Government and the Central Bank of China in the Last Two Years - Case Study Example

Government and the Central Bank of China in the Last Two Years Government and the Central Bank of China in the Last Two Years Introduction In 1978, the government of china embarked on major economic reform programs after state had had all productive asset control for several years. The government emphasized the need for rural enterprises, liberalized foreign trade private businesses, and investment formation. The government also encouraged state price control, industrial production investment, and educated workforce. China was nowhere near the definition of success a few decades back from 1950s. However, it has become a shocker to the world’s largest economies by showing an excellent take off in its economic, technological, governance and defense growth. Furthermore, the Chinese success does not stop at that point; it is getting empowerment day by day to continue achieving success. Favorable political and social environments, good governance, and strong economic will power are some of the reasons that are attributed to the Chinese government success. Reasons for Chinese Government Success in the Last Two Years Presence of Demographic Dividend In the years of Mao, the philosophy of joint efforts made work easier. Consequently, the population of china rose significantly beyond sustainability. However, Chinese government took comparative advantage of the massive population to build and develop an economy that is export oriented. The government acted on the labor-intensive population to capitalize on its processing base. The Government has various measures to accomplish its mission of becoming a processing industrial state. The first measure was to keep low the cost of living for citizens through controlling the prices of essentials, which consequently enabled Chinese workers to work at lower wages without compromising survival. In addition to the large population of the labor force, China secured a production edge that eventually attracted various multinationals that came in search of places to house their OEM manufacturing. China unified its national government to capitalize on its understanding of their population. Lower Currency Rates In the last two years, Chinese government capitalized on the purchasing of US debt as well as RMB pegging to the dollar. As a result, china got an opportunity to keep its currency at a lower rate and steady, making its export cheaper besides the export economy propping up. Managing cheap export has been advantageous to china since its products enjoy better balance of payment. Such affordable goods enjoy competition in the international market, thus earning china foreign exchange. One Country, Two Systems Model The effectiveness of this model reflects conspicuously in economic performance of Macau’s stellar since 2003. World Bank Data reveals that GDP per capita of Macau in 2003 rose over $90,000 pushing it to the fourth richest in the world (Chen 2014, p. 1). However, Macau’s GDP per capita dropped to only $14,000 upon returning to China. In the meantime, GDP per capita of Hong Kong was about $38,000, a mild increase up from the 1997’s $27,000 upon returning to China. It is evident that Chinese central government through its supportive economic and social policies enabled Macau’s economy to have an experience of perhaps the rapidest economic growth globally. It could be the most rapid kind of growth in the last two years or decade. It is a fact that Macau’s economy achieved the significant growth through the supportive policies of the central government, consequently contributing to the success of Chinese government in the last two years. The growth of Macau’s economy also had a significant contribution into the education sector. Many institutions of higher learning around Macau’s witnessed rapid rise as Macau’s economy was growing. For instance, the University of Macau rose significantly and currently ranks among the top three hundred universities globally. University of Macau has achieved success making it surpass many other long-term serving universities in Hong Kong and its environs despite celebrating a short history of service. Political Stability and Unity Political stability and unity that Chinese government has managed to sustain through its model of one country two systems has provided a favorable social environment for overall development in china. Under the model, local industries enjoy a peaceful environment where they also bask in the high levels of local autonomy as well as free decision-making (Chen 2014, p. 1). In addition, the local industries celebrate a wide range of policy issues. Consequently, the industrial community easily interacts and identifies with the Chinese people and government in recent years leading to trade success. Moreover, there exists trust between the Chinese people and the government. There is a notable difference between people of Macau and Hong Kong. Macau has not witnessed the many endless political divisions, empty debates that have marred Hong Kong in the recent past that are