Role of Central Bank of China in Running the Economy Over Last Two Years - Example

To develop an understanding of what has happened in China over the last two years Contents Introduction 3 Discussion 4 Role of Government in running the economy over last two years 4 Role of Central bank of China in running the economy over last two years 7 Macroeconomic Policies used by Government & Central bank of China 9 Growth: 9 Inflation: 10 Balance of Payment: 10 External Sector: 10 Conclusion 11 References 11 Introduction According to the reports of IMF, 2014, the socialist & market based economy of China is the second largest economy of the world in terms of nominal GDP & the largest economy in terms of purchasing power parity. This fastest growing economy in the world, with a growth rate of approximately 10% over last 30 years long period of time, is the largest global hub of manufacturing & exports which gives rise to the fastest growing consumer market & second largest importers in the globe. The country plays a crucial role in international trade. Continuous growth, sound market reform policies and influential contribution towards global economy helped the country to become an important member of World Trade Organization in 2001. During that period of time, China remained the only Asian country to have a GDP more that $10 trillion mark. In spite of having such rapid growing economy, China is still counted among the developing countries. Statistics of 2012 says that about 98.99 million people of the country lives below poverty line. Fundamental challenges like incomplete market reforms, high inequality, environmental in-sustainability, and demographic pressure relating to aging population, rapid urbanizations and external imbalances are dragging the country behind. Hence, China’s 12th Five Year Plan (2011-2015) is working towards elimination of such social & environmental imbalances. Emphasis has been shifted to reduction of pollution, eradication of poverty, enhanced access to education & healthcare, increase energy efficiency, social & economic protection etc. A targeted annual growth rate of 7% clearly indicates that emphasis has been deviated from fast growth to equity & sustainability. The two major factors that have majorly contributed towards China’s sound economic policies & continuous development are the Government of China & the Central Bank of China. Government has played a predominant role in the economy of the country in terms of controlled financial policies & banking systems, formulation of industrial policies, distribution of investment funds, managing wholesale & retail network & the like. Central Bank of China has also shown marked contribution towards successful control of the economy by managing inflation, foreign exchange reserve, bank rates & interbank relationships (An, 2005). Discussion Role of Government in running the economy over last two years As operating under socialist political & economic environment, the Government’s responsibility in planning & managing the national economy is huge. A major part of the governing bodies make significant contributions in formulating economic plans, state budget, administrations & financial postulates. By the early 21st century, as a result of shift in the emphasis from high growth to sustainability, role of Central Government in managing economy was reduced by means of increasing function of both private initiative & market forces. Government continued to play a dominant role in the fields of equity & sustainable development such that agricultural procurements in the rural sector, controlling poverty & population, improvement of living condition, managing energy & sources of natural resources etc. This intention behind reducing Government intervention & inviting completion among private business & market forces to play a larger role in investment decision & setting up prices can be seen as Government’s initiative of reconstruction of nation’s growth model. But still, the Chinese Communist Party reserves the right to control the major decision on economic priorities & policies. The Planning Commission & Ministry of Finance is also concerned about the functioning of entire economy. Hence, the main advantage of the initiative of such virtual privatization is to enjoy a great deal of economic activity that continues outside the planning- allowing a broader scope of development. Government’s active participation in China’s economy has resulted in the following factors: Due to structural transformation, China’s economic is gradually slowing down from 10% to 7% in 2013-2014. Output increased by 7.7% in 2013, outraging Government’s indicative target. Stable growth fractionally indicating the effects of min 2013 growth support. However, recent growth rates are significantly below the level observed in past 30 years, showing clear success of the recent Five Year Planning (2011- 2015). The decreasing growth rate indicates a shift from manufacturing to service sector on the supply side of the curve & rapid accumulation of credit leads to a shift from investment to consumption on the demand side. Structural shift of the economy towards labor intensive service sector resulted in a very small effect on labor market due to decelerating growth rate. Due to quarterly growth volatility, rebalancing becomes unfavorable. Volatility also resulted in a contradiction between structural trends & demand potential. The more the growth rate will become moderate over period; the structural shift will become more prominent. According to IMF reports, the growth rate of China is expected to decrease marginally from 7.7% in 2013 to 7.6% in 2014 and further to 7.5% in 2013. Reforms in fiscal & financial sector need to address issues like financial instability in short run. Sharp credit growth & shadow banking system to be incorporated by the Government in order to cushion the decreasing growth rate. Policy has been taken to pay off large scale governmental debt accumulation to decrease financial leverage & protect from the risk of defaulting. In order to promote sustainable development, measures (both financial & fiscal) of have been taken in such a way that can proved to be disrupting for the growth rate in short run. Finally, Government’s policy to encourage short term growth can be summarized in terms of implementation of promotion of competition, elimination