The Growth of China from 2008 to 2018 - Research Paper Example

The growth of China from 2008 to and the impact of the same on US economy Introduction The year 2008 is predominantly known for its economic events that rocked the global financial markets and affected nearly all countries, China being inclusive. With no clear causative factors, the financial recession of 2008 is known to have devastated many nations especially in relation to their growth prospects and macroeconomic factors. China, being a socialist market economy is known to be having the second largest economy when measured in nominal GDP and purchasing power parity (Barth, Tatom & Yago, 2009; Siddique, 2007). Precisely, in the global market the economy of the country is perceived as being the fastest growing economy in the world. With the main aim of ensuring recovery after the recession of 2008, the country has managed to record tremendous growth, particularly in the gross domestic product (GDP), which is used by its leaders in the benchmarking of the economy’s performance. In this study, I seek to address the concept of economic growth in China from a macroeconomic point of view, and how the same impacts on the US economy from a macroeconomic point of view (Chuang & Thomas, 2010; Morrison, 2013). China’s economic history dating back to 2008 The economy of China has been considered as one of the fastest growing economies in the world taking into consideration its real annual gross domestic product (GDP) that has averagely grown to 10% in the year 2013. As such, China is regarded as a main global power in trade. The other economic achievements in China that make its economy to be growing faster is that fact that it is the largest manufacturer, the largest trading economy, the second-largest foreign direct investment (FDI) destination and the only country holding the largest number of foreign exchange reserves (Calhoun & Derluguian, 2011). Within a span of only three decades beginning the year 1979, the rapidness in the economic rise of China can be considered as one of the major and the greatest success stories economically. However, this rating cannot be merited to that of the U.S.A considering that it has a lower per capita value as compared to the US (Gordon, 2008). However, in the year 2008, China’s economic growth was adversely affected by the recession considering that significant declines were noted in its exports, FDI inflows and imports. Consequently, there was a slowed growth in the country’s GDP and a large number of the working population lost their jobs through forced retrenchments and early retirements. From the angle of macroeconomics, it can be said that the recession affected households, businesses and the public sector (Blackford, 2008; Liao, 2009). The impact of the 2008 global economic slowdown on China In the preceding year before the recession year i.e. 2007, the real GDP of China as was measured stood at 14.2%. However, during the recession year and as a result of the economic slowdown, the declined to about 9.6%, and further continued to slow down to 9.2% in the year 2009. According to economic analysts, this was the most tragic moment in the economic history of China and the government of China, in response instituted a couple of measures that helped to curtail the situation (Brown, 2001a). Ideally, the implementation of the large economic stimulus packages by the government of China is what led to the recovery of the economy. In addition to the stimulus packages applied, the country adopted an expansive monetary policy to curb the situation (Gupta, 2008). The effects of these applied measures were quite evident, particularly beginning the year 2009 owing to the fact that the domestic investment rate, as well as the consumption, was improved. This helped explain the sudden turnaround effect in the macroeconomic performance of the China economy around the year 2009 considering that the country’s GDP for that specific year was 9.6%. The increase in consumption and investment of households, business and public sectors greatly aided in the prevention of the economic slowdown (Hung, 2009; Swaine, 2011). While the year 2009 seemed to be more promising economically and that the country would record better growth prospects in the succeeding years, there has been an evidential continued drop in the real GDP rates thus, signifying a continued decline or slowdown in the economic growth (Burnell, Randall & Rakner, 2014). For instances, between the year 2009 and the year 2011, the economic growth averaged about 9.6%, and the real GDP rates in the most recent years of 2012 and 2013 grew only by 7.7%. Coupled with predictions and forecasts by the International Monetary Fund that China’s real GDP would further drop to 7.0% between the year 2014 and 2018, the indications are quite clear that the recession of 2008 has greatly impacted on the economy (Global Development Horizons, 2011). The causes of the economic growth of China Economists and other analysts who have had the opportunity to observe and study the trends of economic growth in China have attributed the economic growth to have been as a result of two major factors. The first factor is that there was the existence of a large scale of capital investment in the country; much of which was financed through foreign investments and large domestic capital contributions/savings. In this case, when the economy was faced with the slowdown, individuals aggregated their savings and provided money needed for the operation of the country. Second, the trend in the growth