Does the Rise of China Signal a Permanent Shift or Is It a Short-Term Phenomenon - Assignment Example

Place Here Does the rise of China signal a permanent shift (as was thought of Japan) or is it a short-term phenomenon? PRO: Yes, the rise of China does signal a permanent shift because… 1. The growth of china which is has been at an average of 10% for the decade still looks promising as it is domestic-demand driven rather than being solely export-led. 2. The final system of China is referred to as China’s ‘money making machine’. (Kiedel) 3. Growth in China has been characterized by high investment, saving and rapid rural to urban migration. 4. China influences and caters to global demand. (Weihua) CON: No, the rise of China does not signal a permanent shift and is a short-term phenomenon because… 1. China’s economic model is the export-led growth model which is characterized by high dependence on U.S consumption and generally the consumption of other countries it exports to which means China’s economy can collapse anytime the consumption pattern of these countries fluctuates. (Duncan) 2. The growth has shown to be directly proportional to inequality and poverty. 3. The emphasis is on production and not consumption; China has been growing because of its productivity however it does not have the capacity to consume what it produces. 4. The high growth has caused an imbalance between growth and environment. China’s economic performance has been a subject of skeptical evaluation ever since its recent growth has sparked economists’ interest. Skeptics have tried to come to a conclusion about the nature of this growth being mostly export-led or the result of fierce growth in the local market. Recent reports show an upward trend in China’s exports and the existence of a substantial trade surplus which would lead most to assume that the growth can be attributed mainly to the export industry. There is a fear also that limited global markets will curtail this expansion sooner rather than later. However, evidenced data suggests something different: China’s growth has come as a result of an overwhelming growth in the local market. This evidence is furthered by a study of the five past macroeconomic booms and slowdowns that occurred in China since 1978, a detailed study of which reveals that China’s growth in those times had been found to be dependant primarily on shifts in domestic investment and consumption patterns. In more recent years also, the contribution made by country’s trade surplus have always come up as secondary to China’s overall growth. China has thus been able to acquire the title of an independent source of global growth; its imports will likely play a role in being an independent growth stimulus for other economies of the world, letting China secure its own trade expansion on a long-term basis and overall sustainable growth. China’s phenomenal growth, particularly, over the past decade has been the subject of much discussion. A number of economists believe that China is still growing strong and will be so in the future. Parallel to this belief, exists the belief that China’s rapid economic growth is just another boom that will witness a bust. Skeptics quote the examples of Japan and the Soviet Union whereby inflated economies deflated because of pressures they could not sustain. The GDP for the country for the past decade has been 8% to 10%. China has been able to maintain this growth rate consistently which indicates the economy’s smooth transition from an agrarian economy to an industrial economy. The primary reason said to be responsible for this promising future growth is the belief that China’s growth is domestic demand driven as opposed to the popular belief that it is heavily export dependent. The cycle created of increasing corporate profits is reliant on profits from rising exports which becomes the impetus for the economy. Another reason for believing that China will continue its growth for another decade or so is China’s financial system. The financial system has the ability to finance infrastructure and public investment which are essential for sustained growth. China has been wary of inflation rates and it strives to stabilize them in order to avoid the debacle of Japan. Remittances from abroad have also increased which has been a prominent contributor to GNI. Furthermore the saving rate in China is very high, almost 45%. Even if people do not earn much they save a lot. This has made accessible to the common man high involvement consumer goods. (watch) China’s main growth driver has been its productivity which is driven by the driven by the efficient mobilization of resources. This has resulted in employment generation thereby absorbing surplus labor and creating jobs. Therefore the surplus labor in agriculture and the entrepreneurial ability emerging in the Chinese economy are growth drivers for China. Poverty in China has been declining rapidly. Chinese companies have gained better profitability margins over the years and in some cases have become considerably more profitable than their foreign competitors. This rise in profitability can be seen in companies of different ownership including