EFFECTS OF GLOBALISATION ON AN EMERGING ECONOMY

STRATEGIES FOR CHINESE ECONOMIC GROWTH (1978 -2015)

1. OPEN TO THE WORLD POLICY (1970S)

The year 2015 marks 37 years since China embarked on a proves of social and economic reform designed to improve the
quality of life of the population, and open the economy to global integration.

 Allowing foreign companies to come into China

 Changing from a centrally planned system that was largely close to international trade, to a socialist market
economy (market economy with Chinese characteristics) that now has a rapidly growing private sector
 China has also exploited the benefits of greater involvement in the world economy by actively pursuing increased
foreign trade and investment
 Since 1978 agriculture has been privatized, prices gradually liberalized, and state enterprises have since experienced
autonomy
 A diversified baking system and stock markets have been established and the non-state sector has grown rapidly
 Modernisation of the Chinese economy such as agriculture and manufacturing

2. 5 YEAR ECONOMIC PLANS (1970S-2015)

China uses 5 year economic planning cycles to map strategies for economic development, set growth targets and launch
social and economic reforms for the entire country. The economic plans are developed by the Communist Party of China and
are government-planned direction of the economy. The 5-year plan that initially embraced globalisation was the fifth plan
(1976-1980). It called for greater modernisation of the Chinese economy and greater opening up to the world.

The 12th Five-Year Guideline (2011-2016)

 Shift away from the export-led sectors to increasing domestic consumer demand
 Raise income to allow all Chinese residents to benefit from national growth with a specific focus on providing
resources to rural areas in order to raise income in the countryside  increase in GNI
 The creation of coastal hubs of research and development, high end manufacturing (ETMs) and services to replace
simply transformed manufactures
 Modernisation of the Chinese agricultural sector with foreign firms being invited to invest in modern agriculture and
environment protection industries
 Relaxation of the One-Child Policy to a Two-Child Policy
 Greater deregulation of the financial sector to make it easier for consumers to borrow and for foreign investment

The GFC revealed the weak domestic consumption “engine” of the economy as a significant structural weakness. This is a
significant change for China. Increase in wage costs due to higher incomes will impact on export leading sectors, as well as
contributing to cost push inflation. China needs to balance the inflation threats with increasing domestic demand while
maintaining export sectors.

3. TRADE POLICY

 Comparative advantage: cheap labour (agricultural based)

 Linked to ODP
 Attracted STMs from world then rural labour to work in the SEZs because comparative advantage in terms of STMs
 Main focus initially was to develop key export industries particularly in manufacturing (STMs) by establishing
Special Economic Zones in key coastal regions such as Shanghai, Guandong and Fujian provinces
 Tax concessions and lower environmental and labour regulations attracted FDI
 Key focus was to make China “the factory of the world”
  China gained membership to the WTO – reducing barriers to trade – in 2001, allowing China access to multilateral
and bilateral trade agreements with many countries
 China has used bilateral agreements to expand trade and investment around the world
 The access to decrease protection and China’s comparative advantage in labour production costs allowed for
greater exports to the rest of the world
 Currently the trade policy aims to attract foreign investment in higher technology industries and the services sector

4. INVESTMENT POLICY – A REBALANCING ACT

 Attracted TNCs (manufacturing –STMs)

 Increased technology, financial flows and labour flow from rural/ countryside

A key problem faced by the Chinese economy was the lack of investment needed to modernise key areas of the economy.
Building domestic investment required higher levels of income that was no sufficiently available in the 1970s so foreign
investment was encouraged (but through joint ventures with domestic Chinese firms) along coastal SEZs. In conjunction
with the trade policy, investment increased particularly in simple transformed manufactures.

Currently FDI and fixed asset investment is being sought particularly in:

 Modernising agriculture
 Establishing high technology industries
 Becoming blueprints for the redesign of state owned enterprises – making it more private owned, major
companies are currently owned by the government
 Establishing production in less developed provinces

Furthermore restrictions on private investment in fields that are present monopolized by the State are currently being
removed, in an attempt to develop the private sector and the flow of investment funds. These include aged health, financial
services and legal services. Chinese enterprises are also being encouraged to invest in and compete for foreign contracts as
a means of stimulating trade and encouraging domestic investment.