can be attributed to the rapid productivity of growth in the economy (Döring, 2007). Diverse readings that have been piloted in this line have implicitly shown that the acceleration of the economic reforms that were practiced in the country was through the adoption of these two factors. Subsequently, the reforms are considered to have in turn led to the increase in economic efficiency hence, a boost to the economy’s output levels. This cycle ended with the additional investments that were pumped into the economy (Guo & Lamb, 2010). According to other economists though, the robust economic progress of China can be accredited to the productivity gains/increased efficiency that largely resulted from the reallocation of resources to the formerly government controlled sectors such as trade, agriculture and services (Hao & Wang, 2011; Chan, 2012). Additionally, the FDIs that were received in the country brought in new technological advances that boosted the economic efficiency of the country hence, the rapid growth (Zhu, 2010). However, according to projections by the Economist Intelligence Unit, it is expected that the growth of China’s economy will slowly and gradually decline, considering its technological approach to development, as has been developed countries. Economists would argue that not unless China establishes itself as a new center for technological advancement, its real GDP and productivity would decline (Zheng, 2007). A critical analysis of China’s economic growth standards at the current moment would easily reveal that just as other developed countries have experienced, the transition to a middle-income economy has not been successful. This is for the reason that the country seems incapable of sustaining the high levels of productivity that it had aspired to attain or at least attained. The main reason for this could be that the country probably has failed to adequately address the structural inefficiencies that have been witnessed in its economy (Garnaut, Song & Woo, 2009). Therefore, there is a clear projection for a continued slow decline in the real GDP to about 6.3% in 2014 to a low of 3.7% in 2020. This is as presented in the figure below. Projections of Chinese and U.S Annual real GDP growth rates for the period 2014-2030 (In percentages) Source: Economist Intelligence Unit Measurement of the economy’s size There have been a lot of global speculations in regards to whether China as a faster growing economy will be able to overtake the U.S, which currently is the strongest economy. As shall be discussed below, the effect of such an overtake would imply that China becomes the largest world economic power (Andrade, 2007; Seedhouse, 2010). However, the determination of this economy’s size can be attributed to the nominal exchange rates measured in U. S dollars. In the year 2012, the real GDP of China was approximated at $9.4 trillion, a significant figure equivalent to about 56% of the economy of the U.S (Brown, 2000; Morrison, 2013). The per capita GDP, when estimated, revealed that the figure for China was roughly $6,960, a 13.15 that of the U.S (Wong & Lu, 2002). In this measurement of the size of the economy in China, it would be inappropriate to use nominal exchange rates in the conversion of the data given that it is likely not to yield accurate estimates of size of China’s economy. According to Wiarda (2007) the nominal exchange rate would also not yield accurate results owing to the fact that they may not appropriately estimate the living ideals of the people of China in relation to that of the U.S. it is not efficient to use nominal exchange rates in the measurement because the same only reflect on the prices of foreign currencies as opposed to determining the differences in the prices of the goods and services across various countries. Therefore, it would only be fair to develop measurements based on the actual purchasing power (Calhoun & Derluguian, 2011a; Schmitt, 2009). Through the increase in the purchasing power parity, there is a probability of an intensification in the exchange rate of China and its per capita GDP. Basing on the World Bank data obtained by the Economists Intelligence Unit, the prices of goods and services are about 45% higher in China relative to the U.S. An adjustment for the price differential will raise the GDP of China in 2013 to $13.6 trillion instead of the former; thus, showing a relative proportion of 80.9% as China’s relative economy size to that of the U.S economy (Chai & Roy, 2006). Therefore, basing on the purchasing power parity, China’s economy will likely overtake that of the U.S. these estimates are as presented in the table below (Yu, 2008). Comparison of U.S and China’s GDP and per capita GDP China U.S.A Nominal GDP ($ billions) 9394 16,786 GDP in PPP ($ billions) 13579 16,786 Nominal per capita GDP ($) 6960 53,060 Per capita GDP in PPP ($) 10060 53,060 Source: Estimates by Economist Intelligence Unit using World Bank PPP data The impact of China’s economic growth to the U.S economy from a macroeconomic perspective The economic rise in China is of substantial importance to the U.S Congress considering the realization of the significant implications that it has on the U.S economy and superiority as an economic power. The U.S considers the large market in China as a final entry point for its firms to set up base in China’s markets. The realization is that the country has to recognize the faster economic growth of China given that most of the firms in U.S use China as a final point of assembly to the global network of suppliers (Bergsten et al, 2009; Li, 2010). To firms operating in the U.S, the economic growth in China has greatly opened the trade market for their goods and services, as well as in the importation of goods and services from China. The result of this is the increase in the number of firms within the U.S; hence, a rise in the employees or workers employed by the firms. This kind of relationship will fairly translate to the increased income of households thus, inverse in their purchasing powers. However, this kind of behavior is only feasible in the short run since; the market in the U.S is as well competitive (Chai, 2011; Hu, 2011). To the United States, the rapid economic growth of China has led to the substantial increases in the bilateral trade ties that were before quite weak. For instance, according to the World Bank estimates of 2013, the trade total between the two countries stood at $558 billion in the year 2013. This is as opposed to the figures in 1980, which stood at $5 billion. This tremendous increase in bilateral gains can be attributed to the faster economic growth of China (Breznitz & Murphree, 2011). On the front of trade, the U.S considers China as a great trade partner given that it is the second-largest partner of the U.S in trade globally. Nearly, China acts as an exporter and importer of products to and from the U.S. The economic growth of China over the period of 2008 to 2013 is imperative to the U.S government considering the fact that China holds large amounts of Treasury Securities at its disposal; hence, helping the federal government in the financing of its budget deficits (Dobson, 2009). This is true from a macroeconomics point of view considering that improved growth in China’s economy would be directly linked to the budget deficit being serviced by the U.S Treasury securities (Hao, 2010). However, on the other hand, there has been the raising of numerous economic issues by the U. S policy makers. Such include claims that trade relations between the two countries should be severed owing to the fact that China uses unfair trade practices, as opposed to the case of U.S trade markets. Some of the examples used in support of this claim are that China undervalues its currencies and foreign subsidies that it gives to the domestic suppliers; thus, flooding the goods and services market in the U.S with goods that are low-cost (Subramanian, 2011). This approach is dangerous and may not be appropriately used in the U.S considering that the workers in the U.S have already started being insecure with the flooding of the market with cheap labor. Consequently, the practices are likely to threaten the living standards of the local U.S citizens given that most have become concerned with their standards of living, loss of job opportunities and the wages. There is increased confidence in the economic model, in use by China given that trade and economic reforms are its surest ways to modernize and become stronger economically. To the U.S firms, a further impact would be in relation to the undermining of the competitiveness of the U.S intensive firms, and the contravention of the intellectual property rights of individual firms in the U.S which are based in China. In addition to these impacts, critics to the economic growth of China contend that the same would lead to the creation of investment barriers that would limit the opportunities for the U.S firm based in China to lose out of the market due to the economies of scale. Subsequently, firms may be forced to set up production points in China as a cost of operating in the economy (Jain, 2006; Laurenceson & Chai, 2003). Conclusion Through the improved economic domestic spending, China’s currencies are likely to appreciate hence, the ability for more imports, and speeded economic recovery. This study has mostly sought to illustrate the extent of China’s economic growth particularly from the period of the 2008 economic slowdown (recession). Through the sampled studies, it is true that the growth in China’s economic power will have a significant and influential contribution on the global economic stage, especially in matters related to the U.S (Shou, Ren & Palgrave Connect, 2013). Such issues include the proliferation of nuclear materials, the aggression from North Korea and the climate change (IMF, 2010). In all these aspects, it is largely seen that the success of the interests of the United States relies on the economic cooperation it maintains with China. These are some of the crucial impacts expected of the recognition of the fast economic growth in China. To this end it appears tricky upon the U.S to welcome the economic prevalence by China given the complexity of some of the issues relating the two countries (Tellis, Kuo, Marble & National Bureau of Asian Research (U.S) 2008). The way forward in addressing these complexities still remains to be a foremost challenge to the policy makers in the U.S. little is expected from the side of china to help sustain the macroeconomic issues surrounding the national economy in the United States (Worm, 2008; Ye, Levine & Liu, 2011). References Andrade, J. A. S. L. (2007). USA 2030: Predictions. Georgetown, Guyana: Astemari Publishers. Barth, J. R., Tatom, J. A., & Yago, G. (2009). Chinas emerging financial markets: Challenges and opportunities. New York: Springer. Bergsten, C. F., Peterson Institute for International Economics., & Center for Strategic and International Studies (Washington, D.C.). (2009). Chinas rise: Challenges and opportunities. 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