Country Report:China - Essay Example

?Introduction: China, most certainly carries an extremely important position in the overall economic axis of the world. Officially known and proclaimed as the Peoples Republic of China (PRC) by the Mao’s Regime in 1949, it is the most populous nation in the world with a population of over 1.3 billion people and the fourth largest nation in terms of total area. Beijing is the official capital of the country, Shanghai is the largest city and a financial hub of the nation. China is a vast country having most of the climatic and topographical diversities within its boundaries. From the High and rough Himalayas and Karakorum’s in the North West to the Gobi desert in the East and the wetlands and subtropical landscapes to the South East. An economic giant, China is a country that has a rich history and magnanimous talent both in agriculture and industry. It is one of the five remaining Communist states in the world and regularly cited as the next super power largely owing to its rapid economic progress and international influence. The world’s largest exporter and second largest importer China has immense potential. It is a part of many international organizations including being a member of the G20. The official currency of China is the Yuan (CNY) and is considered to be the next dollar by many analysts around the globe. The two major stock exchanges are Shanghai Stock Exchange and the Shenzhen Stock Exchange having a total market capitalization of plus $4 trillion dollars. Chinese exports largely depend on its major export partners like the United States, Hong Kong and Japan while it relies on imports from South Korea, the neighboring Japan and Hong Kong. With a credit rating of AA- by Standards and Poor’s and foreign reserves well in excess of $3.2 trillion dollars the Chinese economy continues to boom with some hiccups caused by the global economic slowdown. In 2011, the IMF predicted that China's GDP (PPP adjusted) would overtake that of the United States in 2016. (Gardener 2011) Macroeconomic Study: (a) Major macroeconomic Indicators: Real GDP & Real GDP growth rate: Source: (Dr. Sohn’s Economic Network; China’s Second Quarter GDP Growth; retrieved: March 17th 2012) China’s real GDP Growth rate has been steadily rising since the 2009 meltdown where its growth rate dropped to around 6 % which was still substantially higher than the rest of the world reporting negative figures. Recently China posted 9.2% increase in its real GDP far above many countries marking its preeminence in the world. China has kept its currency largely undervalued making exports to other nations very cheap. China continues to take the world market by storm with its cheap products owing to low cost labor and abundance of raw materials. The Chinese GDP hit 47.2 Trillion CNY for the year 2011 amounting to a 9.2% growth rate. The high growth can be because of the economic slowdown in the United States and European nations under the heavy debt crisis. ii) Unemployment Rate: Source: (Trading Economics.com; Bureau of Economic Analysis: Retrieved: 16th March 2012) The minimum wage recently increased to $100 per month as many companies shifted their operations to other cheap labor countries. Agriculture continues to be the chief employer although its share has decreased form 60% to 40% followed by the industries. Women constitute a significant portion to the overall labor force. The rising wages during the 2007 pushed the cost up and exports were being expensive for the US which said that it was putting inflationary pressure on its economy. Although, labor productivity was not being compromised, increased wage rate seems to be the prime concern for China since workers are now more literate and willing to come out for their rights. The unemployment rate has remained steady around 4 % for China which goes on to show that the labor policies are well in place and economy has continued to grow despite being hampered by economic downturns. (Forbes 2011) iii) Current Account Balance: Source: (Indexmundi.com; China Current Account Balance; retrieved: 16th March 2012) China posted Current Account Balance of 280.6 Billion Dollars in 2011 which is by far the highest in the world. It goes on to reflect a stable economy with room for any economic jolt resistance. But the Current account surplus of China has remained under high criticism by many economists although there are many reasons that support this high balance. The surplus is due to the appreciation of the CNY coinciding with the high current account balance further pushing it up. Also many economists have explained that China’s unique saving behavior may be a cause of the surplus with many households in the middle class the culture promotes savings. Also China has become the manufacturing hub in the past decade or so and this has helped bring vast trade surpluses to China. Being the largest and the financial leader as an exporter of technology equipments apparels and many other products the current account shows a high value. (China Daily 2011) (b) Fiscal Indicators: (i) Ratio of gross fiscal deficit to nominal GDP The fiscal deficit to GDP ratio for 2012 is being targeted to as low as 1.5% slightly up from 1.1% posted in 2011. China posted a fiscal deficit of 519 billion Yuan for the year 2011 which is substantially lower than its targeted 900 billion. China posted a fiscal deficit of 1.05 trillion Yuan for the year 2010 which was up by roughly 100 billion from 2009 but still under 3% of GDP. China has continued to keep the fiscal policy in check despite its expenditures to grow the economy. ii) Levels of government expenditures and their ratio to nominal GDP Source: (BCA Research.com, retrieved 15th March 2012) The figure mentioned above clearly indicates that China has kept its Government expenditure around 20.8% of its total GDP at marked low levels as compared to other countries. This is an indicator of its stability and growth sustainability. (iii) Levels of revenue and their ratio to nominal GDP. China’s Tax revenues to GDP ratios have been around 9.93% in 2007 and around 10 % in 2010 (World Bank, 2011) .The data clearly suggests high level of government debt and non tax revenues to power the country economics. (c) Monetary Indicators: (i) Rate of growth of money supply. Rate Of Money Supply 2007 2008 2009 2010 2012E China 16.7 17.8 28.4 18.9 14% Source: (data.worldbank.org; Growth of Money Supply; retrieved: 15th March 2012) (ii) Rate of inflation CPI FOR china has been substantially lower around and under 5% since 2009. The policy makers have kept it in check for the overall growth of the economy. Source: (advisoranalyst.com; Appreciating China to Its Fullest; Retieved: 15th March 2012) d) International indicators (i) Openness index: China’s openness index continues to stay above 60% as of 2011 showing a high value of imports and exports. The trade to GDP ratio has been around 55.4% between 2008 and 2010 (WTO 2011) ii) Levels of exports and rate of growth of exports and imports Source (reuters.com, Three snapshots for Monday; retrieved 15th march 2012) The above chart explains the percentage growth in imports and exports. The year 2009 was by far the worse with imports and exports plunging down to around -48%.Since China has shown steady growth with its imports growing over 70% and exports growing by 50% as compared to 2009.   