The National Development and Reform Commission suggest in 2012 that fixed term investment may reach 24% in 2013 and
should focus on livelihood development, infrastructure and commercial housing. As such over 75% of World Bank loans to
China in 2012 were directed to the central and western regions, the most economically disadvantage. These loans totaled
more than $50.41 billion for 249 projects. The portfolio is concentrated in environment, transportation, urban development,
rural development, energy, water resources management, and human development projects.

5. MICROECONOMIC REFORMS

Corporatization  run like a profit based private company – run like western companies through TNCs, through ODP

Microeconomic reforms seek to make the Chinese economy more responsive, productive and competitive in a global
economic environment.

 Currently Chinese government owned SOEs are either major players or hold monopolies in key areas of the
economy
 This reduces competition which causes innovation and efficiency to fall
 As such China is attempting to establish management systems of state owned assets that reflect modern best
business practices – otherwise known as corporatization
 Eventually the microeconomic reforms may push SOEs to become privatized

Innovation

In the past China has succeeded by producing low cost, low quality products using its comparative advantage of low cost,
low skilled labour. The challenge is to redirect production towards innovative, high tech industries.

Government monopolized industries such as telecommunications; civil aviation and power are thus undergoing significant
reform. The GFC provides an impetus and offers China a valuable opportunity for reform. There is a need to upgrade Chinese
industry and limit development in capital intensive and high pollution industries, and seek high value added industries rather
than those without a competitive advantage or ability to innovate.

Financial reform

The financial system continues to undergo considerable reform in an attempt to encourage investment, as well as to meet
consumer credit needs in an increasingly market oriented economy. The GFC illustrated how China’s ODP made is more
vulnerable to external shocks.

It led China to adopt policies to bolster SMEs. This was achieved via a requirement for major trading banks to organize loans
and credit facilities for SMEs. Access to credit will be an important stimulant of consumer demand, particularly for large
assets such as home and vehicles. This will become especially important, as increases in domestic consumption must
counter the fall in exports as a result of the global downturn. The Chinese government is also slowly opening the yuan to
the market allowing international investors to buy and sell the yuan. Initially this will occur in the Shanghai SEZ in 2013.

Rural land reform

The Government was compelled to turn attention to rural land reform in 2007. Of the 500,000 acres of arable land lost each
year to construction projects and urban development, approximately 1.3 of these seizures are illegal. Leadership at town
level has unscrupulously pursued GDP growth and urban development at the expense of arable land preservation. Local
governments have been ordered to restrict the amount of land conversions for urban developments. The new round of land
reform supports agricultural production and aims to protect farmers from illegal seizures.

Welfare reform  social development increases (positive)

The current 5-year guideline will modify the household registration system (called hukuo), which is responsible for
everything from pensions, unemployment benefits and social benefits. The reforms seek to establish a safety net for people
who are low income and generally do not benefit from economic growth

Relaxation of the One-Child Policy  limited population growth by 400m

China’s ageing population and a gender imbalance has caused a fall in the supply of labour causing waging to increase but
also consumption to decrease and a diminishing proportion of tax paying workers supporting aged and retired people. The
easing of the OCP to a TCP is meant to increase the availability as well as consumers in the future – government subsidises
love hotels.

THE THREE KEY DRIVERS OF THE CHINESE ECONOMY

EXPORTS

Focused from a closed domestic economy to an export oriented economy based on China’s comparative advantage of lower
wages and cost of production. These initial forms of exports were STMs consisting of mass-produced low profit products
that could be put together by low skilled workers. Exports are now focused on ETMs that create a more skilled workforce
and generate higher levels of profit. The problem with heavy reliance on an export-oriented economy is the exposure to
changing international business cycles.

 Developing export oriented country

- Trade surplus comprised on 7% of GDP in 2007
- Initially focused on STMs by using economic advantage of low wage labour
- 2010-2016 export has become volatile
- US, Europe and Japan were in a recession and as China relied on exports, they become more volatile during the
GFC

INVESTMENT

 Investment by foreign firms

Economic growth in China was accelerated by making it easier and more attractive to invest in China. Attracting FDI solved
the lack of capital and technological expertise at the domestic level and mandatory joint ventures with Chinese firms will
allow domestic firms to absorb some of the expertise. Foreign investment was used to increase exports from these joint
ventures as well as to provide employment and access to goods and services from which to develop the Chinese middle
class consumer.

