Hindrances in Chinese Economic Growth Stability - Essay Example

? Hindrances in Chinese Economic Growth Stability Hindrances in Chinese Economic Growth Stability Planet’s most populated country, with a population of more than 1.3 billion, and the second largest country by land area, China has over the past few years also marked its importance on the graph of global economy. Frail in the late 1970’s, People’s Republic of China has undertaken tremendous growth during the last three decades to reach to an astonishing height where it is now recognized as the world’s second largest economy by nominal GDP and it’s fastest growing major economy. GDP has grown swiftly at an average of 10 percent a year whereas over 500 million people have risen above the poverty line. A gradual shift from a centrally-planned to a market-oriented mixed economy, which is based on the market demand and supply mechanisms, has largely contributed towards China’s economic boost. Since the economic liberalization began in 1978, China’s economy has grown around a hundred times. China has recently emerged as an investment-driven, export-led economic giant. Factors leading towards this enthralling progress include salient economic reforms. Foreign trade structure has been de-centralized and efforts have been made to integrate into the international trading system. China became a member of Asia-Pacific Economic Cooperation (APEC) group in November 1991, a step believed to promote liberated two-way cooperation in the economical, regional trade and technological fields. The induction into trade organizations such as World Trade Organization (WTO) in 2001 was also a healthy move to escalate China’s trade figures as WTO required the Chinese government to further liberalize and deregulate trade. Fostering foreign-invested industries has also lent a helping hand towards China’s export growth. All these reforms aggregated into China becoming the fastest paced growing major economy not only in the region but also in the world. However, as China’s importance as a giant, dominating economy has speedily risen, so have the concerns regarding its ability to maintain such dominating position in the near future. Adding to that, attention has now also been focused towards the structure and health of the economy as well as the worsening environmental damages brought about by the massive development of the industrial sector. Today, the government and the policy makers of China have concerns regarding many issues which have arisen as the by-products of intense economic expansion in the country (Zhang 2003). Firstly, one of the major challenges faced by the Chinese economic growth is the prominent US accusation of ‘manipulating’ the Chinese currency. Over the past few years, the official currency of China, Yuan, has been held in a floating exchange rate system, though only allowed a very narrow margin to fluctuate. Many in the US however urge for a more flexible exchange rate which pivots around the market equilibrium determined by the market forces of currency demand and currency supply. Despite of the fact that Yuan has been allowed to fluctuate more liberally and has even risen by 20% in value against the US Dollar since 2005, Japan, European Union and US yet accuse China that it manipulates its currency by deliberately keeping it at a low exchange rate in relation to the US Dollar with a view to make the US products less competitive and, simultaneously, the Chinese goods and services more competitive and relatively cheaper than the US goods. This lowered currency rate leads to a rise in Chinese exports whereas US exports decline. A large amount of trade deficit suffered by the US in trade with China adds to the gravity of the accusation. Concerns for China regarding this issue are that the US, World Trade Organization or APEC might impose trade sanctions on China for its ‘problematic’ currency exchange rate. These sanctions may prove very costly for the growing Chinese economy as the world’s second largest economy is principally led by mass amount of exports to its trading partners. Restrictions over free trade for China may cause the deceleration of its growth or may even put it to a halt. The trade balance between US and China in 2011 exceeded $295 billion and any probable sanctions may drastically affect this huge amount of traded commodities between the two giants. Moreover, China’s Current Account surplus has also been declining during the past few years and the consequences of US pleas regarding an unfair trade advantage China has may turn the already ‘withering’ surplus into a trade deficit, whereas China may also lose its most important trade partner (Davis 2012). Secondly, the post-crisis East Asian economy is now moving towards revitalization, but China faces hindrances maintaining a dominant, leading position in the East Asian economic growth, especially when it faces tough competition from the highly developed economies of Hong Kong, South Korea, Taiwan and Singapore, also rightly known as the four Asian Tigers. The East Asian financial crisis resulted