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Economic condition and monetary and fiscal policy in China

INTRODUCTION

Economy basically means the financial structure of any nation which helps to maintain its position in the comity of nations. Stronger the economy of any nation stronger is its position in the world market. “People’s Republic of China” nowadays is seen as a fast and rapidly growing economic country in the world. Until late 1980’s China even not possessed a reputable standing in the world economy but nowadays it ranks 3rd in the world in terms of GDP. Furthermore, China nowadays plays a significant role in the world’s market and has private sector companies from all over the world. China has steadily growing position in the International economy nowadays. After the commencement of economic reforms in 1978, according to the Official Statistics of China, the poverty rate fell from 53% in 1981 to 2.5% in 2005 [1] . In the 1990s, the Chinese economy continued to grow at a rapid pace, at about 9.5%, accompanied by low inflation rate. China has nowadays obtained huge production facilities and also has advanced engineering plants which are capable of manufacturing numerous ranges of sophisticated equipments, including nuclear weapons and satellites. Today, the economy of People’s Republic of China is the fastest growing economy in the world, after United States and Japan respectively and has a Gross Domestic Product of almost US$ 4.91 trillion [2] . The currency of People’s Republic of China is Yuan also referred as Renminbi(RMB) and is very stable in terms of conversion and the fixed exchange rate for Yuan or RMB is RMB:$ USD= 6.83

ECONOMIC CONDITION OF CHINA:

According to the statistics shown on Wikipedia, the G.D.P of China when computed by International Monetary fund in 2008 was $7,903,235 dollars [3] . The ranking of China’s G.D.P in the IMF list was 3rd and in addition to this; G.D.P growth per year percentage was 8.7% when calculated in 2009 [4] . The G.D.P basic sectors were industry and services with a G.D.P of 46.8% and 42.6% respectively and it was followed by the agriculture sector with a G.D.P percentage of 10.6% [5] . These facts show that China’s economy plays a prominent role in World’s overall economy. As far as the trade of China is concerned, total trade of China in 2006 exceeded $1.76 trillion, making China the world's third-largest trading country after U.S. and Germany [6] . Economic survey produced by the Organization for Economic Cooperation and Development (OECD) in 2005, Chinese exports grew at an average rate of 6% since the mid-1980s [7] . But as described earlier after the economic reforms in 1980 the economy of the country lifted drastically. Although China’s export growth was affected by the global crisis, however China surpassed the United States to become the world’s second largest exporter by the end-2007. After a short period of two years China then took the first ranking in the largest exporter list throughout the world and moreover also is the second largest importer of goods in the world.

ECONOMIC SECTORS OF CHINA:

AGRICULTURE:

China is a foremost and one of the world’s leading producer and buyer of agriculture products. To illustrate we can notice that some 300 million Chinese farmers are working in agriculture industries and most of the people do their labor in the farm which is very small like the size of the U.S Farms. In country almost every cultivatable land is utilized for the food crops. China’s land cultivated for crops is only 75% with respect to U.S cultivated land but still they produce 30% more crops then U.S. Due to this China is the largest rice producer of the world and in addition to this China’s main food crops includes corn, wheat, maize, soybeans, tea, millet, peanuts, tobacco, barley, oilseed, pork, cotton, sorghum, potatoes and fish. These foods are helping China by having a modest proportion in the foreign trade revenue. China is trying their best to advance agricultural production by the help of enhanced plant stocks, fertilizers, applied sciences and technology. According to the United Nations World’s food program, in 2003, China fed 20 percent of the world's population with only 7 percent of the world's arable land [8] . Today agriculture share in overall G.D.P is 13%. China's most important crop; rice is grown up in the southern provinces and many of the plantation here bear harvest two times in a year. As far as wheat is concerned, wheat is significant crop in the Northern provinces, whereas in Central China wheat and rice both are produced in a same ratio. Other crops such as grains such as Millet and Kaoliang are cultivated in the northeast and central provinces also including some of the northern areas. The northern areas also supply substantial quantity of barley. Soybean crop is cultivated in north and north east where as corn such as maize is grown up in the center and north China. Tea certainly is produced in the hilly areas of the south east. Cotton is cultivated widely in the central provinces but a little proportion is also halved by the south east and in the north China. Tobacco main plantation is in the center and southern parts of China.

