Analysis of Chinas Economy - Essay Example

The people of China have benefitted immensely from the spectacular growth improving their standard of living. When per capita income is measured in terms of purchasing power, it has gone up by three times – as per the International Monetary Fund, from $2800 in 2002 to almost $9100 in 2012. That is certainly a commendable achievement by any standard! China is now no more a poor country but is placed in the middle-income bracket. China became a member of the World Trade Organization in 2001 and that gave a big boost to Chinese exports.

Chinese exports grew by an average of 30% between 2002 and 2007 making it the world's largest exporter then. In exports, China holds 10% of the global market. Real estate contributed significantly to the GDP growth after 1998 when the establishment opened the market. Between 2002 and 2010, real estate in China registered average growth of 17%. That has now gone down to almost 12 % due to controls enforced by the government. All said and done, the moot question is whether China will be able to maintain such spectacular growth in the years ahead.

China is more poised to follow a well-known economic principle – the law of diminishing returns that with each unit of fixed investment, the marginal return declines meaning each fresh unit of capital will produce less output than the previous one. In other words, to maintain the same growth, the country needs to invest higher and higher capital each year. China is now integrated with the world economy. Post the 2008 financial crisis, China is unable to push more exports to the developed world due to large-scale unemployment that prevails with stagnating GDP numbers.

Export growth rates for China will be declining in the years ahead compared to what has been registered in the first decade of the new millennium. That leaves little scope for China to maintain 10% GDP growth in the years ahead. China's cost advantage in the world market is declining rapidly because its average wage rates have gone up four times since 2000. Moreover, its workforce, due to the low fertility rate, will keep on declining restricting cheap labor availability. An ageing population will have roles in declining productivity decreasing the cost advantage further.

The point is that China peaked at GDP growth in 2010 but thereafter it is on the decline. Unabated expansion all these years has added to the woes of pollution in many parts of China putting further breaks on industrial growth. The government has decided to wage a war against the pollution that will diminish the growth rate and slow down unrestricted expansion. This does not mean that China will cease to be a growth engine in the years to come; its growth rate will be slower than what has been witnessed in the last decade.

Despite many odds, China will continue to register decent, on average, around 7% growth rates in the coming years because the country has still millions of citizens that are waiting to come out of poverty and aspiring for a decent living.