Economic Development of China - Essay Example

?Economy of China OF THE 29TH NOVEMBER Introduction The 21st century has seen a dramatic decline in the world’s economic development to a slow 2 percent. In contrast, the people’s republic of China has registered an impressive annual growth rate of over 7 percent with a historic 10% in 2010. This paradox has attracted many people’s attention arousing their interest to investigate the strange phenomenon. Upon a close review, of China’s development over the last two decades, this study draws the following five factors as the main reasons behind the sustained the country’s rapid economic growth (the same factors will continue being the impetus behind sustained economic growth for the new giant): To begin with, China started to implement the policy of reforms and opening up to the rest of the world towards the end years of the 1970s. As a result, the barriers to economic growth under the conventional planned economy were removed and full production became the order of the day. As part of the economic reforms, the country adopted a step-by-step approach in pushing the reforms ahead. At the same time, it made sure that there as a balance between the economic reforms, growth and social stability. This enabled the country to correct the notion that China is a hard place to trade as is evidenced by the large capital investment by overseas investors. According to Sharma (2007), there has been a major capital injection into the country’s economy, which been a major boost in the development of the economy. The country has also recognized the importance of a flexible monetary exchange rate. It has put measures in place to ensure that there is free capital mobility (Prasad, 2004). Economic experts have argued that the high economic growth rate registered by China will only be sustained if the country continues implementing the comprehensive economic reforms, and the open up policies. This has and continues to hasten the country’s transition to a free market economy (Morrison, 2011). China is credited for having one of the highest rates of savings and investments in the world. This has been part of the economic reforms and opens up policies adopted from the 1970s. For instance, the saving rates reached an impressive 40% of its Gross Domestic product, one of the highest in the world (Morrison, 2011). This has been enabled by the ongoing reforms in the banking sector. Financial transactions and mediations in China are transacted across the banking sector. The banking industry is heavily dominated by the state-owned banks who act as the main lender to companies in China. There is an absence of the corporate bond market which underscores the crucial role that banks play in the economy of China (Li, 1997). China has instituted a reduction in interest rates to encourage more borrowing especially by people in the private sector, particularly the small and medium enterprises. Therefore, stability of the banking industry in China is crucial for sustainability of economic growth in the country (Li, Liu and Yun, n.d.). Currently, the Chinese government has accelerated efforts to address three key issues; maintaining the economic growth, avoiding social contradictions and improving the ability to cope with financial crisis. Lams have been put in place to stimulate domestic demand with an aim of reducing the over reliance on Gross Domestic Product growth in fixed investment and export promotion. China relies more on the export market which is detrimental in the midst of a global financial crisis like the one being experienced in the world (Wang, 2010). To address this issue of export-oriented economy, the Chinese government has made it a national strategy to strike a reasonable balance between the export oriented models and inward- looking economy. This is being implemented through expansion programs in the global market, while laying down policies to promote domestic consumptions. The Chinese government is on record for trying to uplift the purchasing power of its large population to promote domestic demand. It has also instituted, direct aggressive fiscal stimulus measures to increase household income and consumer spending, thereby reducing the possibility of occurrence of a social crisis, a good measure for sustained growth (Wang, 2010). Second, China has compiled middle-long term growth plans at consecutive years in line with the uniqueness and wants of particular development phases. This has helped sustain the stability and permanence of China’s economic growth. For instance, in conjunction with the Association of Southern Asian Nations (ASEAN) agreed to gradually remove tariffs thereby creating the world’s largest free trade area (Morrison and Vaugh, 2006). China has made exceptional long term plans which have enabled it develop bilateral and multilateral trade relations with Southern Asian states. It has laid plan to build an image of being able to handle its greater fiscal and planned influence in an accountable way (Wang, 2010). Some of the plans include expansion of its economic and political influence in the Asian region and the rest of the world. The current global financial crisis which has left many people worried of the effects it will have on the Chinese economy. The government has been forced to put in place middle-long term plans to cushion the economy against the crisis. For instance, on