MINING:

Mining is a significant worthwhile practice of humankind for the betterment of them and transformation of the nature.  At present, China has constructed up to 300 cities or towns founded on mineral mining, which compromised of 26 provinces, independent regions and city councils which excludes only Beijing, Tianjin, Shanghai, Hainan, Tibet, Hong Kong and Taiwan). For example, cities such as Daqing, Panzhihu(in Sichuan), Bayan Obo (in Inner Mongolia), Jinchang (in Gansu), Pingdingshan (in Henan) and Xitieshan (in Qinghai), are designed on mineral resources and are constructed after the large mineral deposits are pledged, and successful mining of mineral resources. The mining cities are possessing over 76% of the natural gas required by the whole country and also supplying more than 90% of the demand for oil and mineral raw materials, continuously upholding the national economy and social development [9] . The major areas of mining are coal, iron ore, crude, crude petroleum, natural gas, antimony ore, tin concentrates, nickel ore, tungsten concentrates, unrefined salt, vanadium and molybdenum. In arranged in order of magnitude, bauxite, gypsum, barite, magnesite, talc, manganese, ore, fluorspar and zinc are also important in minerals. The largest production is of coal with an overall production of nearly 2 billion tons. Following the coal is the mining sector of iron ore with a production of 310 million tons. Proceeding to it is the crude petroleum with a yearly production of 175 million tons. 41 Million Cubic meters of Natural gas are extracted in a year. Antimony ore and tin concentrates are having a production of 110000 tons concurrently. Production of Nickel ore compromises of 64000 tons. Tungsten concentrates and unrefined salt are having an extraction of 67000 tons and 37 million tons respectively, whereas vanadium’s production is 40,000 tons and molybdenum ore extraction is of 29000 tons. Furthermore, China’s has a output of 2,450 tons of silver and 215 tons of gold in 2004. When the mining sector was accounted in 2002 the total employment is the mining sector was only 0.9% but it produced 5.3% of the total industrial production [10] .

STEEL INDUSTRY:

Production of Steel plays in an important role in country’s overall economy and as China is the largest producer of steel in the world therefore Steel industry is consistently trying to grow their production of steel. In 2000 the steel production was calculated to be 140 million tons was tremendously risen up to 419 million tons in 2006. The production is mainly based on the numerous small scale production centre in the country with Anshan being the largest producer overall the country. As far as exports of steel is concerned China holds the first ranking in the largest exporters of steel in the world. Exports when computed in 2008 were 59.23 million tons, compromising of 5.5% decrease from the previous year [11] .

AUTOMOTIVE INDUSTRY:

Automotive production is always having a vital part in country’s economy. China turned into the world’s third largest automotive vehicle manufacturer in 2006 and in addition to this also became second largest consumer of automobiles in the world. After the reforms in China the production of automobiles has ascended greatly. For instance to show the difference in the year 1975 the automobiles manufactured in the country were 139,800 but after the reforms when they were calculated in 1985 automobiles produced annually were having a number of 443,377. This increase kept on beginning and in 1992 the production was risen up to 1.1 million. In the next decade the increase was still consistent and in 2002 the incline reached up to 3.25 million and then stood up to 4.44 million in 2003. The production then increased to 5.07 million in 2004.After only two years China’s automotive country became one of the biggest sectors with a production of 7.28 million in 2006. In 2007 it was predicted that soon 9 million automobiles would be made by and China will become the number one auto maker in the world by 2020. Not only International but also Domestic sales have increased with production up to 7.22 Million automobiles were sold in the year 2006 which also includes the 5.18 million passenger cars and 2.04 million of commercial vehicles. This shows that how prosperous is the China’s automotive industry that they started exporting cars in 1999 and nowadays is the significant industry of the country. In 2004, the famous company Honda was built and it was expected that it will export 30,000 passenger vehicles in Europe by 2005. This company was merely built for the export market. Because of the improvement in the automobile industry the 12 major foreign automotive companies had collaborative plants in China. Their major production was compromising of automobiles such as minivans, sport utility vehicles, buses and trucks. China exported US$4.7 billion automobiles and their spare parts in 2003. In the next year, 78000 units of automobiles were exported and 73,000 units in 2005. Subsequent to this year, in 2006 almost 340,000 units were exported. The forecast is that the automobile and spare parts export would reach US$70 billion by the year 2010. The companies which are becoming well known such as Geely and Chery are consistently appraising the international markets in both developing and developed countries [12] .