impacts of formulation and implementation of policies that are ineffective. Chinese Economic Reforms The Chinese government has carried out various economic reforms that are friendly to all nations across the world. China gave room to international trade as well as direct investment from countries all over global regions. China welcomed investors from even Hong Kong, United States and Taiwan with trade. As a result, China received new ideas, new technology as well as heavy and lucrative investments in the process (Huang 2012, p. 1). Most of these achievements came in the last two years. In addition, the new economic reforms encourage Chinese entrepreneurs and research and development officers to try anything that have a possibility of working. In the process, the R&D personnel approve whatever can work and abandon whatever fails to work. From Chinese trial and error mode of approach to technological advance and innovation, the country makes great discoveries that help in boosting its economy, thus success. Implementing Economic Reforms through Pareto-Improving The kind of economic reforms Chinese government implements is all-inclusive such that every citizen gets better off with improved living. No one in the economy gets worse, hence minimizing opposition, maximizing support and leads to social harmony preservation. The Existence of Antimonopoly Laws Another landmark effort that contributes to Chinese government success is the existence of laws that are against monopoly. Chinese government understands the harm that is likely to result from monopolistic situation (Lau 2009, p. 3). For that reason, it has left its market open for both domestic and foreign industries to explore and compete healthily. The reforms reduce and eliminate information asymmetry. As a result, the local markets also become efficient and sufficient in terms of quality and quantity they offer. Chinese government in the last two years has specific goods and services standards and gives quality assurance using operating testing agencies through mandate of the government. Further, Chinese government also use limiting advantage and bonding requirement to reduce moral hazard incidence. Success of Central Bank of China in Running Chinese Economy Liquidity Injections by Central Bank of China China’s central bank took monetary policy measures of two rounds to perform liquidity injections into the banking system of china. Central bank of china injected a total of $125.9 billion dollars into the country’s banking system in an effort to reduce interest rates as well as supporting the economy. As a result, the low interest rates by central bank encourage commercial banks of china to promote public borrowing due low interest rates charged in borrowed loans. In addition, low interest rates also lure investors into the market, thus promoting economic growth. The central bank lowered interest rates to as low as 3.5% to smaller lenders and midsize borrowers (Zhu 2014, p. 1). The central bank has made several proposals to its policies that can help in cutting down borrowing cost and fortunately, success is already evident according to Zhu. The central bank intends to cut down the borrowing costs of the entrepreneurs to be able to liberalize rates of interests. The central bank further shows success in its attempt to offer financial support to sensible spending on housing. The bank also vowed to crack down on real estate speculation. Description and Evaluation of Main Macroeconomic Policies Used By the Government and Central Bank of China over the Last Two Years Monetary Policy Open Market Operations An open market operation is vital macroeconomic tool that the Central Bank of China and the government applied in the last two years. PBC uses open market operations to determine if the liquidity in the banking system is available. Under circumstances of global financial crisis, PBC issues bonds alongside adjustments with Reserve Requirement Ratio to disable foreign exchange inflows. In the last two years that have witnessed slow inflows of foreign exchange, People’s Bank of China has issued limited outright bonds. However, PBS has shown more activities in utilizing repurchase agreements as well as reverse purchase agreements to determine liquidity situations of the banking sector. In addition, China still uses these operations only when it comes to fine-tuning of liquid frequency conditions. The measurement is specific to frequency fine-tuning because relevant markets are insufficiently established to use such operations as the primary tool for implementing monetary policy. In addition, since Chinese financial system is in the evolution process, it is increasingly likely to continue relying more on open market operations to implement monetary policy. State Council The state council set the inflation and growth targets through the authority it has over exchange rate and influence on domestic supply of money and economic credit growth. Peoples Bank of China (PBC) has made every possible effort to meet the set target. Peoples Bank of China (PBC) measures rates of interest on deposits and loans