Chinas Macro Environment - Essay Example

China Report Table of Contents Introduction 3 II. Chinas Macro Environment 4 A. Economy 4 B. Politics 5 C. Society 6 III. Chinas Economy by the Numbers 7 A. GDP 7 B. Inflation 7 C. Balance of Trade 7 D. State Budget 8 E. Employment 8 F. Rates of Interest 8 G. Foreign Investments 9 H. Imports and Exports 9 IV. Future Prospects 9 V. Conclusion 10 Works Cited 11 1. Introduction 2010 was a watershed moment for China, marking the culmination of an economic transition from one that is planned in a central manner to one that is oriented towards market forces. That year it became the worlds biggest export machine. Agriculture was de-collectivized as a first step, and then gradually price controls were eased, fiscal policies were removed from centralized control, government-owned concerns gained more freedom, the banking sector was created too with more freedom, and many other reforms were instituted with the objective of making the economy more oriented towards free market forces. The stock markets were encouraged to grow and develop, and China embarked on a sustained effort to boost trade and investment activities with the outside world. Moreover, the private economic sector was given a boost and given substantial incentives and freedoms. This has come about gradually, with some hiccups and changes in direction, all aimed at bolstering Chinas global stature as an economic powerhouse and making sure that domestic industries are allowed to flourish. Moving forward from this state of affairs there are several challenges to the economy and to the social cohesiveness and stability of the country that the Chinese government needs to address. Those relate to the reduction of the high rate of savings or the deployment of those large savings, even as domestic consumption on the other end remains lackluster; the provision of jobs to a large section of the Chinese population; the reduction in the rate of crime and the rate of corruption inherent in the system; concerns relating to the environmental sustainability of its economic activities, in light of global warming, its increased fuel needs, and the need to source energy from cleaner alternative energy sources moving forward. This has implications for the overall sustainability of its economic drive, given the widespread damage to the environment at present, which cannot be totally abated because of the lack of cleaner, safer alternative energy supplies to coal and oil. Moreover, the demographic shift towards a greater number of older Chinese has tremendous repercussions for the future of the Chinese society and economy. Clearly the challenges include diversifying away from fossil fuel sources of energy, and sourcing more power from solar and other viable alternatives, including nuclear, though that presents its own problems too. Recent turmoils in the global economy likewise have rocked the Chinese economy to the extent that growth had stalled somewhat, even as stimulus activities such as greater spending and relaxed monetary policies have guaranteed some boost to growth to GDP in the short term. The central tenet of the current long-range plan for the economy has to do with moving away from a dependence on exports to fuel growth, and towards making sure that domestic consumption is a major driver of the Chinese economy. This move is seen as bolstering economic stability and making the Chinese economy less prone to contagion effects from instabilities and weaknesses in the global economy and the economies of its major trading partners. II. Chinas Macro Environment A. Economy The great move towards a free market economy commenced in the 1980s, a deliberate effort touched off by the reform-minded strategies of Deng Xiaoping. The shift was characterized by the spurring of local economic activities, putting more income into the hands of private individuals, and stimulating the consumption of all manner of goods and services. These strategies coincided with concerted efforts to start new industries, boost production and employment, and generate investments from the world markets. The drive from this period was focused on massively jumpstarting production as well as boosting overall economic growth via that. That initial drive of course was problematic in its early spurts, because chiefly of concerns relating to how production for instance was not tied to market forces and real needs, but rather was undertaken solely for the purpose of being able to notch production increases as being additive to the overall GDP of the country. Moreover, there were concerns that production was done with no respect for the environment or for the consumer, the result of which is that both suffered from goods that were poorly made and wastefully made, and which were sometimes outright hazardous to both the environment and to people. The problem is that even as the country pursued economic growth too, concerns such as the environment, human rights, wealth distribution to the masses, and overall product safety were set aside, or given only token importance. This shoddy regard for these aspects of production and the economy spilled over into dangerous products that made their way into global markets, including the US. The key obviously lies in a greater concern for these issues, and a solution tried has been to delegate more decision making power to local governments, who can then put more emphasis on such aspects of production as quality, safety, sustainability, and relevance to chosen domestic and international markets. B. Politics Chinas Communist Party is the sole political power in the country, and has been since it rose to power with the establishment of the Peoples Republic of China in 1912. The sole power has jurisdiction over 22 provinces and four municipalities, including Shanghai and Beijing. It also has jurisdiction over Macau and Hong Kong, and claims jurisdiction over Taiwan, though this is disputed and subject to intervention from the global community, which partly recognizes the autonomy and independence of