People’s Republic of

China

April 8, 2014
ECON 3331
Sean Gallagher
Wells Brewer
 Introduction
China:
Capital - Beijing
Language - Mandarin, Cantonese
Government System - Communism
Economic System - Socialistic/ Free Market

United States:
Capital - Washington D.C.
Language - English
Government System - Democratic Republic
Economic System - Free Market
 Timeline

221 BC 1911 1949 Now

Imperial China Republic of China Peoples Republic of China

Notable Dates

1971 Accepted into the United Nations

1978 Economic Reforms Started
2001 Became apart of the World Trade Organization
2010 China has 2nd largest Economy
2012 The economic growth of china began to decrease
 Fiscal Policy
 Set by government of China primarily parliament

 “Proactive” fiscal policy is officially what the

government is supporting

 This can be translated as a moderate expansionary policy

that creates demand and stimulates the economy primarily
by expanding domestic demand

Source: China Daily

 Monetary Policy
 Set by People’s Bank of China

 “Prudent” monetary policy

 The goal of a “prudent” monetary policy is to maintain

price stability, as it usually means a relatively
expansionary monetary policy when the economy turns
sluggish or a relatively tight monetary policy when the
economy shows signs of expanding too quickly

Source: China Daily

 “Healthy” GDP Growth Rate
When considering where the healthiest growth rate occurs,
multiple points of intersection involving the highest economic
growth rate while still maintaining acceptable price stability
and a natural rate of unemployment are the essential elements.
These are important elements of the growth rate:

real GDP growth rate

GDP PPP($) growth rate
real per capita GDP
per capita GDP PPP($)
 United States China
 Healthy Growth Rate  Healthy Growth Rate
7.5 %
3%
 GDP (PPP)
 GDP (PPP) $13.37 trillion
$16.72 trillion
 GDP per Capita (PPP)
 GDP per Capita (PPP) $9,800
$52,800
 A “Healthy” 7.5%
 In comparing the historical inflationary percent changes with the GDP
growth rate changes, we see that the acceptable price stability occurs
around the GDP growth rates of 7-9%

 The next piece that we must look at is the per capita GDP PPP ($). By
calculating the percent change from year to year, we have determined that
growth of 9.3% occurred in per capita GDP PPP ($) from 2012 to 2013.
This is a good example of the per capita GDP PPP ($) increasing at a high
rate while having acceptable unemployment

 In these years, if the real GDP growth rate was closer to 7.5%,
unemployment at around 4% and inflation was relatively stable, the
economy of China would have been healthiest
Sources: CIA World Fact Book,
Index Mundi
 GDP by Sector

United States China

 Agriculture: 1.1%  Agriculture: 9.7%

 Industry: 19.5%  Industry: 45.3%

 Services: 79.4%  Services: 45%

Factors that must be considered in determining
the healthy unemployment rate are:
 Population

 Labor Force

 Labor Force Participation

Rate

 Total Unemployed

 Unemployment Rate

 “Healthy” unemployment rate for

China is 4%
“Healthy” unemployment rate for
United States is 5%
 China’s Population

Labor Participation (Total Population)

China United States
58.83% 48.73%
 Unemployment
 According to the official statistics regarding China, when the
unemployment rate was below 4% there was rapid GDP growth with
increased CPI volatility that hurt overall economic health in the
country. The rate that would best serve China’s economic health is
around 4%, officially

 Again, this is the official statistical conclusion. This can be

extrapolated from the graph measuring from the years 2000-2010
during which time there has been minimal change in the
unemployment rate

 In spite of large changes in other key areas which indicate economic

performance such as GDP growth rate, GDP per capita, CPI, etc.,
the unemployment rate has remained nearly constant over the last
decade. This is cited as an unreliable statistic
Sources: CIA World Fact Book,
International Monetary Fund
 Possible Issues with
Unemployment Statistics
 The direct method of data collection, corruption by the National
Bureau of Statistics, and the use of the registered unemployment rate
(RUR), as opposed to the unemployment rate (UR) are all highly
criticized elements of China’s unemployment statistics

 China also has a massive migrant worker population estimated at

around 260 million. The inclusion of these workers in the normal
employment statistics can create inaccuracies when comparing it with
other countries’ numbers Sources:
Bureau of Labor Statistics
China Economic and Security
Review Commission Staff
Research Project

Demystify the labor statistics in China

Fang Cai, Yang Du, Meiyan Wang
China Economic Journal
Vol. 6, Iss. 2-3, 2013
 Problems with Aging Chinese
Population and Labor Force
 Shrinking number of people entering into labor force

 Growing number of the aging in the labor force

 In 2010, there were 110 million people 65 and above in China; by

2030, the number will be more than 250 million. By 2050, 25% of
the population will be over 65

 The One Child Policy which came about in 1979 is largely

responsible for these problems with the labor force

 Rural area working environments are also improving causing large

numbers of potential migrant workers to stay nearby for work, thus
dwindling the urban labor force even further
Source: CNBC: China's Aging Population Threatens Its Manufacturing Might
 “Healthy” Inflation Rate
A “healthy” inflation rate can be determined by analyzing a number of
factors including:
Consumer Price Index
Producer Price Index
Money Supply
Inflation Rate

These factors should be used to arrive at an inflation rate that is stable yet
allows for maximum economic growth.