MANUFACTURING INDUSTRY:

China is very affluent with manufacturing industry. The manufacturing industry accounts for 49.2% of the total GDP of China [13] . In the rankings of industrial outputs worldwide China ranks third in list.  The main manufacturing includes the iron and steel industries, aluminum products, machinery, textiles and apparel industries. Some other industries in China are petroleum, cement, chemical, fertilizers and food processing. As described earlier China also has a huge automobile industry and in addition has industries in which the transportation equipment for rail cars, locomotives, ships and air craft are manufactured. Furthermore, China possesses industries of consumer products such as electronic and telecommunication devices and components, footwear and toys etc. Government, right from the start has given substantial attention to the industrial development because they want to enlarge their manufacturing sector. The highest preference is given to the machine building and metallurgical industries. Thus these two industries account for 20-30 percent of the total gross value of the output given by industries [14] . In general the industrial output has developed at the average rate of more than 10 percent per year, which exceeds all the economic growth sectors [15] . China in addition, becoming powerful in chemical industry as well and is manufacturing chemical fertilizers, optical fibers, synthetic fibers and chemical plastics. This development has led China to be among the world’s leading producers of nitrogenous fertilizers. As far as consumer goods sector is concerned the principal significance is given to textiles and clothing, and these sectors are playing an important role in China’s exports. The manufacture of textile is growing swiftly and it also includes the production of synthetic textiles account for the almost 10 percent of the total gross industrial output and its getting pompous day by day. The important textile centers are Shanghai, Guangzhou and Harbin [16] 17. The main export sectors of China are machinery and electronic products. Nowadays China is the World’s principal manufacturer of cement, fertilizers, and steel. The industries are not only expertise in machinery and textiles, but also producing good quality pharmaceuticals, software, semiconductors, electronics and precision equipments. Thus China’s manufacturing industry is playing a vital role in China’s economy and the industrial production is prominent in all over the world.

CHINA’S MONETARY AND FISCAL POLICY:

In the past few years, the Government of China is following a uniform fiscal policy to provide money for the construction projects going in China by distributing government debt. At the same time, secure monetary policy has been executed in accordance with fiscal policy. By the help of these policies the general prices and deflation has been controlled. The main instruments of the fiscal and monetary policy are as follows.

MONETARY POLICY:

The People’s Bank of China (PBC) has been working on sound monetary policy, encouraging policy competence. China’s principal money has increased rapidly and the financial institutions standings remained sufficient. The main objective of the monetary policy is to sustain the solidity of the merit of the currency because it is important for the economic growth. The basic policy instruments includes the PBC reserve requirement ration, central bank base, interest rate, open market operation, rediscounting, central bank leading and some other policies specified by the State council. The PBC is trying to use the policies in a flexible mode to modify money supply properly and to maintain a stable growth. Furthermore they are improving the incentives to disburse loans and create corporate governance of commercial banks.

FISCAL POLICY:

Fiscal policy is a contrast to Monetary policy in which the matters of Government’s borrowing, expenditure and taxes are included. In early 2002, due to a very slow global recovery in the economy, the Chinese government resumed to persist with advanced fiscal policy to boost the domestic and international demand. As paying compact attention to the clearer risks due to the rise in the fiscal deficit and public debts, the Chinese government was also aware of the implicit indirect fiscal debts going up from loans in the bank sectors. Due to the fiscal policy after three quarters, fiscal revenue was arisen by 10.9% and there was a 17.6% increase in the expenditure under the budget limits. Due to the factor that the revenue was slow and the expenditure was increasing, it made a little space for more fiscal depict decrease. The main factors in expenditures were due to the continued investment in projects which were funded by government, the investment from western region and innovation of technology. Another reason was the increased investment in agriculture, science and education sector by the government. Thus these factors provided a base for formulating and implementing the macroeconomic policies. [18] 

TAX SYSTEM IN CHINA:

Tax is always stayed a significant public fund and source of fiscal funds of China. Furthermore, Tax in China is an economic advantage taken by the government to fortify macro-economic rules that gives in the output some of the essential influences on China’s economic and social development. Subsequent to the reforms of tax system in China the adjustments took place continuously in the tax system in the following years. Introductorily China built a tax system that contains regulations that can be modified by the socialist market economy. A system which includes important controls in pledging China’s fiscal revenue which broadens the opportunity to outside world and help the country in sustaining, boosting and ensuring a healthy national economy. Basically there are 25 types of taxes, which by their function can be subdivided into 8 categories [19] .