- The lack of capital and technological expertise at the domestic level was solved through direct foreign
investment (using mandatory joint ventures with Chinese firms)
- No investment prior to the Special Economic Zones (before 1990s)  brings TNCs, technology, finance
- Emerging from 1994 – 2010
- Proto-advanced from 2010-2014 onwards  does no attract foreign investment because labour is too
expensive
- Foreign investment was used to increase exports from these joint ventures as well as to provide employment
and access to goods and services from which to develop the Chinese middle class consumer

 Domestic Investment

Domestic investment initially occurred through the government. Revenue from trade surpluses as well as access to foreign
debt allowed the Chinese government to modernise the country through infrastructure and housing projects as well as
invest in education and health. This improve the productivity of the economy as well as increase the quality of living. As
income increased, so did wealth and individuals and firms began to invest domestically, which increased the funds available
for other firms to use as investment  increases financial stability.

- Increased taxation due to trade surpluses as well as foreign debt borrowing has allowed the Chinese
government to modernise the country through infrastructure and housing spending as well as investment in
education and health
- Domestic Chinese firms were able to utilise foreign technology, foreign expertise (labour) and foreign
investment to modernise Chinese production methods

CONSUMPTION

 Domestic Consumption
- The long term goal is to develop away from the main reliance on exports and instead develop a Chinese middle
class of consumers (in order to minimise the effects from the international business cycle)
- Chinese middle class could be as big as 300m

INCOME EXPENDITURE DIAGRAM

These strategies for economic growth work well when there is sustained demand for the products and services that are
exported to overseas countries (2000 -2007). The diagram above summarizes the effects of these strategies on the Chinese
economy. Expenditure of resources through government spending and foreign investment are allocated to the
manufacturing sector, which increased demand for labour. This decreases unemployment while increasing wages and thus
consumption. This also causes exports to become cheaper. Investment in manufacturing also requires investment in
infrastructure such as roads, bridges and railways, which contributed to the modernisation of China. The cumulative effect
of these various expenditures is the increase in national income or economic growth. Expenditure involves TNCs building
factories and hiring and training workers while National Income is I + G + (X –M)

EFFECTS ON CHINESE ECONOMIC GROWTH AND DEVELOPMENT

Quantitative economic growth 1970s to 2015

The use of the strategies by the Chinese government to develop exports, foreign investment and consumption has allowed
the Chinese economy to focus on rapid growth by continually growing at an average rate of 10% in the last 20 years. This in
turn has positively affected unemployment, levels of income, trade in goods and services, foreign investment and
consumption.

The effects of globalisation have increased China’s GDP per capita from below US $500 in 1978 to almost US $3500 by 2013.
GDP per capita at price purchasing parity has also increased from around US $500 in 1980 to almost US $8000 in 2013. This
increased purchasing parity suggests an improvement in the standard of living in China as the purchasing power in the
economy continues to grow leading to increased domestic consumption in 2013.

Effect on employment

Quantitative growth has seen the number of employed persons significantly increase from less than 400,000,000 in 1978 to
around 767,000,000 in 2012, as transnational corporations that were being established in SEZs needed workers. Workers
were also needed in government infrastructure projects and the increase in service industries such as retail due to higher
rates of domestic consumption.

The significant increase in employment was caused by labour market reforms in the late 1980s, which change how labour
was allocated in the Chinese economy. It allowed private firms more say on how many workers to hire and at what wage
rate. The effect was that 147 million farmers were able to move to cities in order to work in manufacturing sector and hence
increase their level of income and standard of living.

Labour market reforms through the 5-Year Economic pans, ODP and
microeconomic reforms has allowed for a greater supply of labour to become
available such as the 147 million rural migrants who are allowed to migrate the
cities. The increased supply of labor allowed wages to become lower, which
attracted FDI that looked for the lowest production costs. This allowed
Chinese made products to be produced at lower costs and thus made Chinese
exports cheaper than other exports, thus driving the export sector of the
Chinese economy.

The quantitative growth created by labour market reforms and the

investment, trade and open to the world policies has meant that while the number of employed persons has consistently
increased from 1978 to 2013, the number of job vacancies has also increased (but at a slowing rate) as foreign investment
continued to be attracted to China. This is a key component of maintaining economic growth according to Okun’s law.

