How Successful Has the Government and the Central Bank China Been in Running its Economy - Essay Example

MACRO & MICRO ECONOMICS, CHINA’S ECONOMY and Macro & Micro Economics, China’s Economy How successful has the Government and the Central Bank China been in running its economy over the last two years? According to the recent statistics, China comes second after the U.S in terms of economic might with a GDP ratio of 53.1. In addition, China was named the third largest trading country between the years 2009 and 2011 due to the high number of exports and import activities in the Asian country. Before its accession into the World Trade Organization, the Chinese economy was largely ignored across the globe with experts citing currency undervaluation as one of the key pointers of this ignorance. It was until China ascended into WTO that saw its global trade double accounting for over 10.38% of all trade exports in the world. In the year 2011, China was named as the biggest import/export partner coming third and second respectively in the import and export activities globally. Das (2012, p. 38) suggests, “China is considered as one of the most diverse economies of modern times”. This explains why the country is referred to as the ‘world’s factory’ in some economic quarters. Beginning 1978, the Chinese economy has reduced its over-reliance on state owned enterprises and focused more on private enterprises despite the fact that state enterprises account for approximately 46% of the nation’s industrial output. However, the Chinese government has most recently renewed its efforts in encouraging state owned enterprises mainly in sectors that stimulate economic development. Some of the key sectors that are state owned include; banking, telecommunications and natural resources. Many countries have now recognized just how much China is strategic as a trade partner. Despite the success of the Chinese economy, there are growing concerns regarding the trade balance of China with the rest of the world. In particular is the U.S. that has a trade deficit with China amounting to up to $135 billion a situation that has tripled compared to the trade deficit of the US with China a decade ago? In addition, more concerns have been raised regarding China’s trading activities where China has been accused of unfairly offering subsidies to stay ahead of competition in terms of the global trade. Some economic analysts argue that China as an exporter dumps substandard products in developing countries in order to maintain their trade dominance in the global front. China exports include among other products; textiles, electronics, data processing equipment and integrated circuits. The total value of Chinese exports currently stands at $ 2.05 trillion. As stated by Anderson et al (2003, p315), China imports from other countries oil and mineral deposits, motor vehicles and metal ores. The total value of China’s exports is approximated to stand at $1.817 trillion. The current situation with regards to the China’s fiscal policy is that the country has adopted an “expansionary fiscal policy” (Lin, 2011 p.13) while at the same time maintaining a tight monetary policy that has resulted to some sort of policy mix. From an economic perspective, China’s economy is greatly affected by inflation and a slow growth rate. Despite being one of the largest world economies, China’s economy is greatly affected by macro-economic forces that subsequently affect the overall economy. In the aftermath of the financial crisis, China re-examined its fiscal policies that were significantly different from those in the US and the European Union in order to cushion the nations’ economy from further recess shockwaves. Before the 2008 financial crisis in China, the nation had historically adopted proactive fiscal policies in addition to having more reanalyzed monetary policies. However, there was a consistent tightening of monetary policies in China from as early as 2003 a situation that is evident as a result of the comparison on the prevailing economic conditions in China in 2003 and 2007. The expansionary fiscal policy in china is meant to encourage demand for investment while at the same time ensuring that the overcapacity for demand is well catered for. In addition, the expansionary fiscal policy is meant to create some balance between demand and supply in a nation that is highly reliant on global trade for sustainability. http://www.tradingeconomics.com/china/government-budget China’s budget is presented annually by the ministry of finance where it is subject to ratifications by the national People’s Congress as well as the local people. In 2009, China pegged its total revenue estimation at 3.6365 trillion Yuan. Of the total amount, the central government contributed a total of 50.5 billion to the total revenue. In 2013, the Government of China recorded a budget deficit of 2.10% of the total GDP of the country. However, the country’s budget had been on a consistent average of about -1.93% budget deficits between the years 1988 and 2013. According to the current statics, China’s government debt is approximated to be 25% less than the gross domestic product. In 2004, China recorded a budget deficit of approximately $26 billion which is approximately 1.5% of the country’s GDP. However, economic experts are of the view that China’s budget deficit will significantly reduce in subsequent years owing to the strong and favorable economic conditions across the world and the strategic position of China as a trade partner. The shrinking budget deficit will otherwise have an impact on the public expenditure where the Chinese government will more likely spend on health and other public services. Over the last decade, China has undertaken massive reforms in its budget structure with the national budget investing more in public service. However, the greatest challenge that China as a large economy in East Asia faces is that it has a decentralized fiscal system. According to He & Pauwels, the country has five level of governance that includes the national, provincial, prefectural, county and township governments (2008, p.17). In china, the national government accounts for just about 30% of the total budget while the subsidiary levels are responsible for most of the revenue collected. This disparity is a clear indication that despite the fact that the national government is vital for the overall revenue collection and budget process, the four other levels of governance affects the budget process and the outcome is pegged on the level of implementation at these levels. Since the recession period, China has implemented a series of policies meant to offset fluctuations on the nation’s economic activities. From an economic perspective, such policies were implemented with little or no intervention from the government. After going through a series of economic growth over the years, China started to experience inflationary pressure characterized by trade imbalance and lagged growth. This created the need to employ various fiscal economic stabilizers in