TURNOVER TAXES:

It consists of three types of taxes.

Value Add Tax

Consumption Tax

Business Tax

The degree of these taxes is mainly depends upon the quantity of turnover of sales or the tax paid in the production, distribution or function sectors.

INCOME TAXES:

It includes

Enterprise Income Tax

Income Tax on Enterprise with Foreign Investment and Foreign Enterprises

Individual Income Tax

In the category of Enterprise Income Tax there are certain enterprises on which this tax is applicable such as the private enterprises, joint equity enterprises, etc. These taxes are charged according to the profits earned by the manufacturers, dealers or the profit earned by the individuals.

RESOURCE TAXES:

There are two categories under these taxes.

Resource Tax

Urban and Township Land Use Tax

These taxes are applied to those users committed in exploitation of natural resources or to those who use the urban and town land. The main intention of this tax is to modify the unusual profits extracted by the taxpayers who can use the natural resources such as land, water.

TAXES FOR SPECIAL PURPOSES:

City Maintenance and Construction Tax

Farmland Occupation Tax

Fixed Asset Investment Orientation Regulation Tax

Land Appreciation Tax

Their level of levied is only on special directing objectives.

PROPERTY TAXES:

House Property Tax

Urban Real Estate Tax

Inheritance Tax

All these tax are not levied yet but they depend on the specific purposes for which the property is acquired.

BEHAVIOR TAXES

In this category the taxes that are included are:

Vehicle Tax

Vehicle License Plate Tax

Stamp Tax

Deed Tax

Securities Exchange Tax

Slaughter Tax

Banquet Tax

As clear by the name the levied is done according to the behavior.

AGRICULTURE TAXES

Types of agriculture taxes are:

Agriculture Tax

Animal Husbandry Tax

Both of these taxes are levied on the basis of the enterprises, individuals that have gained profit from agriculture and animal husbandry occupations.

CUSTOM DUTIES:

This tax is enforced on the goods and items that are imported or exported into or out of the region of People’s Republic of China.

INTERNATIONAL TRADE:

As China is the largest market in the world, so China has got a great number of partners for the external trade and commerce. China in this decade has boomed its exports from U$249.2 Billion in 2000 to U$1201.7 Billion in 2009. According to the statistics of PRC General Administration of Customs, the China’s main export destinations in 2009, were United States(U$220.8 Billion),Hong Kong(U$166.2 Billion), Japan(U$97.9), South Korea(U$53.7 Billion),Germany((U$49.9 Billion), The Netherlands(U$36.7 Billion)and United Kingdom(U$31.3 Billion). The chief goods that are exported are electrical machinery and equipment, power generation equipment, apparel, iron and steel. The country also exports furniture, optics, medical equipment, organic and inorganic chemicals etc. As described earlier most of the commodities are exported to United States, Hong Kong and Japan.

As far as imports are concerned China principal import partners are Japan (U$130.9 Billion), South Korea (U$102.6 Billion), Taiwan (U$85.7 Billion), United States (U$77.4 Billion) and Germany (U$55.8 Billion). Not only exports have increased but imports are also pushed up from U$225.1 Billion in 2000 to U$1005.6 Billion in 2009 [20] . The main commodities that are imported are Electrical Machinery, Mineral Fuel and Oil, Power generation Equipment, Ores, Slag, Optics, Medical Equipment. Other commodities are plastics, iron, steel, copper and articles thereof. Thus, China’s total trade to the world when calculated in 2009 was U$2207.2 Billion which shows that China’s markets and industries are developing business cooperation and exchanges with foreign countries. (REFER TO APPENDIX 3)

FOREIGN DIRECT INVESTMENT:

Foreign Direct Investment is a key element in the development of the economy of the People’s Republic of China. As China is a safe and sound destination for investment and similarly the government is trying its best for the economy by opening their market for foreign businesses, therefore they have attracted large numbers of direct foreign investment. According to the Ministry of Commerce (MOFCOM), though the financial crisis is slowing the growth of global economy, but China still is a preferred destination for the foreign direct investment (FDI). About 58-60% of the China’s imports and exports are accounted from foreign-invented enterprises. From 1993 till 2001, China remained the world’s second largest recipient of foreign direct investment after United States. The foreign investment in China kept on increasing rapidly over the past years i.e. China in 1999 received the Foreign Direct Investment of U$39 Billion and in It was risen up to U$41 Billion in 2000. China which is the leading recipient of Foreign Direct Investment (FDI) in 2005 received U$80 Billion of FDI from all over the world [21] . In the next year China’s FDI decreased to U$69.47 Billion which was a significant decrease. In addition, in the end of September 2008 China came over Japan and became the first largest foreign holder of United States hidden securities with a total of $ 585 billion. Thus China, after reforms is trying its best to open up market for foreign direct investment. After the struggles of the government China is nowadays largest recipient of the foreign capital.

CONCLUSION & RECOMMENDATIONS:

CHINA GROWTH SECTORS TO BE ENHANCED:

China has almost done equal level of efforts in every economic sector but still some amendments need to be done in its agricultural sector & banking system to maintain a steady economic growth and to maintain a balance between these policies.

AGRCULTURAL SECTOR:-

The Chinese government although introduced agricultural reforms yet a lot of effort is needed in forestry, agriculture and fishing. Only about 10% are is available as land due to climatic factors and from this more than half is not irrigated. About two third of population inhabits the rural areas. The soil texture also varies. In most areas the Chinese peasants rely upon simple and non mechanized methods of farming although use of farm machinery has been introduced. These peasants must be encouraged to use machines to meet the agricultural demand of such a large population. Forests are meager due to rapid industrialization and thus wood has to be imported. New policies should be adopted to manage through these problems.

MINING INDUSTRY:-

More than 3 dozen minerals have been found economically important in China, who is rich in mineral resources. These minerals are obviously dug out through mining but mining industry needs to be expanded and special attention is needed in mining tools and to eliminate mismanagement in this field. This will not only increase the rate of employed nationalists but will also help to build the future economy.

TELECOMMUNICATIONS:-

China has made great advancements in telecommunications. Use of cellular phones and internet has increased rapidly specially at the beginning of 21st century. In spite of this a large ratio of the population is devoid of basic telephone service(landline) and as China is a developed country its ratio of phones per capita in 2003 was not reach up to the mark. So this sector also needs special attention.

BANKING:-

China’s banking system has progressed in leaps and bounds over the last two decades. All the power is concentrated in the hands of the government. The Chinese government should maintain the level of economic dealing by giving more preference to the banking systems. Rural areas should also be indulged in banking system.

NEW GROWTH SECTORS TO PERSUE:

HUMAN CAPITAL:-

China did a good job in provision of basic education to the rural inhabitants increasing literacy rate and setting the country in the good form. But still the whole population is unaware of the basic educational necessity especially the poor rural folks. Programs should be conducted to spread its importance in order to get a powerful nation. Institutes should be opened in such areas so that the poor students can get basic education as well as can learn the mechanical techniques of farming and other skills. This will surely increase the Human capital.

RURAL HEALTH PROGRAMMES:-

Chinese government do provides relief at the time of need to the rural areas but still health problems prevail in certain rural areas. Proper and modern health institutes should be established in such areas having latest equipments. This will encourage the rural students to work in field of medicine and science. As development in science is also another factor to add up the economy. Better health of people will lead a better economic nation.

IRRIGATION SYSTEMS:-

As mentioned earlier about the un-irrigated and varying land of China, irrigation system needs to be enhanced. Biotechnology can play a key role by growing drought resistant crops. In this way the country will not have to import a lot and economy will also increase. Because being self sufficient in agriculture is a major aim of any country. Tea, flowers, fruit, grains and herbs are the basic needs but due to drought conditions their prices rise. This problem can be eliminated by enhancing the irrigation system.