Thus the increase in the persons employed and in job vacancies has translated to continuing low unemployment rates that
have averaged around 4% up to 2012 due to increased demand for labour from SEZs, government infrastructure projects and
increased consumption. In particular we can see the effects of the combination of investment, export and consumption
strategy had during the GFC, which managed to limit unemployment to a high of only 4.3%. As of 2013, Chinese
unemployment has continued to fall, but as Okun’s law suggests, China will need to ensure economic growth remains about
7-8% in order to prevent an increase in unemployment.
An effect of global integration is exposure to regional and international business cycles. We can see that the Chinese
unemployment rate has been affected by changes to the international business cycle. Unemployment has increased due to
the Asian Financial Crisis in 1999/2000 and the GFC in 2007-2009. This has been exacerbated by the reliance of the Chinese
economy on export driven growth, which is particularly vulnerable to international downturns. However since GDP growth
is still outpacing the unemployment rate, the Chinese economy is still experiencing an upswing but at a slower rate.

Effects on the level of income

The main cause for the increase in wages has been the increase in demand for labour in the manufacturing sector. As such
wages for manufacturing has exponentially increased from 1978 to 2013 and so the average yearly wages has mirrored this
increase. This in turn signifies an increase in the standard of living particularly for the 146 million rural to urban migrants
since higher levels of income can allow higher levels of consumption, savings and access to health and education.

However an increase in the level of income also means an increase in the cost of labour, the major cost of production in
China. This will have the effect of making Chinese produced goods and services more expensive and less competitive than
foreign goods and services. In this way China finds itself at a crossroad – in order to rebalance the economy by increasing
domestic consumption, wages have to increase. But by increasing wages, Chinese exports become more expensive and may
discourage foreign investment thereby decreasing the export driven economy. Increasing income is necessary in order to
improve the quality of life particularly in the poorer provinces of China, thus decreasing inequality.

Effect on consumption

The level of wages in China has increased due to globalisation. Including the level of taxes that needs to be paid, the level of
disposable income or the actual income that can be consumed or saved has still significantly increased ever since the
Chinese economy was opened up to the rest of the world. Globalisation has thus allowed for greater domestic consumption
and/ or savings to occur.

As a function of income, Chinese consumer spending has grown strongly since 1978. Interestingly the growth in consumer
spending has mirrored the growth in the disposable income suggesting that Chinese consumers are becoming an
increasingly important part of the Chinese economy. It is this increased level of consumer spending that the Chinese
government aims to maintain since any increase in domestic consumption will offset any decrease in the level of exports.

The other function of consumption is the level of savings, While Chinese domestic savings has traditionally been high, we
can see that recently from 1992 to 2012, the level of domestic private savings has somewhat fallen. If we compare the level
of consumer spending the previous graph to the level of consumer savings in the graph below, we can see an inverse
relationship forming – as the level of Chinese consumption increases, then the level of domestic savings has fallen.

This suggests that a shift in the Chinese economy is starting to form as domestic consumption becomes more important
after 2013. It can be seen that the Chinese government has attempted to influence the level of consumption by generally
pursuing a loose monetary policy by decreasing interest rates. This would slow savings and generally encourage greater
consumption.

Effects on the level in trade of goods and services

Globalisation and the ODP, trade and investment policies and the creation of SEZs had the effect of increasing the total
value of exports since 1978. While the long term trend shows an overall increase in exports, the actual year on year change
sows that since 2001 when China joined the WTO and became more integrated with the rest of the world, Chinese exports
have become more vulnerable to changes in the international business cycle.

The initial push for exports through ODP and SEZs have been low value STMs and this correlates with the increase in the
number of employed persons particularly 147 million farmers migrating to urban centres. However the focus on low valued
exports has meant that the creative and innovative part of the Chinese economy has remained largely undeveloped and
ETMs are only just starting to become a larger component of the manufacturing sector. This is due to the lag effect of
educational attainment since ETMS require higher levels of skills and education and the effects of government investment
into education is only finally starting to be felt throughout most of China. As China continues to invest in economic
development particularly in education, then ETMs will become the main source of exports.
Trade in the export of services has only been a small proportion of the Chinese export economy. This is due to the focus on
rapid quantitative growth based on mass produced low skilled, STMS. Since services require an educational system based
more on specialised education and encouraging creativity, it will take China longer to compete with exporting services. This
is an identified weakness and is being addressed in the 12 th year economic guidelines and in microeconomic reforms in
education.

