corruption with decisions being made for personal gain instead og economic
* Infrastructure development:
Due to rapid economic growth, domestic freight and logistic systems have been pressured
This leads to bottlenecks (limited by resources) in movement of goods and services.
In adequate electricity production capacity and distribution places a limit on Chinese
Social infrastructure (e.g. transport, electricity, schools, hospitals) are poorly developed in
some parts of China.
* Legal infrastructure:
Commercial laws and regulations need to be implemented to protect private property rights,
investors and creditors.
Environmental laws are needed to protect the environment and eliminated corruption in
corruption in government and bureaucracy.
* Social security reform:
China needs a large social security system with unemployment benefits and pensions (to deal
with the ageing population).
The lack of social security is one of the main reasons for the high savings rates and relatively
In 200910, the Chinese government announced that $120 billion of expenditure will go towards
providing basic healthcare to 90% of China, in part to discourage excessive precautionary
China has been ‘pump priming’ the economy to keep GDP growth running at close to 8%, to
keep the unemployment rate rising up too fast.
China’s unemployment rate seems steady at around 4%.
However, China’s official unemployment rate is unreliable, not counting the estimated 10 million
workers made redundant due to failed SOEs and unemployed peasants in rural areas.
* Reforms of the labour market:
Household Responsibility System in China restricts the freedom of people to move from rural
areas to city areas.
It is an inefficient use of labour resources since allocation is not responsive to the forces of
demand and supply in the labour market.
There is a lack of OHS regulations, exposing workers in dangerous industries to unnecessary
accidents and health risks (has led to thousands of deaths and injuries).
Exploitation of workers through underpayment/non payment of workers. In some cases, child
labour has been exploited to meet orders and generate higher profits.
The Chinese economy should move away from investment and export driven growth to
sustainable and non inflationary growth generated by stimulation of household consumption and
Regionalisation, rather than globalisation was seen when during the GFC, countries with high
savings and current account surpluses such as China was able to insulate themselves from the
effects experienced by countries with low levels of savings and current account deficits.
As China continues to grow rapidly, being the second largest producer and consumer of energy
after the US, China must continue to invest in and secure energy resources projects & increase
development in the use of renewable sources of energy to reduce pollution.
Statistical analysis of impacts of globalisation are dominated by the rising economic power of
China, since China has the largest population.
The rise of China is a major structural change in the global economy that has been occurring
concurrently with globalisation.
Trade has been central to China’s rapid growth as exportoriented manufacturing industries has
led their rapid industrialisation.
China’s growth is also assisting with globalisation as it deepening trade and financial links
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