DROUGHT-RESISTANTANCE:-

Many of the Chinese provinces like South west China, Guilin, some south western parts etc frequently suffer from drought conditions and the government in order to meet these natural disasters and has to spend the fund money although funds are separately allocated to meet such situations but still efforts are required to handle these situations economically.

SOLAR SECTOR:-

Due to the ever increasing demand of energy, every nation is keen to find different means of energy resources. China is self sufficient in energy but solar energy cannot also be neglected. Very little work is being done in this sector. A large number of solar modules and materials need to be manufactured.

INTERNATIONAL TRADE:

China having a population of 1.2 billion people is world’s most populous country. To meet the demands of such a large population certain strategies should be adopted so that the country can balance its imports and exports. For this purpose international trade is the best way. Although China is playing a role of “markets of all markets” having a vast network of international trade yet some challenges still lie in this sector. Chinese trading companies sometimes also face inadequate market data and wrong entry strategies and due to poor access to sales channels, cultural differences and difficulty in finding the right business partners and investors. Chinese traders should form a group of individuals in their trading companies who can go worldwide and can choose their partners according to their demands by introducing their products as some of them have already started. The Chinese investors should also spread this knowledge on small scale in rural areas for a good market of cottage industry products. Seminars for market awareness and for the sake of finding good investors should be conducted. The company representatives should also find the shortcomings, defects or the desires of their international consumers. These steps will help them to get into the international market easily.

GOVERNMENT’S ROLE TO PROMOTE INTERNATIONAL TRADE:

Government of any nation is the major contributor of its economy. All the power of China is divided among three main bodies: the state, Communist party of china and the People’s liberation army. The government of People’s Republic of China can promote the international trade by:-

Maintaining the friendly foreign relations and extending them further on matters of trade and mass communications

Taking into confidence all the trading and business companies of the country and providing them initiatives to maintain good relations with foreign investors and trading companies

By encouraging foreign investors to visit their country by arranging business seminars in China as well as in other countries.

By introducing the representatives of leading trading companies with that of smaller national trading companies so that all can work untidily for a prosperous healthy international trade.

By launching different schemes for the benefit of national trading companies to help them to be in contact with international market and investors.

By holding a worldwide meeting annually on all levels in the nation in which the problems regarding are sorted out and more plans could be made for its promotion.

APPENDIX 1:

G.D.P GROWTH IN CHINA IN RECENT YEARS:

APPENDIX 2: G.D.P PER CAPITA (PPP) OF CHINA IN RECENT YEARS [22] :

Year

GDP – PER CAPITA(PPP) (US$)

2001

4300

2002

4400

2003

5000

2004

5600

2005

6800

2006

7600

2007

5600

2008

6100

2009

6500

Appendix 3: CHINA’S TRADE:

China's Trade with the World ($ Billions)

 

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Exports

249.2

266.1

325.6

438.2

593.3

762

969

1,220.50

1,430.70

1,201.70

% change

27.8

6.8

22.4

34.6

35.4

28.4

27.2

26

17.3

-16

Imports

225.1

243.6

295.2

412.8

561.2

660

791.5

956.1

1,132.60

1,005.60

% change

35.8

8.2

21.2

39.8

36

17.6

19.9

20.8

18.5

-11.2

Total

474.3

509.7

620.8

851

1,154.60

1,421.90

1,760.40

2,176.60

2,563.30

2,207.20

% change

31.5

7.5

21.8

37.1

35.7

23.2

23.8

23.6

17.8

-13.9

Balance

24.1

22.5

30.4

25.5

32.1

102

177.5

264.3

298.1

196.1

China’s Main Trading Partners:

CHINA’S MAIN TRADING PARTNERS ($ Billions)

Source: PRC General Administration of Customs, China's Customs Statistics

Rank

Country/region

Volume

% change over 2008

1

United States

298.3

-10.6

2

Japan

228.9

-14.2

3

Hong Kong

174.9

-14.1

4

South Korea

156.2

-16

5

Taiwan

106.2

-17.8

6

Germany

105.7

-8.1

7

Australia

60.1

0.7

8

Malaysia

52

-3

9

Singapore

47.9

-8.8

10

India

43.4

-16.3

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