While the volume of exports has increased, a problem for China is that by relying on an export strategy for economic growth
has exposed itself to IBC. As the Chinese workforce becomes more skilled, this would increase cost of labour and make
exports more expensive. The balance of trade measures the levels of exports compared to the level of imports. While
Chinese balance of trade has on average stayed above zero meaning that it exports more than it imports, we can also see
that China is also heavily affected by downturns in the IBC. The continuing downturns in Europe and the US until very
recently have caused China’s balance of trade to fluctuate. In late 2013 exports have again began to increase as conditions in
the US and other major export destinations has improved.

The uncontrollable external fluctuations and the increasing costs of manufacturing in China have forced the Chinese
government to reconsider focusing purely on an export strategy for growth. The rebalance in the Chinese economy then
means drawing down and instead focusing more resources on developing Chinese domestic consumption through foreign
and domestic investment.

Effects on the level of foreign investment and TNCs

Since 1978, but particularly after joining the WTO in 2001, China has actively encouraged FDI and TNCs in China. A UN report
confirmed that China is now the top recipient of FDI, overtaking USA. The capital influx has fuelled strong growth in China’s
manufacturing sector, assisting in China’s high-sustained economic growth rates.

Many jobs that would previously have gone to Indonesia or Philippines have gone to China. Even Mexico, a source of cheap
labour, has lost 320,000 jobs to China since 2001. While cheap labour in China attracts FDI, as labour costs rise, the attraction
of China as a FDI destination lessons. We can see this in the increase in the level of wages particularly in manufacturing. The
effect is that as the cost of production increase; the manufacturing and services jobs are now flowing back to lower cost
countries such as the Philippines, Indonesia and Mexico.

Investment is encouraged by the government and was a key driver of the economy’s growth after trade and domestic
consumption stalled as a result of the GFC. Investment funding is now directed to rural areas as well as the central and
western provinces. This is evidence of the government’s desire to address investment and growth deficiencies in the more
isolated and resource poor provinces. Much investment is also directed at the completion of urbanization projects that are
seen as essential to future growth.

An increase in expenditure by foreign direct investment has the effect of increasing aggregate
Refer to income expenditure diagram.

supply. This encourages greater employment of resources such as labour, which increases the national income. More
workers with higher pay then encourage greater consumption.

China’s annual FDI inflow in 2013 fell for the first time in three years. However, China retained its position as the world’s
most attractive FDI destination drawing $111.7 billion FDI in 2012. Despite the general decline in 2013, provinces in central
zones saw a net increased in FDI of 18.5%. The key eastern coastal areas, which account for more than 82% of China’s total
FDI, saw a decline of 4.2%. Western zones regions saw a decline of 14.3%.

Investment inflow from the EU declined by 3.8%, which was not unexpected amid solvency problems, while FDI from the US
rose by 4.5%, and from Japan a surge of 16.3% was recorded. Last year, China’s manufacturing sector reported a 6.2%
decrease in FDI. Despite this, China has not seen a massive relocation of foreign businesses as foreign companies in labour
intensive industries seek cheaper emerging economies.

Effects on economic development: 1978 – 2015

China’s market oriented reforms over the last 35 years have dramatically improved the performance of both the rural and
urban economies and resulted in substantial improvements in a range of human development indicators. In general, adult
literacy levels and educational attainment, access to improved water and sanitation have all increased while the infant
mortality rate has fallen.
Movements in China’s HDI shows that significant increase in the general quality of life in China has occurred. By 2012 the HDI
has increased to 0.687. However, improvements in the quality of life are not consistent across the country. Urban residents,
those who live in the eastern coastal provinces, in general, enjoy a superior standard of living. Just as all regions of China
have not experienced economic growth equally, not have the benefits of growth in terms of economic development been
equal.

Since the commencement of reforms in 1978 and the subsequent ODP period, one of China’s greatest achievements has
been the reduction of large-scale poverty. Since 1979, over 300 million people have been “lifted out” of the US $1 a day
poverty measure. However, remote and resource poor areas in the western and interior regions still have consumption
levels below $1 per day, often without access to clean water, arable land, or adequate health and education services.

In January 2013, the National Bureau of Statistics released an official Gini coefficient result for China for the first time in a
number of years. The Gini index ranges from 0 to 1, with the 0.4 mark viewed by most economists as the point at which
social unrest may become a significant issue. The official statement by the Chinese government revealed that the 2012
coefficient stood at 0.474. While this was a decrease from the previous year and also from the 2008 peak, it is an indication
that the wealth gap remains “relatively large” and according to the government “demonstrates the urgency for China to
speed up reform of the income distribution system to narrow the poor-rich gap.”

