China's Importance to the Global Economy - Research Paper Example

China’s importance to global economy China’s importance to global economy Outline: China Factors contributing to China current status China’s Impact on the global Economy Converging superpowers the IMF view Conclusion Work Cited China The People’s Republic of China also called China is the most populous country with over 1.3 billion people worldwide. (China’s Global Shield, 2009) With the introduction of the market base economic reforms in the year 1978, China became the fastest growing economy (BBC News, 2009). It has also been the world’s largest exporter and the second largest importer of goods. China is the worlds second largest economy if we see by both nominal GDP (Gross Domestic Product) and PPP (Purchasing Power Parity)(New York Post, 2010). It is even the permanent member of UNSC (United Nation Security Council). China has been title as the global super power by a number of academic (Carnegie Endowment for International Peace, 2010) military analyst (Maxwell Air Force Base, Alabama: The Air War College, Air University. p. 33.) and public policy and economics analysts. However, its outputs contribute widely to the world; its demands for raw materials are massive that may poke environmental threat. Despite, China benefiting higher economic growth rate its domestic consumption remain low, as a result higher national saving rate and more overseas investments results. China will move on to become the world’s second largest economic nation in the years to come.   Factors Contributing to China’s Current Status Chinas rapid growth cannot be term as an accident. Behind its success lie the application of right policies from the side of the economic theory and even practically. Decision to Join WTO Chinas growing economy resulted in a very significant role in global economy. Its decision to be a part of WTO has not only supported its country towards success but also contributed to the worldwide economic development. The practical importance of this success is evident. This year China will probably account for whole of net economic growth worldwide. Chinas GDP growth would be 8.0% or above. Its economy will grow by 7.9% year-on-year probably in the second quarter and would accelerate. Urban investment rise by 34%, retail sales by 15%. China’s success result explicably because of the normal economic factors. China makes use of series of mutually and interconnected reinforcing policies. Price Control Measures China has very strictly enforced price control measures. It has kept the value of its currency (Yuan) at an artificially low level. Division of Labor Firstly, the economy has a high proportion of exports. Every economist after the great Adam Smith has recognized the vitality of division of labor in acceleration the level of productivity, and division of labor in a modern economy is essentially international. An increasing level of imports and exports are the increasing way of participating in such a division of labor. Economies of Scale The application of division of labor also results in economies of scale for China. The investopedia defines economies of scale as “The rise in efficiency of production as the quantity of goods being produced accelerates. Typically, a country that achieves economies of scale benefits from lowering of the average cost per unit through the increase in production units this results fixed costs are shared over an accelerated number of goods.” High Level of Investment Second is Chinas greater level of investment. Latest econometric research reveal conclusively that, after division of labor, the largest factor in economic growth results from the rate of increase of fixed investment. This covers not only the developing economy such as China but also even the developed economies. Mr., Dale Jorgenson, the worlds leading proficient on the productivity growth notes, "Investment in physical assets is the most essential source of economic growth in G7 nations. The contribution of input capital exceeds that of the total factor productivity for all periods for all countries." China could only criticize if it uses such high level of investment inefficiently and contrary to claims its usual productivity reveal that China uses that investment with an efficiency rate between the ranges of respectable to high. Socialist Market Economy Third, the decisive point is that China has a "socialist market economy" against the old criterion of "market capitalism, a part and parcel of macro economic regulation. Keynes pointed out in the final part of his general theory, the point related to the situation where mass unemployment is again flying upward, that “some what comprehensive socialization of investment will result the only way of securing an approximate full employment". (Keynes General Theory) That "some what comprehensive socialization