of Chinese bank directly using monetary policies. Benchmark rates are vital in determining actual loans and deposit rates. As a result, PBC influences both the bank deposit supply and the bank loan demands. PBC benchmark rates help in setting deposit rates ceiling as well as demand for bank loans. Consequently, recent reforms ease financial restrictions hence giving banks an opportunity to pay up to 1.1 times rates of deposits that are relevant to benchmarking. In addition, banks also charge rates that are lower at the rate of 0.7 times the benchmark. Businesses and households face rates influenced by benchmark interest rates, even though numerous actual borrowing rates numerous go beyond the benchmark. Range of factors including the risk borrowers profile as well as availability of general funds in the market influence the spread of benchmarking. Chinese bank balance sheets structure also influences economic activities. Reserve Requirement Ratio Another important macroeconomic instrument Central Bank of China and the government use is the reserve requirement ratio (Chen 2009, p. 66). RRR determines liabilities if deposit proportion People’s Bank of China requires retaining as assets at the central bank. PBC is capable of influencing the supply of finances available for credit facilities through varying Reserve Requirement Ratio. Fiscal Policy In china, State Council and a range of central and local agencies are responsible for implementing fiscal policies. State Council remains responsible for the overall policy direction. Local government that implements most parts of the fiscal policy. Local government accounts for a large section of government expenditure that includes education, infrastructural investments, and social security. Combination of central government transfers is the agencies behind financing local government projects and investments (Yang & Kuhn 2009, p.178). However, there are restrictions that govern local revenues and borrowing, and local government is subject to this restriction. Consequently, the government created local financing vehicle (LVG) that is responsible for raising funds on their behalf. As a result, central and local budget position does not reflect fully in the fiscal policy expenditure. Budget balance is the useful guide that provides information about changes in the stance of fiscal policy. Property Market Property market is a vital driver of economic activity in China, alongside property investment cycle that contributes to aggregate demand fluctuations. Property construction has effects on industrial production materials demand. The property market is still a vital destination for household saving because of lack of china’s financial market development (Fosu 2013, p. 153). Underdevelopment of China’s financial market makes it insufficient to offer a range of alternative opportunities of investment that are typically available in the developed economies. Analysis reveals that despite the property control remaining in place, inflation of prices of property begun to crop up. Conclusion The effort by Chinese government to pursue a path towards knowledge based service economy is receives lots of applaud. It is a positive move because technological advancement in every sector of Chinese is geared towards expanding and achieving massive success. The Chinese government should undertake more public investments in healthcare, mass transportation, healthcare and environmental protection. The above public investments will eventually yield benefits of economic reforms that a majority of citizens can share. References Chen, D. (October 14, 2014). In Macau, Chinas One Country, Two Systems Is a Success: 3 reasons why Macau won’t see Hong Kong-like protests. The Diplomat. Retrieved on November 18, 2014 from http://thediplomat.com/2014/10/in-macau-chinas-one-country-two-systems-is-a-success/ Chen, J. (2009). The China Economy Yearbook: Analysis and Forecast of Chinas Economy. Brill Academic Pub. Fosu, A. K. (2013). Achieving Development Success: Strategies and Lessons from the Developing World. Oxford, Oxford University Press. Huang, Y. (November 14, 2012). China’s Innovation Success Depends on Political Changes. EmTech: Singapore. Retrieved on November 18, 2014 from http://www.technologyreview.com/view/507431/chinas-innovation-success-depends-on-political-changes/ Lau, L. (2009). Thirty Years of Chinese Economic Reform: Reasons for Its Success and Future Directions. Springer Links. Retrieved on November 18, 2014 from http://link.springer.com/chapter/10.1007%2F978-3-540-92185-1_2 Sadeghian, D., White, G. & D’Arcy, P. (2013). Macroeconomic Management in China. Bulletine. Yang, L., & Kuhn, R. L. (2009). Chinas banking and financial markets the internal research report of the Chinese government. Singapore, Wiley. http://public.eblib.com/choice/publicfullrecord.aspx?p=1120335. Zhu, G. (Novenber 6, 2014).China Lends Money to Banks with Interest Rate of 3.5%. The Wall Street Journal. New York. Retrieved on November 18, 2014 from http://online.wsj.com/articles/pboc-pumps-money-to-china-banking-system-1415273754 Read More