“Healthy” inflation rate for China is ≤ 2%

“Healthy” inflation rate for the United States is ≤3%
 Inflation
 Government of China can manipulate the rate of inflation by
setting monetary policies

 Due to the added volatility resulting from the financial crisis in

the late 2000’s, the Chinese government has looked to focus
largely on stabilizing the rate of inflation through its monetary
policies
 This chart demonstrates the slowing rate of inflationary growth in
China by measuring the percent change in the CPI.

 From this, and by analyzing the historical trends in GDP growth rate,
we can conclude that the healthy rate of inflation is around 2%. At
this rate, arbitrary redistributions of incomes and wealth will be
minimized while growth and consumption will continue to expand

Sources: CIA World Fact Book,

Index Mundi
Sources: Trading Economics
and U.S. Federal Reserve
 Changes in Spending
 One of the primary goals of both the monetary and fiscal policies in China
is to produce a shift away from an investment led GDP towards one driven
by consumption. This is referred to as “re-balancing”.

 Currently, investment spending accounts for more than 50% of economic

output

 These investments come largely from the state. Again, the goal is to
increase domestic consumption primarily through bolstering and enhancing
the service sector.

 The policy makers are accomplishing this by incrementally making credit

more expensive through raising interest rates, which the government has
the power to do in China

 In the United States, the market sets the interest rates, so this level of direct
control is not feasible here
 Implications of current artificially set
interest rates
 Because of China’s
central ability to set
interest rates, low rates on
both savings and loans
can simultaneously exist.

 As a consequence, nearly
39% of GDP is spent by
businesses paying interest
on loans. Inevitably,
businesses will seize
making a profit if this
policy continues for too
long.
 Exchange Rate
1 USD = 元 6.21 Yuan
 Determining factors when considering flows of foreign trade
and investments for both the United Sates and the People’s Republic
of China

 Exchange Rate  Exports

 International Trade  Imports

 Current Account Balance  External Debt

 Foreign Direct Investment Flows

  China has the world largest surplus

 The United States has the largest deficit

Source: IMF
 Export Trade Partners
United States China
Canada 18.9% Hong Kong 17.4%

 Mexico 14% United States 16.7%

China 7.2%  Japan 6.8%,

Japan 4.5% South Korea 4.1%

These figures represent a

percentage of total exports
for the country
 Export Goods
United States China
agricultural products
(soybeans, fruit, corn) Electrical and other machinery

 industrial supplies Data processing equipment

(organic chemicals)
Apparel
capital goods
 Radio telephone handsets
(transistors, aircraft, motor vehicle
parts, computers,
Textiles
telecommunications equipment)
 Integrated circuits
 consumer goods
(automobiles, medicines)
Sources: CIA World Fact Book,
U.S. Census Bureau &
Index Mundi
 Currency Manipulation
•A major concern with China is that its currency
is intentionally kept low by the government
through the stock piling of foreign reserves, so
that Chinese exports can have an advantage over
countries exports.
 Import Trade Partners

United States China

China 19%, South Korea 9.4%

Canada 14.1%, Japan 8.3%,

Mexico 12%, Taiwan 8%,

Japan 6.4%, United States 7.8%,

Germany 4.7% Australia 5%,

These figures represent a Germany 4.8%

percentage of total imports for
the country
 Import Goods
United States China
agricultural products electrical and other machinery,

industrial supplies  oil and mineral fuels

 crude oil
machinery components
 capital goods
 (computers, telecommunications optical and medical equipment
equipment, motor vehicle parts,
office machines, electric power metal ores
machinery)
motor vehicles
consumer goods
(automobiles, clothing, medicines,  soybeans
furniture, toys)
Sources: CIA World Fact Book
U.S. Census Bureau &
Index Mundi
 Investments

Unites States China

Domestic: $2.815 trillion Domestic: $1.344 trillion

Abroad: $4.854 trillion Abroad: $644.2 billion

China’s Foreign Direct Investment –
Net Outflows (% of GDP)

Source: Trading Economics

China’s Foreign Direct Investment-
Net Inflows (% of GDP)

Source: Trading
Economics
 Analysis of Foreign Trade and
Investments
China
Establish greater rapport and respect for other countries laws
and policies especially concerning intellectual property and
internal financial regulations to bolster currency’s international
standing
Shift GDP to greater domestic consumption and greater foreign
domestic investment outflows
United States
Reduce external debt, increase financial regulations, reduce
trade deficits via expansion of exports of energy products such as
LNG
 In conclusion
• “Healthy” GDP growth rate
 “Healthy” GDP growth rate for China is 7.5%
 “Healthy” GDP growth rate in the United States is 3%

• “Healthy” unemployment rate

 “Healthy” unemployment rate for China is 4%
 “Healthy” unemployment rate for United States is 5%

• “Healthy” inflation rate

 “Healthy” inflation rate for China is ≤ 2%
 “Healthy” inflation rate for the United States is ≤3%