in some of the countries in the region cutting off their industrial development plans whereas many observed an outbreak of public turbulence and social disorder. These in turn led to the hampering of foreign relations between these countries and thereby causing the foreign investments to be withdrawn. Contrarily, during the same crisis period, China’s economy rapidly grew. But now with the East Asian Tigers on the path of resurgence through increasing market competitiveness and modifying domestic economic and investment structures, China needs to take effective and timely measures if it wishes to maintain its growth rate in the region. Steps should be taken to stimulate domestic demand, increase local employment opportunities, make use of the comparative advantage to further increase exports and to optimize import structures. Cooperative and friendly relations with its neighbors is also essential for China if it wishes to remain competitive in the region. However, anti-Chinese attitudes and the violence and riots resulting there from pose a constant challenge in fostering a cooperative and friendly trade environment in the region. Domestic and neighboring stability is essential for China to be able to continue its journey of economic progress and this can only be brought in by effective political reforms and good domestic policies with an objective of constructing a peaceful and enjoyable national situation (Zhang 2003). Thirdly, when we talk about the industrial structure of East Asia, the Chinese industrial structure lags far behind from what is required to be the core industrial arrangement of East Asia. Therefore if China plans to be the leader in the new prototype of industrial development in the East Asia, it needs to develop new and efficient technology as well as bring in technological innovation to keep up with the pace of industrial evolution in the region. In terms of trade, China shall have to search for new, permanent and advantageous trade markets to ensure a stable balance of trade and a surplus on its Current Account. Similarly, in terms of investments, China needs to bring in greater amount of foreign capital, make efficient use of such capital and also try to increase the foreign direct investment. Moreover, China needs to develop regional economic and trade cooperation so that it may benefit from the recent rapid advancement in the industrial field in the East Asian countries and encourage East Asian region to be a free trade zone. Furthermore, highly competitive economies like Singapore and Hong Kong make it vital for China to adopt an innovative approach in the technological and industrial fields in order to remain competitively efficient and prosperous (Zhang 2003). Another problem faced by the economy of China is a global challenge which translates into domestic issue for China. This is the dependence of Chinese trade on currently-weak economies. Major buyers of Chinese products are US, Japan and Europe and these economies currently face economical crisis resulting from increasing debt. This issue may potentially adversely affect china’s flourishing export business as it threatens to curtail exports from China and may thereby lead to a negative balance of trade, that is, its exports falling short of its imports. Although China has ten major trade markets in the East Asia and is itself India’s largest trading partner, the total of its foreign trade with US, Japan and European countries constitutes a large proportion of the overall trade balance. In order to reduce this dependence upon currently weak economies and to ensure a steady growth and positive balance of trade, China needs to find new trade markets in the region. This can be done if policies for ‘opening up to the world’ are introduced and continue to be brought in and implemented effectively (Davis 2012). Apart from that, a huge challenge which needs to be tackled by China is the growing rate of inflation. In the recent years, rapid economic advancement has resulted in the prices of the basic consumer goods rising sharply, bringing in severe consumer inflation. In the first four months of 2008 alone, food prices rose by over 21% whereas property prices have also showed an upward trend. To curtail inflation and moderately rising property prices, Chinese government has introduced many fiscal regulations. Interest rates have been raised and limits have been imposed on bank loans. Inflation reached its record high in July 2011 when it rose to 6.5%. More regulations came in to curb the inflatory effect but it had a side effect; a downfall in the country’s growth rate which fell from 9.5% to 7.4% between June 2011 and October 2012. China needs an intelligent economic scheme which could help it control the rising inflation and meanwhile also does not adversely affect its economic growth rate. Some serious efforts need to be made in order to bring in such reforms if China is to remain on the economic peak and competitive in relation to its cutthroat-competitive neighbors (Bloomberg 2011). Moreover, economic globalization leaps quite