of an investment" is impossible in the private sector dominated economy. The declaring advantage China has in the recent crisis is that it has other means rather than just indirect sources (budget deficits, reduction of interest rates, etc) to reverse the plunging investment. China can make use of the state owned company sector to accelerate investment and can increase the rate of lending through its central banks. This is the main cause for China rising to its status as a Global super power. Other points can even be included here but the above mentions are the fundamentals acting behind the continual success of China as a global super power. China’s Impact On the Global Economy The Australian Reserve Bank governor, Mr. Glenn Stevens, explain the rise in the importance of Chinese economy as extraordinary. [AAP, 2011] He says the emergence of China is the transformative event for the global economy. Mr. Stevens also said there is no guarantee that growth will go uninterrupted. "Youve got to learn that China has a cycle...and itll have ups along with downs and such would continue more in future than in past," he said. Currency swaps arrangement and Yuan: It is difficult to state alone the effects of swap arrangements. However, we are sure that over the years cross border Yuan base transactions have increase significantly. In 2009, Yuan denominated transactions were less evident but 2010 has cause every other month to carry out increasing number of Yuan base transactions. China’s ever-growing e-commerce transactions has hit 4.5 trillion Yuan equivalent to ($682.16 billion) in 2010, up 22 percent year on year, as per the recent researches (CNZZ Data Center, e-Business Research Center, 2010) Total cross-border renminbi transactions has hit $58.7 billion in 2010, this is thirteen times the amount that had been a year earlier. Foreign-exchange regulator announced in its 2010 that the increase in such transactions results from the continual efforts of China to make the Yuan more international. (China international payments report, 2010). Early reports from People’s Bank of China (PBOC) suggest that Yuan base transactions will triple in 2011. The major transactions are those with Hong Kong and Singapore. They both have swap lines with the PBOC. (The Editors, 2011) Furthermore it is predicted that trade transactions settled in the currency rate Yuan may rise to $3 trillion by 2015 as China increases use of its currency as an alternative to greater world currencies in business and finance, said The China Construction Bank. Impact of strengthening Yuan The increase use of Yuan denominated transactions would result in increasing use of Yuan and of course the decreasing use of mainly U.S dollars. As a result, the demand for Yuan would naturally increase against the decreasing demand for U.S. Dollar. There would not be any need to raise/hold as many dollars because now the nations will be using the Yuan in their bilateral contracts with China. In economical analysis, the long-term effect of such decrease in demand for U.S. Dollar would decrease the exchange rate of dollar while the Yuan would continue strengthening. More generally, this proves that China is assuming the leadership role in the global economy. This trend would only continue its pace if the U.S. economy continues its downward spiral and China plays visible and active role in lifting the global economy out of recession session. Inflation and Property Risk Being the second wider economy, any changes in China’s economic policies would have an accompanying effect worldwide. As the World Bank says, Chinas economy would grow strongly this year though facing risks from inflation and its surging real estate markets. The World Bank reports this year economic growth as 9.3 percent, but with an accompanying inflation of 5 percent. The bank recommends that the government must restore the usual financial and regulatory conditions using its massive economic stimulus with respect to the global crisis. Foreign exchange reserves Chinas foreign exchange reserves grew by an amount of $469.6 billion last year to a record high of $2.869 trillion, as a result cementing its position to the worlds largest country in place of foreign exchange reserves. The regulator said that Chinas recent account income reached $305.4 billion last year that is an increase of 17 percent from 1-year back. We see that the countrys capital along with financial account income, an account of net capital inflows, equivalent to $226 billion. The regulator has given the statement that it would support the reduction of recent trade imbalances at the same time holding back the arrival of the hot money. Contribution To Environment China has set it goals towards contributing to a twenty percent cut in energy use over per unit of GDP in the 5 years play to 2010. With Efforts in the fourth Quarter, it is expected that