order to influence the Chinese economy positively. In order to address the impact of inflation on the Chinese economy, the government and the private sector in the country invested heavily on technology. Technological advances were meant to drive the economy positively and align production and consumption in line with the global competitive structures. Technology allowed more room for industrial upgrade and systemic innovation with the country’s key sectors. Coming from recession, China acknowledges the fact that monetary policies such as pricing tools come in short to address key economic concerns. The government has therefore resulted to using expansionary fiscal policy particularly in public expenditure leaving intervention related to monetary policy to come in as an alternative. Describe and evaluate the main macroeconomic policies used by the Government and Central Bank China over the last two years. Established in 1st December 1948, the People’s Bank of China was meant to propel the Chinese economy through the socialist economic systems. According to Yongding, (2012, p.557) the Bank plays a leading role in internal and external management of the Chinese economy. Currently, the central bank in China is responsible of regulating the entire financial sector in China with its key responsibility being the drafting and enacting of financial laws and regulations to be applied in China’s financial sector. Subsequently, The Bank of China is required by law to ensure compliance to the existing laws governing the financial sector of the country. In relation to the inter-bank activities, The Bank of China regulates the Chinese foreign trade market and the lending activities between different Banks within the economy. The bank also mitigates economic and financial crisis by introducing policies meant to cushion the economy from further economic impact. In essence, the Bank of China is the overall custodian of all the economic and banking activities in China where the bank is required to perform all its duties and functions as prescribed by the state council. “In recent years, China has to mitigate various challenges in its economic and financial reforms in the backdrop of global forces that affect trade and the overall economy” (Park & Sehrt, 2001, p.638). In preserving financial stability, the Bank of China has introduced a raft of measures that indirectly or directly has an impact on inflation, lagged growth and unpredictable economic conditions. The economy of China is definitely one that has a lot of influence in global trade. However, its sustainability and ability to maintain a positive growth is pegged on the micro and macro-economic factors that affect China’s economy. In comparison with countries in Europe and the US, China has ratified a monetary policy that has changed significantly since its inception. In terms of its currency, China has been accused of undervaluing its currency in order to offer a more lucrative trade platform. Fung is of the view that if the Yuan was valued based on its true value and the prevailing marketing conditions, China’s domestic and international trade would be affected (2014, p.4). In 2014, China’s economy experienced some lagged growth. This saw The Bank of China inject approximately 1.8 trillion Yuan which is approximately $294 to try and increase liquidity and revitalize both domestic and international consumption. Despite the fact that some of the monetary interventions by the central bank have been widely criticized, the operations of China within the global context remain unchanged. The Bank of China recently maintained a lending rate of 6% while interest rate has remained largely unchanged. Some financial analysts are of the argument that the Bank of China operates in a non-transparent way by setting the interest rate instead of the same being dependent on the prevailing economic conditions. Naughton, (2008, p.171) states that China’s interest rate has remained consistently high a move that the People’s Bank of China explains as meant to cushion the nation from the rising inflation rate. However, a high interest rate is likely to have some effect on foreign trade by affecting the import and export sector and the entire trade balance. Primarily, the Bank of China intervention on the nation’s currency is meant to strengthen the currency and not to weaken it in order to boost foreign trade. However, some of the intervention carried out by the central bank have largely been seen as either maintaining the status quo or trying to acquire a competitive trade advantage by having a weak currency. Despite all these, China remains one of the leading global economies accounting for over 10% of the total trade across the world. Since 1978, The People Republic of China has made major reforms in market reforms which have seen China shift from being a central economy to a market based economy. China is referred to as the ‘production hub’ across the world due to its self-sustaining economy driven by an effective trade balance. The GDP of china has experienced a gradual increase averaging up to 10% annually a situation that has subsequently lifted the poverty levels of over half a million Chinese citizens. However, rapid economic growth does not come without major challenges. Currently, there is a lot of inequality in China characterized by an ageing workforce and a huge gap between the rich and the poor. It is therefore necessary for both the Chinese Government and the People’s Bank of China to mitigate some of these challenges for sustained development. Lin, (2011,p.17) is of the view that transitioning from a middle income to a high income status is more challenging as opposed to a reverse transitioning. The rate at which the Chinese economy is growing requires significant policy adjustments to shelf the country’s economy from the global economic shocks. Such adjustment would go a long way in preventing a repeat of a recession that the country experienced a few years ago. References Anderson, AR, Li, JH, Harrison, RT & Robson, PJ 2003, ‘The increasing role of small business in the Chinese economy’, Journal of Small Business Management, vol.4, no.3, pp.310-316. Das, DK 2012, ‘The Chinese Economy: A Rationalized Account of Its Transition and Growth’, Chinese Economy, vol. 45, no.4, pp. 7-38. Fung, HG 2014, ‘Banking, State-Owned Enterprises, and Global Strategy: Editor’s Introduction’, Chinese Economy, vol.47, no. 5-6, pp. 3-4. He, D & Pauwels, LL 2008, ‘What prompts the Peoples Bank of China to change its monetary policy stance? Evidence from a discrete choice model’, China & World Economy, vol. 16, no. 6, pp. 1-21. Lin, JY 2011, Demystifying the Chinese economy, Cambridge University Press, UK. Naughton, B 2007, The Chinese economy: Transitions and growth, MIT press, Massachusetts. Park, A & Sehrt, K 2001, ‘Tests of financial intermediation and banking reform in China’, Journal of Comparative Economics, vol. 29, no. 4, pp. 608-644. Yongding, Y, 2012, ‘Rebalancing the Chinese economy’, Oxford Review of Economic Policy, vol.28, no. 3, 551-568. Read More