The Chinese government admitted that China “should improve its efforts to divide the cake”. China has 2.7 million
millionaires and 251 billionaires ($US), yet 9.9% of its people live on less than $1 per day according to UN. In 2012, the richest
30% of population claimed 84.6% of income. By contrast, the poorest 30% of the population had an income share of only
6.9%.

China has witnessed a growing division between the prosperous cities and the impoverished countryside since the early 90s,
while lower income city residents have been left out of a property boom has benefitted many since the housing market
emerged in the late 1990s. The Chinese government data shows that there is a three fold income gap between rural and
urban areas while a four fold gap exists between workers in the most profitable industries (e.g. IT/ real estate) and those in
the less lucrative areas of production (e.g. agriculture) and the visibility of these vast disparities is a source of tension and
potential unrest.

The Chinese leadership’s insistence that economic development is a priority is not just rhetoric. This is a very real concern
that China’s economy is becoming more polarized and one of extremes. Economic divergence has the potential to cause not
only economy but social problems. Official Chinese data showed that in 2012, China’s urban residents saw their per capital
real disposable incomes increase 9.6%, bringing an average income to 24, 565 wan ($3, 912). Rural residents’ per capital
income climbed 10.7% to 7,917 yuan ($1260) in 2012.

The GDP provincial growth rate above shows that the highest GDP growth rate is occurring in the poorest provincial regions.
This suggests that the Chinese government has increased its expenditure in these regions as well as encourage foreign
investment to modernise these provinces.

Effect on the environment

There is concern that China has pursued unsustainable production methods in its drive for economic growth. While China’s
environmental practices have has successes, sustained high rates of economic growth have impacted on the country’s
natural resources and air quality. Air and water pollution, depletion of soil fertility, deforestation and loss of arable land are
all very real environmental issues.

While only 14% of land is arable in China, each year more than 500,000 acres of this arable land is converted for construction
and urban development projects. Leadership at township level has unscrupously pursued GDP growth at the expense of the
environment. The consequence is maybe that China will become a net importer of food in the future.

The global contraction slowing China’s economy could have had both positive and negative effects on the environment. A
slowdown decreases pressure for energy and resources since there is a correlation between increased environmental stress
and high economic growth rates and high consumption of energy and natural resources. The government could us the
opportunity to downscale high waste high polluting industries. However, as more industries find themselves under financial
stress the government could have come under increased pressure to relax energy and emissions controls to reduce
production costs.
EFFECTS OF ECONOMIC GROWTH ON CHINESE ECONOMIC DEVELOPMENT

Economic growth has led to higher HDI  more developed while HDI has improved overall, economic development in China
has not been evenly distributed

Government Health Expenditure

 Government Health Expenditure as a percentage of GDP has sharply increased

 This has on average led to improved health standards in China

Life expectancy

 Life expectancy has increased due to better access to health, housing and education
 However higher life expectancy has caused the working population to age, promoting the relaxation of the one-
child policy
 Not only are people living longer but child mortality is decreasing across China
 This distribution is unevenly spread
 Poorer provinces are more affected

Educational attainment

 Adult educational attainment has improved particularly for secondary and higher education
 Can see a move from developing  emerging, semi-skilled  skilled workers
 This has had a profound effect on the lives of many ordinary Chinese, particularly in rural areas who now have
greater social mobility due to education
 Over time this will give rise from a lower income to middle class income
 But educational spending varies across provinces
 Many provinces are below the line of average
 Disparity in illiteracy rates between provinces and gender

Income

 Chinese income has grown significantly as foreign TNCs move production into Chinese SEZs
 Thus the growth of urban areas in China rather than rural areas
 Mass rural to urban migration where people seek better job opportunities and access to more social capital
 China is shifting away from an agricultural population to a manufacturing and service based economy (one of the
largest population shifts)
 This has placed tremendous impact on the Chinese government to develop social capital for both rural and urban
areas
 We can see this through an increase in government spending on social capital but the spending has been uneven
across economic development indicators
 Development of Chinese cities in the coastal and central provinces mirrored the growth of SEZs
 These areas become the focus of government investment in social infrastructure rather than non-SEZs