55.4 iii) Level of foreign exchange reserves Source: (FutureOfuschinatrade.com, us and china foreign exchange reserves, retrieved 15th march 2012) The foreign exchange reserves of China clearly indicate a rising trend especially after 2006. The Foreign exchange reserves of China are primarily composed of USD in the forms of US Government bonds and exclude reserves held by Hong Kong and Macau. China has the highest foreign exchange reserves in the world followed by Japan at $1 trillion. (World Bank 2011) Critical Problems: Uneven economic growth: The global economic crisis has clarified to the Chinese government and its people the threats and dangers of relying too greatly on foreign trade and investment for its economic growth. The dependency has made it particularly vulnerable to any economic meltdown and its effects on China. (Morrison) Inflexible Currency Policy: China’s policy to not allow its currency to float has spurred the necessity of the government to make large-scale purchases of the dollars to keep the exchange rate Within predefined target levels. We have seen the Renminbi (RMB) appreciate in value Since 2005, analysts believe that it still remains highly undervalued against the dollar. China is heavily dependent on its exports and other fixed investments theses policies may falter its long term viability and its economic sustenance. It may have inflationary pressures on the overall economy as well as boost over production in some sectors. Also the easy credit policy by the banks may trigger Non Performing Loans in the future. (Morrison) China’s banking system. Chinas banking system is largely governed by the central bank which puts a pressure on the banking system to ensure that capital flows to State owned enterprises which are deemed by the government as begin cardinal for the growth of the country. These Enterprises, on many occasions don’t seem to pay their debts to the banks. Also the interest rates are set very low even below inflation which prohibits depositors to keep money in the banks. (Morrison) Regulatory Environment and Government: There is wide gap between the urban and rural masses perhaps the highest in the world .This type of social imbalance has led to widespread protests by the masses and political unrest. The government is said to be corrupt and many misallocation of investments and fraud are underway. (Morrison) Global Economy and Internal Environment: There are also concerns and tensions regarding a highly centralized political and a n increasingly decentralized economic system China as a country is too highly dependent on its external trade and since we have witnessed a global economic slowdown China will come under pressure if the world economy continues to move towards recession. Also the increased cost of wages and labor productivity are causes of concern for the business since China is a country with the cheapest labor available and any increase. In wage rate will hamper its ability to control cost of its exports. (Morrison) Future Prospects: With China growing as a country the income disparities will subside paving way for greater production and literacy. The Chinese market is a extremely big in size and together with the increasing consumption thresholds of the population brought about by urbanization, the market will pave a better future for all the industries in the country .The efficiency of the market will rise and growth rate will witness an increase. The internal demand for both goods and services would shoot up dramatically which would subsequently help create opportunities for more manufacturing and further investment. Although China will have to decrease its reliance on exports and built a stringer country that has a large room for improvement. Having earned a considerable advantage through cheap labor and increase of human capital productivity through the help of education and better infrastructure, the future is bright for China and looks positive and bright. The business in the country will grow and prosper as the potential is very large. With better policies and enforcement of laws the industries and agriculture will flourish. Better health and education standards will improve the overall HDI and pave way for greater productivity. China as a country has abundance of raw material and cheap labor that will always remain in its favor and no other country has yet been able to match its preeminence in the export market. Overall, the economic outlook for China is certainly very great as most analysts suggest that the country will move ahead of the United States to become the world’s most powerful economy by 2020. Summary: China as a country is gifted with natural resources and labor capital. It is a country which is highly dependent on its imports and exports and provides the world with high quality goods and services. The global economic meltdown in 2008 had bad affects on Chinese economy. Chinese trade and Foreign Direct Investment declined and many workers had lost their jobs. The intervention by the Chinese government helped ease matters when it provided $600 billion stimulus that targeted largely the infrastructure in the country which triggered higher lending by banks by helping to loosen the monetary policy and boosting domestic demand. Policies like these helped China see off the decline in its global demand. While many economies saw either negative or virtually no growth in these tough years, China still posted GDP growth of 9.6 % in the year 2008 and a slightly lesser, 9.2% in 2009. As its exports recovered in 2010, China came out with a stunning number of 10.6 % growth (IMF 2010). Many economists believe that China will surpass the United States as the economic super power in the near future although per capita GDP of the US is expected to still remain a lot higher than that of China owing to a very large population and increases social divide. There are other quite a few challenges that may constrict its growth. The issues include pollution, growing social and income divide, undeveloped social safety network, poor management and regulation of economic system and strong involvement by its government in many economic divisions of the country. The sustainability of the economic growth of China rests majorly on the ability of its federation to implement comprehensive economic regulations that would allow a faster transition of China to an economy of free markets. China would also need to strike equilibrium between its domestic demand and its heavy reliance on exports. The capacity of its government to implement comprehensive economic policies and generating local demand to decrease reliance on exports will pave the way for the future of its country. But despite that the overall outlook for China is positive and with some changes in economic policies and internal stabilization the country can become the next economic superpower. Works Cited: People's Daily Online. 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