Gross Domestic Product of China - Assignment Example

Macro and Micro Economics "Every country’s economy is intertwined with every other country’s economy", that is what Catherine Rampell argues in the New York Times in September 24, 2008 issue. Chinese economy has also affected considerably due to financial crisis that set in 2008 in the US and then in the Europe. The paper attempts to explore china’s current economic status and the policy options that it may adopt to come out from the difficult economic situation that it faces currently. Gross Domestic Product of China Gross Domestic Product (GDP) is a good measure of economic growth in any country. Chinese economy has grown at the phenomenal rate in last two decades; however, GDP growth rates between the year 2010 and 2014 has been falling consistently after touching close to 12% Source: http://www.tradingeconomics.com/china/gdp-growth-annual in the first quarter of 2010 to little above 7% in the first quarter of 2014. Lower GDP growth rates have affected the employment generation in a significant manner. Unemployment Rates In spite of the over 7.5% GDP growth rates between 2010 and 2014, unemployment rates in China remained between 4 and 4.3% in last four years. Reduced exports create huge impact on unemployment rates; that in turn, affect GDP of the country. Not only that but also it results into lower private sector investment in the country (Marcelis, 2008). In 2009, China’s exports continued to decline month after month. While in March, 2009, exports were down by 17.1%, it declined further in the month of April by22.6%. The following chart shows how exports were affected between 2008 and 2009. Source: http://online.wsj.com/news/articles/SB124209675372909631 Consequent to this, private investment declined considerably; however, intervention from the Chinese government in the form of stimulus package provided some respite to the economy. Fan Jiaping, the economist from the State Information Center, remarked then, "Export demand doesnt show any signs of turning for the better" (Batson, 2009). Inflation Rate The following chart suggests that in the beginning of 2010, the inflation rate was negative in China that subsequently rose to the level of around 4% in 2012; however, since then after touching nearly 1% in the middle of 2013 it has again rose to the level of above 4%. This surely does not augur well for the economy, currently. Source: www.tradingeconomics.com Some Megatrends in Chinese Economy As per Jeffrey Towson and Jonathan Woetzel, six mega trends are changing economy and business of China and they are: Huge manufacturing sector, burgeoning foreign exchange reserves, over 400 million strong Chinese consumers, huge spending on education, urbanization in a large scale, and information technology. The Chinese economy produces 90% of the worlds personal computers, 80 percent of the worlds air-conditioners, 90 percent of the worlds mobile phones, and 70 percent of the worlds solar panels. Manufacturing contributes to the 40% of the Chinese economy employing 130 million people. Moreover, China has begun moving towards low-tech to high-tech manufacturing areas. Most manufacturers currently enjoy the benefits of scale. On foreign-exchange front, its reserves have surpassed USD3.5 trillion and that is why China is the largest buyer of US securities (Towson & Woetzel, 2014). It is certainly not a small achievement that its yearly trade surplus with the US has gone up from $10 million in 1985 to over $300 billion in 2012. Education is paramount to providing thrust to nations economy and that is quite visible in China. College graduates from 1 million in 1998 have surged to over 7.5 million now providing a big boost to research-and-development activities in large scale. It is important to note that in 1990s, R&D spending in China was only a small percentage of global R&D spending; currently, it constitutes over 12 percent of the global spending – just behind the US in R&D spending but surpassing the most European countries to become a future economic growth engine of the world. It would be worth noting that the companies such as Huawei with total work force of 150,000 people, over 68,000 are involved in R&D. In comparison, only 21,000 people in Cisco out of total workforce of 66,000 employees are involved in R&D (Towson & Woetzel, 2014). Urbanization has become a big phenomenon boosting construction activity in large scale across China. Over 300 million people have already migrated from rural to urban areas in the last 30 years; additionally, 350 million people will be migrating by 2020. China will soon have at least 160 cities comprising of population over one million. Housing and other construction activities will provide a huge economic boost to China in coming years. Investment in real estate has gone up significantly from merely $120 billion in 2003 to $980 billion in 2011 giving enormous boost to Chinese economy. China Vanke, a leading developer built over 80,000 apartments in over 25 cities in 2012 alone generating sales of almost $16 billion (Towson & Woetzel, 2014). Shortcomings In spite of GDP growth rate hovering above 7.5 percent in 2012, it could be surprising to note that one-fourth of the graduates could not get a job in China. Consequently, income inequality is widening rapidly. Due to huge manufacturing sector, environment in China is deteriorating rapidly. Environmental concerns likely to slow down economic growth rate of China. By 2007, China has become the worlds largest greenhouse gas producer in the world overtaking the US. As per the Asian Development Bank, most cities of china do not meet air quality standards prescribed by World Health Organization (WHO). China now cannot overlook environment concerns for further economic growth as it leads to climate change and health issues for its citizens. In view of the above, chinas further economic growth cannot be sustained unless the establishment takes into account environment concerns and its costs. Proposed Policy Options In view of the reduced exports, China needs to boost infrastructure investment in a large scale within the country so that unemployment issues can be resolved to a great extent. This will create a cascading effect in domestic sector of the economy increasing demand of the goods. Modern infrastructure such as roads, bridges, air ports, seaports, rapid transport system will help accelerate the growth of economy. Since large population still subsist on agriculture, it will be advisable to encourage investment in agriculture for further value addition; this will open new vistas for rural people halting their rush towards urban centers or large cities for employment. Conclusion Though Chinese economy has cooled down a bit yet it has not lost its steam. It is quite likely that due to changed economic scenario in the world and environmental concerns, Chinese economy may not grow at higher rates in coming years yet it should be able to sustain between 6% and 8% of economic growth rate for several years from now. As such, there is no doubt that in the years ahead, China will occupy one of the top positions in the world economy References Batson, Andrew. 2009. “Chinas Exports Fall, Threatening Recovery,” Wall Street Journal, May 13. http://online.wsj.com/news/articles/SB124209675372909631 Rampell, Catherine. 2008. “Why the World Cares About the U.S. Crisis,” New York Times, September 24. http://economix.blogs.nytimes.com/2008/09/24/why-the-world-cares-about-the- us-crisis/ “China Unemployment Rate” Trading Economics. Accessed June 19, 2014, http://www.tradingeconomics.com/china/unemployment-rate Marcelis, David. 2008. “Economists React: China’s Growth Is Slowing, Not Slumping,” Wall Street Journal, October 20. http://blogs.wsj.com/economics/2008/10/20/economists-react-chinas-growth-is-slowing-not-slumping/ Towson, Jeffrey and Jonathan Woetzel. 2014. “All you need to know about Business in China,” Mckinsey & Company. http://www.mckinsey.com/insights/winning_in_emerging_markets/all_you_need_to_know_about_business_in_china Read More