November 10, 2008, China rolled out a stimulus package worth $ 586 billion. It was aimed at promoting growth and domestic consumption in sectors of the economy such as disaster management, investment infrastructure and protection of the environment. This has helped to control the effects of the global decrease in China’s exports. It has also helped the manufacturing industry through its investment in infrastructures and removal of loan quotas on lenders, thus, encouraging growth. The third factor to explain the sustained growth is the experience gained from the reform period amidst many challenges and crisis. However, the country was able to overcome the challenges and gain more experience in macroeconomic control. Through expanding demand for its products, the country was able to put at bay the deflation brought about by the great Asian financial crisis. The Asian financial crisis was an enormous challenge to dominant economies of East Asia. However, China was able to handle the crisis by running remarkably easy fiscal policies, allowed its exchange rates to fall, and cut interest rates. These measures enabled China to trade out the problem. The experience gained in handling the enormous financial crisis in Asia, molded China into a formidable force, which has been able to handle the current global financial crisis. Comparing notes with the current crisis in Europe, China has managed to side step the debt crisis since it has strained itself to rely less on borrowing and foreign capital inflow. The Asian financial crisis was followed by the SARS epidemic in China. The country was reeling under the effects of the massive catastrophe which has been equated to 9/11. The SARS episode has been handled effectively in China. However, it left with no lessons for the great economy. It has reinforced the need for politics of reforms and market liberalization, as well open up policy. The country leadership has learnt the need for transparency and openness to its citizens on how the affairs of the country are run (DeLise, 2003). The diagnosis for SARS is equated to the diagnosis of institutional ailments and the prescription for a cure. DeLise, says that the Asian financial crisis prompted the International Monetary Fund to place conditionality on China for fiscal reforms and improved banking and bankruptcy laws, greater transparency in governance and improved corporate governance (2003). On the other hand, the SARS epidemic led to calls for reforms in the political governance of China and enhances transparency in the public sector. The crisis has left the nation more experienced to handle future crisis than it was before. This means that should another financial crisis, or an epidemic like SARS, occur, China has the relevant experience to handle it. The financial crisis in Asia was an excellent lesson for China in managing its macroeconomic. With the current global financial crisis, it has used the experience it gamed during that period to put the negative effects of the current global financial crisis minimal. China has instituted cuts in interest rates to enable entrepreneurs to bolster their solvency through borrowing from the financial institutions. It has also put measures to boost real estate growth and sales through advancing mortgages and exempting taxes on properties and land. To address the challenge of the decline in global demand for its exports, China has announced a recompense package on taxes charged to exports. Fourth, China has attached considerable importance to the formulation and implementation a wide range of policies targeted at the market. These policies have created the right conditions for a sustained rapid growth and social progress. One of the long term development plans has been to eradicate the high levels of illiteracy in the country. It has enacted education policies to promote the admission of more students into colleges and universities to study technology courses. China has made greater strides in uplifting the literacy standards of its citizens. By implementing education policies such as the mandatory 9-year education policy, China has been able to reduce the levels of adult illiteracy from 52% in 1964 to 17% in 1999 (Wang & Yao, 2003). Despite the increased enrollment in primary and tertiary levels, tertiary levels are still low. The government has made efforts to increase the enrollment rate from 11% in 2000 to 15% in 2005 (Dahlaman & Aubert, 2001). The government has increased efforts to improve tertiary enrollment rates, to ensure that a majority of its human capital is well equipped to face the daunting task of maintaining the high economic growth rate. China is in the process of enacting and implementing policies to ensure that there is even distribution of investments in the education sector in order to be able to sustain the high economic growth and welfare improvement in the future (Wang &Yao, 2003). To sustain economic growth, has put in place policies to ensure that its high population is well educated to provide human capital necessary for development. There have been considerable investments in the education sector of the nation with specific focus on technology. The country has been facilitating research and development in science and technology, outsourcing policies, financing promising projects done by the youth, promoting entrepreneurship and controlling interest rates on loans related to