The Causes Of Chinas Economic Growth Economics Essay

Introduction

China, economically extremely backward before 1949, has become one of the world’s major economic powers with the greatest potential, and the overall living standard has reached that of a fairly well-off society. China in 1964 sets the target of realizing modernization by the end of the 20th century. It reiterated this goal in 1975. However, the actual progress of development proved that target was unattainable, although the call played a rather positive role in mobilizing the national efforts in the historical background that the whole national was eager to concentrate on national construction (Wang, 2004).

China in 1979 initiated a new political line in taking economic construction as the central link is starting to reform and opening up. China’s ongoing economic transformation has a profound impact not only on China but on the world. Since then China has been the fastest growing economy in the world over almost three decades and China is now the world’s third largest economy, which ranked only tenth in 1978 (World Development Indicators database, World bank, 07 Oct 2009).

China is playing an increasingly important role in world commerce. China is a major exporter of manufactured products. It has also become a major player in world markets for oil, metals and other raw materials. Foreign investors from around the world have been attracted to its booming economy, High productivity growth due to major structural changes, the opening of its economy to international trade (Shane and Gale, 2004).

Causes of China’s Economic Growth

China Agriculture is one of the most important sectors of economy the agriculture sector provides more than 12 percent of GDP and is still a key employer at almost 50 percent of total employment, reflecting the large gap in labour productivity compared to the rest of economy.

The Agriculture produces wheat, rice, potatoes, peanuts, millet, cotton and many other things. China is today the world’s largest soybean importer at 43 percent of global

imports. With exports, especially of fruits and vegetables, also on the increase, China’s impact on world agricultural markets can only become stronger (state.gov, 2009).

Industry and construction account for about 48 percent of China’s GDP. China is being ranked the third worldwide in industrial output. Major industries include mining, ore processing and other transportation equipment.

Energy is surging rapidly in China demand due to the strong economic growth. In 2003, China is the second-largest consumer of primary energy and oil, and for 2006, China increases in oil demand represented 38 percent of the world total increase in oil demand.

China is also the third-largest energy producer in the world.

Natural gas usage in China has also increased rapidly in recent years. China is also the world’s largest producer and consumer of coal, an important factor in world energy markets (EIA, 2009).

Trade – China imports rose from $16 billion in 1979 to $1,132 billion in 2008, while exports grew from $14 billion to $1,429 billion (see Table 1).

China is now one of the most important markets as it has growth dramatically in recent years with an average annual growth rate of nearly 27 percent from 2003 to 2008. Import over this period increased by an average of 19 percent per year. It is the world’s third-largest merchandise trading economy and is the second largest exporter. China’s trade surplus, which total $32 billion in 2004, surged to $297 billion in 2008 (Wayne, 2009).

Table 1. China Merchandise World Trade : 1979 – 2008

($ billions)

Year

Exports

Imports

Trade Balance

1979

13.7

15.7

-2.0

1980

18.1

19.5

-1.4

1985

27.3

42.5

-15.3

1990

62.9

53.9

9.0

1995

148.8

132.1

16.7

2000

249.2

225.1

24.1

2001

266.2

243.6

22.6

2002

325.6

295.2

30.4

2003

438.4

412.8

25.6

2004

593.4

561.4

32.0

2005

762.0

660.1

101.9

2006

969.1

791.5

177.6

2007

1218.0

955.8

262.2

2008

1428.9

1131.5

297.4

Data adapted from International Monetary Fund, Direction of Trade Statistics and Global Trade Atlas (using official Chinese statistics)

Foreign Investment

China’s trade and investment reforms and incentives led to a surge in foreign direct investment (FDI), which has been a major source of China’s capital growth. According to Chinese data, annual utilized FDI in China grew from $636 million in 1983 to $92 billion in 2008. The FDI in China at the end of 2008 stood at an estimated $853 billion, making China one of the world’s largest destinations of FDI (Wayne, 2009).

Based on cumulative FDI for 1979-2008, about 41 percent of FDI in China has come from Hong Kong, 10.5 percent from the British Virgin Islands, 8.1 percent from Japan and 7.5 percent from the United States (see Table 2). Hong Kong was the largest investor in China for 2008 (Wayne, 2009).

Table 2. Major Foreign Investors in China: 1979 – 2008

($ billions and % of total)

Estimated Cumulative Utillized FDI: 1979 – 2008

Utilized FDI in 2008

Country

Amount

% of Total

Amount

% of Total

% Change over 2007

Total

852.6

100.0

92.4

100.0

23.6

Hong Kong

341.0

40.0

41.0

44.4

48.1

British Virgin Islands

89.0

10.5

16.0

17.3

-3.6

Japan

69.3

8.1

3.7

4.0

1.8

United States

64.0

7.5

2.9

3.2

12.5

Taiwan

47.6

5.6

1.9

2.1

-0.3

Singapore

37.5

4.4

4.4

4.8

39.3

South Korea

31.8

3.7

3.1

3.4

-14.8

Data adapted from Chinese Ministry of Commerce.