swiftly and the challenge faced by China in this regard is that it has to seize an opportunity to quickly develop itself independently or else it may get swallowed up in the tide of economic globalization. China shall have to undertake construction and modernization activity on a large scale in order to stay linked up to the world. Economic globalization has two aspects. It has both pros and cons. Generally speaking, it brings a lot of benefits as well as problems to the world. Similarly, while China gets involved in this globalization of economies, a rise in disparity is predicted, that is, more unequal income distribution among the citizens and a greater difference between the rich and the poor. Secondly, as China gets going with this economic globalization and opens up to the world, a greater economic risk in terms of increased competition awaits it. Moreover, a potential threat to its sovereignty is also deemed to be inevitable. Therefore, all of this summed up, china needs to plan accordingly in order to keep growing economically and meanwhile also safeguarding its national interests as well as sovereignty and building up a cooperative culture where there is least amount of income disparity, benefit equality, mutual trust and maximum utilization of comparative advantage, whilst speaking in terms of trade (Zhang 2003). Challenges also exist in the real estate sector. If the Chinese real estate sector faces a boom, it can have drastic results for the economy. A real estate boom, driven by huge amount of existing debt and added up with government measures to stimulate local consumer demand in the country can cause a possible economic crisis (Davis 2012). Adding up to the list of problems facing China’s economy is the fact that Chinese economy is highly energy-demanding and is inefficient. Having become world’s largest energy consumer in 2010 it still, rather shockingly, depends on coal to supply 70% of its overall energy needs. This fact and the rapid economic evolution in the last three decades have harshly affected the nation’s environment and now it has become a serious concern for the government of China. Due to steep increases in the water and air pollution, 20 of the world’s 30 most polluted cities are situated in China today. Moreover, natural resources have rapidly degraded, water table has steadily fallen and soil erosion and desertification have increased which have the overall impact of reduced primary, secondary as well as tertiary output of the country. China faces the challenge to tackle these environmental issues leading towards global warming and depletion of natural resources. Although, many plants have been shut down due to inefficient production techniques they were using, China has now become the world’s largest wind energy provider and China plans to provide for 30% of its energy requirement via renewable resources such as wind and solar energy by the end of 2050, more still needs to be done in the form of government expenditure, more efficient industrial policy and increased incentives to ‘go green’, to ensure greater use of renewable energy to curtail the increasing pollution rates and curb its effects (Aruvian et al 2011; World Bank et al 2012). However, in response to these issues, according to Chinese government, nuclear and alternate energy production methods have been planned and a stimulation of consumer demand is planned to reduce dependence on exports for growth of economy. And if such actions are implemented, China’s economy will continue to grow by approximately 8% annually for the next few years and thereafter by 5% in the following years (Davis 2012). References: Davis, M. (2012, April 5). Problems Loom for the Chinese Economy. Investopedia – Educating the world about finance. Retrieved November 3, 2012, from http://www.investopedia.com/financial-edge/0412/problems-loom-for-the-chinese-economy.aspx#axzz2B4Ma8gtE Prasad, E., Rajan, R., & International Monetary Fund. (2006). Modernizing China's growth paradigm. Washington, D.C.: International Monetary Fund, Research Dept. World Bank., & Guo wu yuan fa zhan yan jiu zhong xin (China). (2012). China 2030: Building a modern, harmonious, and creative high-income society. Washington, D.C: World Bank ; Development Research Center of the State Council, the People's Republic of China. Zhang, L. (Director) (2003, October 24). China Economy in East Asia Economic Development. Asia-Link Conference. Lecture conducted from Durham University, Durham. Aruvian. (2011, January 1). Analyzing Renewable Energy in China - Market Research Reports - Research and Markets. Research and Markets - Market Research Reports - Welcome. Retrieved November 4, 2012, from http://www.researchandmarkets.com/reports/592365/analyzing_renewable_energy_in_china Bloomberg. (2011, October 14). China Inflation Exceeding 6% Limits Wen’s Scope for Easing - Businessweek.Businessweek - Business News, Stock Market & Financial Advice. Retrieved November 4, 2012, from http://www.businessweek.com/news/2011-10-14/china-inflation-exceeding-6-limits-wen-s-scope-for-easing.html Read More