Economic Impact of China

China’s economy has been the global standout as a beneficiary of globalisation. Chinese government reform in both macro and microeconomics has lead to the economy reaping many of the benefits of globalisation. Globalisation can be defined as the increased integration of the economies of the world, converging towards one global economy.

The process of globalisation has been extended by increased linkages in trade, investment, finance, technology and labour. Globalisation has enabled significant increases in free trade, with regional trade agreements reaching 205 in 2007 compared to 23 in 1990, and China has dominated the process of specialisation with incredible efficiency. Globalisation has had significant advantages for China’s growth which has averaged over 9.5 of GDP for the last 10 years, and development with China moving from 95th in HDI ranking to 81st, with Life expectancy, adult literacy and GDP per capita all increasing by 10% respectively. China now consumes 60% of the world’s commodities. For China, globalisation is a “force for good.” (Downer, 2006).

Chinese developments towards today’s globalised economy began in 1949 – 1977. China was a planned economy, with subsistence farming and government control. Growth, productivity, innovation and incentives for profits were all low, but the economy avoided many of the problems facing today’s economy. Unemployment was low, inflation was low, but standards of living were at an all time low.

The second phase of Chinese economic development began in 1977. The first policy was the decollectivisation of the agricultural industry. Individuals were allowed to retain surplus production of goods and services despite still servicing a commune system. This move rapidly increased incentive for work, encouraging entrepreneurship, productivity and economic growth. This policy was vital in helping 200 million Chinese escape absolute poverty.

The second policy adopted was the formation of Special Economic Zones. These zones allowed foreign direct investment and enabled companies concessions on taxation and other restraints. This “open door policy” was the key feature of China’s modernisation. Multinational Corporations were attracted to China because of their low production costs, particularly for labour-intensive industry. China’s large domestic market and efficiency in transport and communication continues to attract investment today. This has lead to China’s accumulation of the 2nd highest level of foreign currency reserves in the world. Increased investment also afforded the opportunity for transfer of new technologies that has lead to a more capital intensive economy. New managerial techniques and administrative business skills also has benefited the economy. China now hosts over 7000 MNCs which contribute 47% of GDP. This policy, particularly, has helped China raise its gross national income to US$7.4 trillion, becoming the 2nd largest world economy by purchasing power parity.

A third policy adopted in the period 1977 – 2000, was the reduction in inefficient Sate Owned Enterprises. The privatisation of industry has lead to extreme growth and allocative efficiency. This has lead to structural change in the economy, that Chinese government has been ineffective in handling. The privatisation has lead to mass unemployment with rates said to be as high as 20%. The reduction in State Owned Enterprises has increased income inequality and the mass shift in population towards coastal cities.

Following the Uruguay round in World Trade Organisation talks, the US and European Union were required to lower protection under the multi-fibre agreement. This allowed the government to adopt policies of trade in which export industries were encouraged. This was knows as industrial policy. In recent times, China has been criticised for ostensibly selecting industries for support to the detriment of others. Overall, however the adoption of this policy was vital in increasing trade linkages. For example, the International Monetary Fund estimates Chinese exports as 53.5 of total world merchandise output. With Australia, a dominant trading partner and source of commodities, China has found a complementary economy, and exports have risen from 4.5% in 1996 to 10.3% in 2006. Overall the reduction in countries protectionist policies has lead to increased market share for Chinese exporters in EU and US markets.

The majority of Chinese imports comes from Asian region countries, namely 63%, but this is only consistent with world directions of trade. Chinese exports tends to the Advanced Industrialised Economies particularly the EU and US.

Moving from a pegged rate against the US to a trade weighted indeed, has given a more accurate value of the exchange rate and less intervention is required. It is a significant step towards financial deregulation in the future.