Taiwan. That said, politically, Chinas power is buttressed by its growing economic might and its growing military might and capabilities as well, not just in Asia but in the rest of the world. Increasingly it is a threat to the West, and to the United States in particular, and in Asia that political power has translated into bolder excursions into Asian waters in a bid to control its vast resources. Politically too, China is just one of five permanent state members to the Security Council of the United Nations, and as such holds tremendous political clout in the global stage, being able to veto actions, and being able to gain the right to amass nuclear weapon stockpiles. The country too, by sheer population size of more than 1.3 billion people, has the capability to assert its political rights and ambitions and be taken seriously when it does. This power again is being supported by a growing economy and its entrenched ties with the rest of the worlds major trading economies, which it can then leverage to further its political ambitions and actions in Asia and the rest of the world. Politically too, the Communist Party has had a tight control on every aspect of Chinese national life, most vitally with regard to the economy, which it consciously decentralized for what it perceived as the better interests of the party and of the country. That gambit has paid off well, in that as the Chinese economy grew by leaps and bounds, from strength to strength, the Chinese Communist Party was able to maintain its vise-like grip on all other aspects of Chinese national life, stifling dissent, controlling Internet access, policing the economic players and setting rules so that the country benefits and not the multiinationals, and making sure that domestic industries are vibrant and strong. All this while encouraging the influx of more investors and financial investments, and keeping the party on top of the whole scheme up until the present day. C. Society Having the biggest population in the world, and having raced economically as it did, China nevertheless has to face many serious societal problems, some of them fantastic in scale and seemingly immune to all sorts of attempts to fix them. For one growth has largely favored the cities, to the neglect of rural areas and the hundreds of millions of people who dwell in the rural regions and depend on agriculture for their livelihoods. This large swathe of the Chinese population has been left behind by the breakneck improvements in the personal fortunes of those relatively few who have lived in cities all their lives or who have successfully undertaken a migration to the cities. For another, the conscious limiting of offspring to just one per family has resulted in a number of hidden ills and practices, including selective abortion based on sex/gender, and the tilting of the demographic characteristics of the Chinese population towards increasingly older people, because not enough young people are being born to bolster the youth numbers. There are a host of other problems as well. Moral values are becoming sacrificed as the country shifts its emphasis to economic well-being over more traditional family values. Social problems arise out of the deteriorating environment too. Even prosperity meanwhile is threatening to enlighten more people who will want to have greater political freedoms too. Employment has been uneven in their provision and in their quality, with a greater number of Chinese being tied to low-paying or agricultural jobs, and a few are able to land better jobs in the cities. Crime upsurge is a problem in the growing cities too, with law enforcement unable to cope with the tsunami of people moving to the cities. Gender inequality persists in a male-dominated society, and an elite core of citizens living in the major cities are dominating economic activities at the expense of greater equality and greater wealth distribution among the rest of the population. III. Chinas Economy by the Numbers A. GDP The countrys GDP is pegged at more than 10 trillion dollars in 2010. corresponding to a per capita GDP of $7,519. The inflation rate is 3.3 percent, while unemployment is 4.1 percent. Debt levels are a third of total GDP. In terms of per capita GDP, the annual average increase is close to 10 percent, with some years with larger increases, particularly in the middle of the last decade. Growth in GDP is pegged at close to 8.3 percent in 2013, an improvement over lower levels registered for the two years prior. The projections for growth in the medium term caps growth at around 6.4 percent by 2017, a slowdown characterized too by a shift away from export-oriented growth towards more growth in local consumption and production geared for local consumption. This does not mean though that exports will slow down. Far from it. The gist is that even as exports grow, the economy hopes to diversify and to strengthen its domestic base too. On the other hand, there are concerns about being able to execute on long-term economic strategies, with threats of instability too marking a somewhat pessimistic outlook for the economy moving forward. B. Inflation Inflation numbers has kept to within a relatively tight band of between 2 and 6 percent, with some years where inflation peaks to about 8 percent and dips to as low as -2 percent in some years, particularly at the height of the global financial crisis in 2008-2009, when inflation peaked and ebbed widely along those extreme values. C. Balance of Trade China as we know it today is the product of a successful trade strategy that saw it amassing really massive and sustained trade surpluses for decades, in the hundreds of billions of dollars. The trade figures indicate a slight easing of trade surplus figures in recent years, after massive record surpluses recorded in 2008, followed by record declines in 2012 and a slight recovery to about 291 billion dollars in 2013. The average is about 53 billion dollars from 1983 all the way to the previous year, and the figures translate to the surplus growing by a factor of 