state-owned enterprises (SOEs), domestic private enterprises (PVTs), and foreign-invested enterprises (FIEs). A significant number of manufacturing concerns were able to enjoy the same profitability increases as they managed to achieve lower unit labour costs whilst still contributing to an increase in real wages of about ten to fifteen percent per annum since the year 2000. Their position as a strong competitor was maintained in the global market as they managed to keep stable or reduce export prices to gain market share, at least until 2006, when other Chinese export prices were on the rise. With China witnessing growth as such in the global arena as such, a conservative estimate would guarantee China a place ahead of the United States as the largest economy in the world in thirty years’ time. The size of the Chinese economy is expected to be more than double the size of America’s, giving the Chinese global commercial and institutional leadership and the ability to easily take the lead in shaping trade and investment patterns globally. Those pessimistic of China’s sustained growth draw parallels with the Japan’s economic fiasco, the main lesson of which is that, central-bank monetary inflation and credit expansion is an artificially created boom which will eventually bust. Firstly, proponents of this concept purport that there cannot be sustainable growth in the Chinese economy because the growth model of China is indeed export-led, that too primarily dependent on U.S consumption. The GDP growth is therefore linked to U.S consumption of Chinese exports. China’s trade surplus with the U.S is also linked through the financial and banking system of the Chinese and U.S economies. The earnings made from selling exported Chinese goods cause an increase in deposits in China’s banking structure. This subsequently leads to an increase in borrowing in order to pay interest on these deposits. For 20 years there has been a rapid growth in bank loans and therefore this is said to be a major impetus for the growth of the economy. This growth has only been made possible as a result of the trade surplus with the U.S. which reinforces the principle that China’s growth has been rooted in the consumption of the U.S economy. The emphasis on productivity has resulted in capital formation. However, all this capital accumulation is towards factories that produce export goods. Therefore, much of the gross fixed capital formation that is witnessed in China’s GDP rate is attached to, primarily, US demand for Chinese exports. Secondly, although given less attention, is the issue of social imbalances. Much of the growth in China has come at the expense of the disadvantaged factions of the economy. As growth rate increased, the income gap and income distribution situations also worsened. (Bottelier). Thirdly, as a result of China’s rapid economic growth saving and investment rates shot up. This also resulted in high gross fixed capital formation. Although generally this would be a good thing, in China’s case, because the production is export-led the economy does not have the capacity to consume all it produces. This negates the concept of domestic demand-driven growth. There composition of total investment in China is also dicey; the internal and external economic imbalances imply a considerably high percentage of investment in the manufacturing sector than in the development of social infrastructure. Areas like health, education and social security therefore remain neglected. The focus of the Chinese economy thus far has been capital deepening and in the presence of growing concerns over inherent linkages to the U.S economy and absence of attention on ‘total factor of productivity’ growth create sufficient doubt in the sustainability of China’s economy. Finally environmental degradation, social inequality, pollution and corruption are all foreseeable barriers to sustained growth of the Chinese economy. Currently there is an imbalance between growth and environment. As the industries grow the problem of pollution also grows unabated. This issue has attracted international attention. Social inequality also seems to be increasing. As China diverted more and more attention towards creating an environment conducive to sustainable growth it also focused on establishing more educational institutions. Although education is a yardstick of growth, the problem that is rife in China is that the quality of primary school education is declining. These problems seem to be arising from ineffective regulations and law enforcement which can be corrected by means of revisiting and revamping policies. Bibliography Bottelier, Pieter. Can Chinas Growth Trajectory be Sustained? Working Paper. Norway: Centre for Monetary Economics. BI Norwegian School of Management., 2007. Duncan, Richard. "Every Boom Will Bust. Even Chinas." 5 May 2011. The Christian Science Monitor. 11 April 2012 . Kiedel, Albert. China’s Economic Rise—Fact and Fiction. Policy Brief. Beijeng: Carnegie Endowment for International Peace, 2008. watch, Economy. The Chinese Economy. Stanley, 30 June 2010. Weihua, Chen. "Rapid growth to sustain 20 years." 11 June 2007. China Daily. 11 April 2012 . Read More