Note: Ranked by cumulative top seven investors through 2008. Cumulative data by country estimated by CRS using previous years data.

Gross Domestic Product (GDP) grow at an average of 10 percents from 2003 to 2006. As a result, real GDP in 2007 exceeded 13 percent and it was the fastest annual growth since 1994. Average annual industrial growth rates have exceeded 15 percent in recent years.

However, the current global economic crisis has hit China hard and reduces the real GDP growth to 9.6 percent in 2008. Recent research indicates that rather than inhibiting GDP growth the state-dominated industrial sector has been a positive contributor – particularly for steel, oil, and chemical production (Li and Putterman, 2008). Rising domestic consumer expenditures have coincided with this growth, and it is estimated that consumer spending during 2008 was contributing about two thirds of the country’s GDP growth versus less than 50 percent in 2007 (The Economist 2008A, p. 68). However, rapid GDP growth rates are a concern to the extent that they have been overheating the economy and contributing to both inflation and poor environmental quality.

Morgan Stanley raised its forecast for China economic growth to 7-8 percent from 5 percent for 2009. The government’s $586 billion stimulus package announced late last year will provide temporary support to China’s economy. Goldman Sachs raised its China growth forecast to 8.3 percent for 2009 and 10.9 percent for 2010, citing strong expansion in both fixed-asset and private sector investment. Following the upward revision of 2008 GDP growth at the end of 2009, there is now a strong expectation that the first three quarters GDP statistics will also be revised upwards, possibly by more than the 2008 figures, so that growth may turn out to be even higher (see Appendix A).

I forecast that China’s growth will be 5 percent to 6 percent in 2009. China is an export-dependent country and the deepening recession in the United States. Its major trading partners will continue to depress Chinese manufacturing output and employment. China’s huge fiscal stimulus package should keep China’s growth from falling below the mid-single digits. China will be unlikely to mount a sustained recovery with the countries to which it exports mired in recession. Since much of China’s economy is still centrally controlled and we do not know much about the size or nature of the Chinese government’s stimulus proposal, or even how they account for GDP growth, we can really only guess that country’s growth potential.

Advantages of China’s Economic Growth

From 1979 to 2008 China’s real GDP grew at an average annual rate of nearly 10 percent. The growth brings material benefits to the majority of Chinese people. China has paid enormous social and environmental cost for rapid economic development.

Chinese people have witnessed the gradual enhancement of national power and international prestige, so that their self-confidence has increased. Therefore, in 2008, China successfully overcame those natural or man-made disasters and hosted for the Olympic Games. The Olympic have brought China both new opportunities and challenges (see Appendix B) and upcoming World trade Fair in 2010.

China has participated and integrated into the international community and become an important member of international community. It will be conducive to share global resources for China, promote creativity, better technology and innovation, has all contributed to greater productivity.

In Beijing and Shanghai the salary of the people have increase for about 12 percent (see Appendix C) and led to more saving and more foreign investment in China.

Dramatic increase in exports from $13.7 billion in 1979 to $1429 billion in 2008.

(PRC National Bureau of Statistics and PRC General Administration of Customs, China’s Customs Statistics)

Disadvantages of China’s Economic Growth

Inflation rates have been high. In February 2008, inflation hit to 8.7 percent and was the highest since May 1996 (see Appendix D). Banking system and Stated-Owned Enterprises operate unprofitably and likely need a bailout from the government.

China’s air pollution, emissions of sulfur dioxide from burning coal and carbon dioxide (See Appendix E) both rank the first in the world.

China’s many important resources per capita are less than the world average. China is short of all resources and has becoming the major importing country of almost all of the important natural resources. Water shortage is another major problem for China (See Appendix F).

Although China has 700 million farmers, the reforms of agriculture and rural areas have been paid less attention, which will cause rural economic and social issues. Education and healthcare systems fail to serve hundreds of million of poor people in China. Few of the people in China are protected by health insurance or pensions.

China has faced three peak pressure of the population. The total population, the gross of employed population and the total aging population. Thus food security, employment opportunities and social security system are facing enormous challenges.

Conclusion

China’s economy has grown at rates that are among the highest for any major country in the 20th century. China’s human development in terms of life expectancy, infant mortality, income distribution, reduction of poverty, etc. had seen great improvement since the establishment of the PRC.

With increased economic growth, the Chinese people’s economic choices have been greatly increased. However, the undeveloped parts of institutions, negative effects of reform policies and governance with increased corruption and reduced commitment towards improved well-being of the poor that impede the complete translation from economic growth to human development should not be ignored. The failure of basic education and the reduced success of primary health services suggest that the central government should not retreat from the basic administrative and financial supports of basic education and a rural health-care system. It should consistently endorse education-for-all and health-for-all policy, and collect enough resources to guarantee the funds for basic education and health care for all people, especially for the poor. All these factors pose risks for future Chinese growth (Shane and Gale, 2004). Whether China can succeed in its reform and development depends on if China can really adhere to the socialist road, and in the relatively long period of time, could achieve sustained economic growth and common prosperity of the people.