the energy efficiency goal for the 5-year plan could be met. With efforts in the fourth quarter, the energy efficiency goal for 11th Five-Year (2006-2010) period would result, Li told Xinhua. It is said that energy consumption per unit of the industrial value output would also fall by 6 %. The gradual year on year reductions would have an accompanying effect on the global economy. Converging Superpowers – The IMF View While the U.S. has been lying down all along because of the severity of its problems, and increasing trillions in hand-outs into the bankrupt, Wall Street banks, on the hand China has been using its time rather more effectively The general view is that U.S. could lose its respect as the world’s biggest economic super power within five years. The International Monetary Fund (IMF) predicts China will overtake the United States in 2016, which will constructively end the Age of America this would be decade before most analysts had expected. This also means that whoever wins the upcoming 2012 presidential election will have the dubious honor of presiding over the fall of the US.     This is the first time the IMF has put a period on any communist countrys inevitable march, and this forecast has tremendous implications for the balance of global superpower The Washington fund base its estimate on the comparative study of the two countries PPP (Purchasing Power Parity). The especial effect of this is the shadow view of the future of dollar as the dominant currency along with attempts by Washington to close the budget gap. In 2009, the IMF dictated gross domestic product per head of the U.S. at £28,000, as compared to £2,500 in China.   No country in the modern era has yet come this much close matching the might of Americas economy. China, on the other hand, has been increasing towards the U.S. with an evident speed. It is an unbelievable fact that just 10 years earlier the U.S. economy was 3 times that of China’s economy. The 2016 date has held many analysts in shocks, as many were optimistic that America would hold out until the end of the 2020s. However, many had the wrong criterion for comparison.  Instead, IMF analysts compared the right theory for a conclusive view that was the difference in purchasing power parities - what people spend or earn in their respective domestic markets. This criterion revealed that the Chinese economy would move from $11.2 trillion in 2011 to a greater $19 trillion in 2016. However, over the same period, the United States economy will increase from a current $15.2 trillion to a trailing $18.8 trillion. Conclusion For the last thirty years, China has enjoyed the title of World most rapid growing country economy. This title didn’t just happen but was earn due to conformed set of basic laws require for the economic development of any country. The economic stimuli work so successfully to bring about the success of China. Work Cited 1. Altucher, James (8 January 2010). "Theres no stopping China". New York Post. 2. BBC-News, (2009), Country profile: China Retrieved (14 July 2009) from http://news.bbc.co.uk/2/hi/asia-pacific/country_profiles/1287798.stm 3. Business News, No Stopping For China, Retrieved (2 August 2010) from http://www.nypost.com/p/news/business/there_no_stopping_china_0H8GJaMgzHCYenL038Yh2N. 4. Chinas golden shield: Corporations and the development of surveillance technology in the Peoples Republic of China, Rights & Democracy. p. 5. Retrieved (29 August 2009) 5. CN-Business News, (2010), China’s E-commerce Transaction Exceed 4.5 Trillion Yuan, http://cnbusinessnews.com/chinas-e-commerce-transactions-exceed-4-5-trillion-yuan-in-2010/ 6. Economies of Scale http://www.investopedia.com/terms/e/economiesofscale.asp 7. Global Times,(2010), China’s Economy, http://business.globaltimes.cn/china-economy/2010-12/598040.html 8. Jorgenson, Dale, (2009), China Economic Investment from http://www.newstatesman.com/economy/2009/09/china-economic-investment 9. Mill. James, Keynes General Theory from http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch01.htm 10. Muldavin, Joshua (9 February 2006), Rural Transformation to Global Integration: The Environmental and Social Impacts of Chinas Rise to Superpower. Carnegie Endowment for International Peace. Retrieved (17 January 2010) from http://www.carnegieendowment.org/events/index.cfm?fa=eventDetail&id=851&prog=zch. 11. Ross, John (2009), Factors Contributing to China’s Current Status, from http://www.newstatesman.com/economy/2009/09/china-economic-investment 12.  The Associated Press, (27 April, 2011), Financial News from http://www.businessweek.com/ap/financialnews/D9MSE9G00.htm 13. Uckert, Merri B. (April 1995). China as an Economic and Military Superpower: A Dangerous Combination?. Maxwell Air Force Base, Alabama: Air War College, Air University. p. 33. From http://www.au.af.mil/au/awc/awcgate/awc/uckertmb.pdf. Read More