10 in the previous decade. Chinas largest surpluses are with North America and some countries in Europe, while its biggest deficits are with Japan, Germany and Taiwan and South Korea, among others. D. State Budget The state budget as a function of GDP is small, and has been negative in some years, reflecting some internal accounting that maybe reflects prudent spending, or the carryover of budget allocations from previous years into the reporting years finances. That said, given the large size of the Chinese economy, at 10 trillion dollars, a fraction of a percent of that as constituting a yearly budget is a considerable amount. Moreover, these figures tie into the large cash reserves of the Chinese government tied to financial instruments in the global markets, which constitute a kind of backup funding for whatever needs the government may have in terms of shoring up its fiscal reserves and the like. In the past decade, the state budget peaked at half a percent of the GDP. E. Employment Unemployment numbers are static, but some caution against taking the government figures as truth, given that official unemployment numbers reflect only the urban situation, and does not factor in unemployment numbers in the rural areas, where an estimate pegs the number of unemployed as reaching more than a hundred million or more workers. That said, in the cities, the unemployment numbers have been steady for much of the last decade or longer, reflecting rapid growth in the cities and the capacity of the cities to absorb new workers from that rapid growth. On the other hand, where rural workers are factored in, the unemployment figures are estimated to go up by a factor of 5 or more from the official figures, given the massive numbers of unemployed people of working age in the rural regions of the country. F. Rates of Interest The interest rate band from the mid 1990s all the way to 2013 was between 5.3 percent and close to 11 percent, with an average of about 6.5 percent. These figures indicate a relatively tight window of movement, with the record high coinciding with a period in the mid 1990s where government tightened monetary policy and effectively discouraged borrowing through those high interest rates. On the other hand, the record low interest rate was achieved in 2002, a period where from the numbers the government tried to stimulate spending by lowering the cost of borrowing money. G. Foreign Investments The countrys net investment position globally is 1.8 trillion dollars in 2012, in stark contrast to the net large negative investment position of the United States, and making China one of the countries with the deepest investment pockets in the world. This is backed by massive inflows of direct investment into China amounting to close to 1.9 trillion dollars in 2012 alone, a figure that is in turn backed by sustained heavy investment flows into the country going back decades. This augurs well for the continued massive growth and strengthening of the countrys coffers and economic position moving forward. H. Imports and Exports The massive trade surpluses discussed earlier correspond to large imbalances in exports from and imports into China, favoring exports. From a low base of just a few hundred million dollars in 1984, exports have ballooned to thousands of millions of dollars by 2013, marking a massive shift towards exports as a key driver of the economy, even as imports have also grown but at slower pace compared to exports. IV. Future Prospects Given the massive scale of the Chinese economy, from exports to the potential of the domestic markets and domestic consumption, to the scale of government spending, savings, and massive influx of investment dollars to the country on a sustained basis, it is hard to imagine that the Chinese economy will not continue to chug along at its current breathtaking speed. There will be hiccups along the way, but the long-term prospects are truly bright and spectacular. V. Conclusion The massive push to spur the domestic consumption and to mobilize the massive savings of the Chinese public should take China to the next level and transition it from an export-dependent economy to one where domestic consumption will be a key driver of economic growth moving forward. Future prospects are brilliant in this regard, and the sustained inflow of direct investment monies into China means that domestic consumption will be backed by more companies and industries producing for the domestic economy rather than for exports. Further reforms in the economy and in the way the state spends money will guarantee momentum. Moreover, shifts in priorities in power generation and the increased concern for the environment and for sustainability also add fuel to economic growth moving forward. Given these prudent management moves and strategies for operating in China should be aligned with long-term trends, including producing for the domestic markets. This means trying to understand local preferences and buying patterns when crafting products and services for the Chinese market rather than for export. Works Cited http://www.tradingeconomics.com/china/balance-of-trade http://www.bea.gov/newsreleases/international/intinv/intinvnewsrelease.htm http://www.futureofuschinatrade.com/fact/chinese-yuan-us-dollar-exchange-rate-daily http://www.imf.org/external/country/CHN/rr/2012/020612.pdf http://en.wikipedia.org/wiki/People%27s_Republic_of_China#Administrative_divisions http://en.wikipedia.org/wiki/Asia-Pacific_Economic_Cooperation https://www.uschina.org/statistics/economy.html http://en.wikipedia.org/wiki/Economy_of_the_Peoples_Republic_of_China#State-owned_enterprises http://developmentprinciplesgroup.com/china-opportunity/vast-market-investment.asp http://www.chinadaily.com.cn/business/2012-07/14/content_15580701.htm http://www.chinadaily.com.cn/business/2010-05/04/content_9808404.htm http://www.tradingeconomics.com/china/government-budget http://www.tradingeconomics.com/china/balance-of-trade http://jacoblangvad.com/articles/2013/02/chinas-2013-economic-forecast/ Read More