science and technology. This has ensured that the economy is driven by capital accumulation of both physical and human capital (Whalley & Zhao, 2010). China has also put policies in place to provide affordable health care to its high population. There have been many policies that have been put in place to ensure that the country has a health population fit for work. Policies to ensure that the country is self reliant in food production have been put in place. A well fed population is healthy too and productive economically. The Chinese government has put policies in place to promote the agricultural sect. Farmers in China are given subsidies to be able to apply modern farming techniques in order to boost food production. Recent land-based productivity has been a success story in China. Farmers now use modern farming techniques such as mechanization, irrigation and inputs such as fertilizers. Lastly, China has upheld the policy of opening up to the rest of world which has promoted to a greater extent its participation in the international trade. There has been progress recorded over the last decades on economic and technical cooperation between China and the other actors in the world. The ongoing reforms have been boosted by the structural transformation in the country’s foreign trade which has been a major contributor towards the high growth rate. China rapid growth as a world economic superpower has been fuelled by the increased expansion of its international trade (Prasad, 2004). China’s export trade has grown significantly at an average rate of 15% each years since 1979 compared with an annual world’s growth of 7% (Prasad 2004). This has fueled an increase for demand of raw materials prompting many Chinese companies to invest abroad. The country has expanded its trade activities across the world enabling it expand its source of raw materials such as energy. Prasad supports this argument by saying that China needs to increase its surge in foreign direct investment and maintain close integration with the world’s trading system (2004). According to Morrison, (2005), China is the world second consumer of oil after the United States at 6.7 million barrels per day. These figures are projected to rise to 13.4 million barrel, per day by 2025. Hence, the country has got no option but to continue with its overseas investments in search of the black gold and other raw materials for its industries. It has registered positive marks by securing lucrative tenders in emerging oil producers such as Sudan. The seriousness in China’s pursuit in expanding its international trade is seen in its attempt to secure a lucrative deal to supply oil to United States. Indeed, China’s economic growth is dramatically changing its monetary and political affairs with the world (Morrison and Vaugh, 2006). In order to achieve progressive economic boom, there is a need for continuous structural transformation in the foreign trade policy. A rapid and sustained growth in foreign policy will guarantee China continuous economic growth (Prasad, 2004). The current global financial crisis has not spared China either. There has been closure of rural industries due to lack of market as a result of a decline in global demand for Chinese exports. To contain this, the Chinese government has put measures in place to enhance export growth. This will help the nation maintain a job growth and preserve social stability. China has continued to maintain current account surpluses through exports to the rest of the world. Indeed, there are plans to buy United States treasuries with the reserves generated while maintaining its foreign exchange. The Chinese government has also put plans in place to increase its trade and industry relations with the third world. This has helped to expand market for its finished products as well as a source of raw materials for it s robust manufacturing industry. Conclusion In spite of China’s rapid economic expansion, the general level of economic development is still below the standard, which means that the country has got a lot of things to do to realize full industrialization, and social, economic and political transformation. The Development Research Centre of the central government predicted that the annual growth rate will be sustained at about 8 percent between 2006 and 2010: However, the growth rate is expected to slow down between 2010 and 2010 to around 7%. The study found out that the positive factors which will sustain China’s growth include improved infrastructure and technical conditions, an optimized industrial organization, a more aggressive manufacturing industry, a wide domestic market with massive growth potentials (Morrison and Vaugh, 2006), the deepening of structural reforms and the improvement of the investment environment. When all these factors are sustained, it is with no doubt that this study concludes that the high economic growth rate can be sustained in the future. References Dahlam, C.J and Aubert, J.E. 2001. China and the Knowledge Economy: Seizing the 21st Century. WBI Development Studies. Washington DC: World Bank. DeLisle, J, 2003. SARS, Greater China, and the Pathologies of Globalization and Transition. Pennsylvania: Elsevier Limited. Li, K.W. 1997, Financing China Trade and Investment. Westport: Preger Publisher. Li, K.W. 1999. China in East Asia Analytical Unit. 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