The Chinese Lorenz Curve

 Lorenz curve shows the distribution of income or wealth amongst the different segments of population
 A perfect distribution of income is a 45 degree line
 As a communist system, we would expect the Chinese Lorenz curve to be close to the 45 degree line
 We can see that the distribution of income has been more unequal especially from 1981 (ODP) to 2008
 This is due to the income differences between rural and urban areas
 The small improvement in 2012 was due to increased government welfare for rural populations
 Chinese middle income to upper income earners are expected to increase significantly in urban areas, which will
increase the income inequality with rural areas
 The uneven distribution of income has led to a greater uneven distribution of wealth
 We can see the growth of the Chinese middle class and upper class and how wealth in China is now more uneven
Economic growth has been very beneficial for the Chinese economy. It has allowed economic development to increase
within China to benefit most of society (Chinese government pact with the people). However the spread of economic
development is uneven – this is the focus for the Chinese government in the current and next 5-year plan.

CURRENT ISSUES IN THE CHINESE ECONOMY 2015/2016:

“The New Norm”

1) Investment boom
- Increased investment by TNCs
- Increased demand for employment in SEZs
2) Impact of the GFC
- Falling demand for Chinese exports
- Slow down in FDI in China
- Low domestic consumption

3) Post-GFC Chinese government intervention

- Economic stimulus program injected ~ $600b
- Focused on investment into infrastructure (transport, housing, rural development)
- Intended to stimulate domestic demand

4) Post-GFC period – the new norm

- 60 new infrastructure projects worth $160b
- Focus on investments is over heating the Chinese economy which leads to higher inflation
- Average growth target of 6.5% instead of double digits

 As China’s economy matures and its labour force peaks, it is only natural that its phase of expansion eases (drop
from 10% to 6.5% or 1.9%)
 The slowdown of recent quarters has been cyclical, not structural, reflecting a loss of demand from its export
markets and a weak Chinese domestic economy  Labour is expensive so price of exports increases

Structural: age, population, migration

 In the long term, it becomes a structural problem

- Development has overly focused on manufacturing (especially on export oriented manufacturing) while service
sector is now starting to increase
- This will create a surplus of labour (Okun’s law), leading to an increase in unemployment and a slowdown in
economic growth

The new 5-year plan: 2016 – 2021

 The Chinese economy is entering a ‘new norm’

 Economic growth is 6.5%
 China’s economy will not be rebounding to the double-digit growth recorded in the previous two decades
 Focus on reducing industrial over-capacity (STMs), restructure the economy and shift to an innovation-driven made
(ETMs)

The drivers of economic growth have become more lop sided

 Between 1978 to 2000 (as a % of China’s GDP)

- Net exports: 2%
- Investment: 33%
- Domestic consumption: 46%
 Between 2000 to 2009
- Net exports: 5%
- Investments: 39%
 - Domestic consumption: 40%
 From 2009 to 2015
- Net exports: 3.4%
- Investment: 4.5%
- Domestic consumption: 35%

The use of these strategies presents the Chinese government with two problems:

1) The Chinese economy is suffering from current international cyclical problems

2) There are also present considerable structural problems towards the development of a stronger Chinese domestic
economy which needs more than exports and government investment

THE PROBLEMS WITH CHINA’S EXPORTS AND IMPORTS – TRADE IMBALANCES

 As a current account surplus economy between 2005 and 2007 China accumulated huge trade surpluses (aided by a
devalued Renminbi which made Chinese products more internationally competitive)
 A current account surplus shows an orientation towards greater exports rather than domestic consumption
 The collapse of trade due to the GFC can be seen by the decline in China’s current account surplus after the peak in
2008 was reached
 The GFC cause a collapse in overall international trade and reduced the Chinese trade surplus
 Worryingly for China the trade surplus did not return when the crisis passed after 2010
 Since the crisis erupted in 2008, China’s trade surplus has declined rapidly
 As a percentage of GDP, this surplus net exports jumped from 2% in 2004 to 7% in 2007 and was back to 2% in 2015
 This is due to the destination for Chinese exports which are predominantly to the US, EU, Japan and to nearby
countries
 China’s economy itself depends to a significant extent on the advanced economies (US, Japan and the EU received
44% of its exports)
 As the external demand remains weak, it is more necessary than ever for China to sustain domestic demand and
household consumption
 However exports are only one side of the equation as China is an integral component of the economic growth fo
many Asian and African/ Middle Eastern economies  economic integration -> ASEAN
 China’s trade deficits with Asia come mainly from processing trade – raw materials. As a part of the ‘Asian factory’,
China imports components from its neighbours and exports the produced goods to the rest of the world (i.e.
Chinese consumers do not purchase these imports)
 Ordinary trade is what is consumed by domestic demand while processing trade is imported, transformed and then
exported
 The import side shows two contrasted trends: “imports for processing” remained weak because international
demand remained weak and their share in GDP was down from 12% to 6% by contrast “ordinary imports” (imports
for domestic Chinese consumption) rebounded quickly as the stimulus plan launched late 2008 boosted domestic
demand  GFC $600bn