The sixth policy implemented was taxation reform in which a centralised tax collection was established. This increased government revenue considerably enabling further development. IT also encouraged domestic saving which has reached 40%. This has contributed to China’s strong current account surplus. Similar reform in the banking system with the elimination of non-performing loans has increased the market-orientated economy. This has lead to China’s greater capital controls, which enabled the economy to sidetrack the Asian financial crisis of 1997-98 which lowered global growth from 4.8% to 2.2%, but Chinese growth by only 6.4% of GDP.

China’s one child policy also saved the economy from the threats of over-population and also extended the decreases in poverty. Unfortunately, this Draconian policy has extensive humanitarian costs.

China’s accession to the World Trade Organisation in 2001 marked phase 3 of Chinese integration to the global economy. China has agreed to the many negatives of reducing protection, but the benefits of allocative efficiency are set to far outweigh the short term costs. Projections of growth rates above 15% are as a direct result of this joining of the World Trade Organisation.

Some of China’s other more recent policies include the coastal/west development program, which attempts to combat the growing income inequality between these two regions. It has already encouraged significant increases in Foreign Direct investment to the west and northern regions, with the establishment of cities similar to coastal cities. An 11th policy, is China’s continual infrastructure schemes, such as building of airports and dams. This has benefited the economy’s infrastructure, but has also created “artificial” employment growth.

China’s most recent policy is the increased push for education. Chinese literacy levels have increased to 90% and the government now gives grants to students to study in western economies. This policy matches their desire to move towards market economies with third sector industry allowing for significant product elaboration. China’s intensive labour services have already increased through the outsourcing industry.

Such rapidity of progress brings many economic and social issues. China’s high rates of growth, 11.3% in 2007, is unsustainable. Recently, threats of rising imported inflation threatens to constrain growth. The high growth, and open door policy has lead to surging imports and a deteriorating balance on goods and services and current account deficit. The Chinese central financial agency is largely untested and their monetary policies are untried, particularly confronted by such a significant issue.

China’s reliance on infrastructure policies to create jobs, a form of pump priming, can only be temporary and this policy is inefficient with a long term focus. Unemployment is a dominant issue, especially as coupled with the above point, expiration of World Trade Organisation concessions to china’s exports (protection) in 2008 which is set to close further inefficient industries and increased unemployment. This issue leads to the incredible migration of workers towards urban areas, creating a dichotomy in the Chinese economy. China’s supremacy in merchandise and labour intensive production is set to be challenged by India, further stemming export revenue. The rise of India will further inhibit Chinese plans of expansion to services industries.

China requires drastic reform of judicial system. This system is ineffective and filters into economic concern in its inability to stop tax evasion and other related crimes. Chinese superannuation systems are also lacking, with pensions and support minimal for disabled or disadvantaged.

China’s dominant issue is the pervasive income inequality between regions. Coastal cities experience incomes 21 times higher than regional provinces in 2004. This inequality is both slowing China’s growth in living standards, but limiting its potential for growth by not utilising all labour resources.

China faces significant labour shortages in the future due to its one child policy. Already the working age population is at 63% and by 2050 it is estimated to reach as low as 50%. This will be a significant constraint on growth.

Capacity constraints in China’s ports and transportation are also limiting growth rates and need to be addressed. Increased pressure, particularly from the EU, for revaluation of the Yuan is also an issue. Retaliation through protectionist policies has begun as economies feel the Yuan is unfairly undervalued.

China’s disregard for the environment has lead to increases in pollution, desertification and erosion. For example, acid rain produced by the increased productive capacity has destroyed arable land in central China. Environmental degradation is set to wipe between 3 and 10% of GDP last year. These negative externalities are growing problem. Water shortages in China have also marked a slight backwards movement in HDI and this needs to be addressed.

So overall, the Chinese government has been extremely successful in promoting the many benefits of globalisation. The rapidity of these trends however looks set to limit potential of china’s economy in the future. China needs careful policy to ensure the benefits continue to outweigh the costs of globalisation. The economic significance of China for the global economy makes the forthcoming years imperative for global growth.