China’s economy sharply contracted during the GFC so as a result in the next 5-year economic plan, China will rely less on
exports and focus on internal sources. The problem is that as soon as the effects of the Chinese stimulus program wear off,
imports of ordinary trade (those purchased by Chinese consumers) declined sharply, highlighting a sharper decline in
Chinese domestic demand and possibly affecting global economic recovery.

Pre GFC – China doing very well

GFC – China attempted to maintain growth but couldn’t because of stimulus

Post GFC – Could no longer have high levels of growth so entered the “new norm”, as no one was buying as much

THE PROBLEM WITH FOREIGN AND DOMESTIC INVESTMENT IN CHINA

 Investment – moving to cheaper countries - by foreign companies generally took in two forms
  Investment from process exports: foreign companies established operations in China, imported raw materials and
then exported to their home countries or other overseas markets (open to the world policy)
 Joint ventures to tap into the growing Chinese domestic markets. By making available goods and services to
Chinese consumers (next 5-year plan)
- Foreign companies going into China to sell to Chinese consumers
 Due to modernisation, Chinese labour and environmental costs are rising and the Chinese currency has been
appreciating (up to 32%)
 This has made China less internationally competitive as a source of production for these foreign firms
 Thus investment in process exports by foreign companies have started to decline
 In fact, in certain industry sectors, a process of ‘re-shoring’ – offshoring outsourcing – is occurring where it is
cheaper to manufacture products domestically again for foreign companies
 For instance Ford, general electric and caterpillar are investing once again in plants in the US
 Instead where foreign investment is occurring it is now more focused towards meeting the needs of the Chinese
domestic economy, particularly by producing high and consumer products, to be consumed by Chinese consumers
rather than exported to developed countries
 However this, as a percentage of overall FDI has remained significantly lower compared to process export
investment
 In terms of domestic investment, Chinese firms have faced the same difficulties as that of foreign firms
 Similarly, Chinese firms have focused on the domestic Chinese economy and is helped by lower interest rates
 However where state owned enterprises have a monopoly in the market, investment has been significantly lower
due to the lack of competition
 As significant sections of the Chinese economy is still controlled by SOEs, domestic investment will not increase
until these sectors are not deregulated
 Lastly a significant portion of domestic investment was done by the Chinese government through fixed asset and
infrastructure investment
 This was done as a means to modernise the country by building expressways, canals, bridges, dams and other
infrastructure
 This form of investment also plays a part in helping to boost economic growth through government spending
 Government debt to GDP increase on the back of the stimulus economic plan as well as continuing infrastructure
projects
 As these projects are completed, debt to GDP ratio has begun to decrease
 The declining surplus derived from exports, the appreciation of the yuan and falling foreign and (non-government
domestic) investment was meant that a greater proportion of investment has been borne by the government
 This has meant that in order to stimulate domestic demand, the government will need to keep increasing its debt to
GDP ration which will contribute towards higher foreign debt
 As such this has led to an increase in the budget deficit and possible financial instability if the budget deficit
continues to increase

THE PROBLEM WITH CHINESE DOMESTIC CONSUMPTION

 If China’s domestic consumption cannot rise accordingly to absorb the capacity left behind by the manufacturing
and export sectors there will be problems of excess capacity (Okun’s law)
 Since exports and investment have not been able to drag China out of its current economic woes, there is now the
expectation of domestic consumption as the main vehicle for growth
 Chinese consumer confidence measures the willingness of consumers to spend. It has been volatile since early 2012
and has started to fall in 2015
 It is also longer than pre-GFC trends
 Falling consumer confidence has translated to a continual fall in Chinese retail sales from the beginning of 2012 to
2015 where it is starting to slightly improve

URBAN MIGRATION AND AN AGEING POPULATION

 What this means is that as the population ages, the number of young workers will start to decline leading to lower
number of labour available  relaxing of the one child policy
 The effect will be to increase the cost of labour in China and reduce the cost competitiveness that China currently
enjoys