of barriers to entry (in selected industries) & reduction of administrative strictness on industries & service sector (Ho, Lau, and Young, 2012). Role of Central bank of China in running the economy over last two years Central Bank of China also has major contributions in policy making & implementation of the reforms & postulates in China economy. Apart from formulation of interest policy, liquidation of debt, credit control, managing Balance of Payment problems etc, the Central Bank of China has taken some significant decisions in 2012-2013 that proves to be beneficial in the current year of 2014 & the nation is expecting positives results in future as well. Considering the model of economic growth taken by China Government in the current period & to slowdown the pace of growth in order to give emphasize on the concept of sustainable development, China Central Bank has understood that there is no requirement of large scale fiscal or monetary stimulus in near future for the country. In spite of slowdown of economic growth rate, the job market of China is quite stable. In fact, industries including real estates, small scale enterprises, exports & tourism sector etc are performing well. In this scenario, the Central Bank of China has decided to enjoy the existing leverages instead of raising the burden of debt. Till then, the country was using the stimulus mainly in lending sectors like agriculture, energy, pollution control etc. Now, as the Government has shifted its importance towards all these factors, the Central bank is finding no requirement of any extra stimulus is upcoming future. Though the proposition involves a no. of challenges say the aftermath if the economic slowdown continues for a longer period that expected or stimulus may not be available in future, if crisis arises due to the deceleration, the Central Bank of China has shown their prediction in counter that the economy will rise at a growth rate of 10% instead of 7.5% after 2015, where the major contributory factor will be agriculture, healthcare sector etc. Even if this doesn’t hold good in future, China’s Central bank is confident that new policy formulation, restructuring & rebalancing can be imposed, if needed, to control the economy. Another major contribution of China’s Central Bank towards their economy is the introduction Shadow Banking System. Understanding that rigid financial policies may curb financing for the small scale industries, Central Bank came with the opinion that Shadow Banking System should not be eliminated just because of the risk it involves, rather strong supervision should be imposed in order to minimize such risk. They also considered the fact that sharp rise of shadow banking institutions may lead to regulatory arbitrage but they are on the opinion that negative attitude toward the system may lead to losing out the opportunities that could be derived from it. The main reason behind adopting shadow banking is to financing the small & medium scale industries through an alternative channel & enjoying off balance sheet services such that micro financing, securitization etc. Estimation shows that Shadow Banking assets of China reached HK$47.6 trillion at the end of 2013 that counts for about 66% of Gross Domestic Product of the country at the end of 2013 which was 52% in 2012. Hence, strict scrutiny has been incorporated specially on risky products, mainly due to avoid financial risk. Eventually, Shadow banking has become an important source of financing for those who are restricted from commercial bank loans (Leng, 2009). In 2014, according to the third quarter monetary policy, in order to lower funding cost of corporate borrowings & support economic growth, the Central Bank of China had pumped necessary funds with tenure of 3 months at an interest rate of 3.5% into the country. Hence, lending rates came down, reducing borrowing pressure helped enterprises to get an access of easy loan. Macroeconomic Policies used by Government & Central bank of China Due to sluggish external market demand & excessive domestic investment in past few years, production capacity has drastically increased resulting in fast falling GDP of the country. To understand the macroeconomic behavior & policy dynamic adopted by Government & Central Bank of China, macro economic variables should be discussed along with their impacts on China economy (Yu, 2012). Growth: Despite sluggish growth in GDP in during 2012-2013, the country is expecting a moderate growth rate especially due to social financing. Along with that, decision of spending on infrastructure to boost up retail sales also indicates an improvement in GDP. Whereas, external demand for consumer goods is showing a weaker picture, internal demand for consumer products due to improvement in status quo is expected to give the nation’s GDP a big boost. Inflation: In case of China economy, Government has been able to control both cost push & demand pull inflation. It has remained moderate during the period of time, on an average 3%. This macroeconomic variable is linked to output fluctuation as a result of surplus labor that has prevented wage- price spirals & agricultural supply shock due to high price volatility. Moreover high level of investment led to excess capacity & a rise in incremental food price. Balance of Payment: Invitation to privatization in many sector leads to a surplus of 2.25% & this is expected to continue in the same manner in this year as well. External Sector: Where domestic rebalancing shows some conflicts in 2012-2013, external sector has shown substantial progress in terms of current account surplus & GDP. The current account surplus is expected to rise at a rate of 4% of GDP till 2018 which ensures global demand recovery. Apart from all these factors, Government’s initiative for sustainable growth & promoting agricultural & small scale enterprises, in turn, will definitely contribute in the country’s GDP, thus ensuring a stable economy (Yusuf & Saich, 2008). Conclusion From the overall discussion, it can be inferred that China’s economy is in an imbalanced situation & it will continue to be like that in the future years as well. Investment levels are really high as a result of fast credit growth. Consumption share is at a lower side. Hence, a large no of economic reform policies has been taken by Government & Central Bank of China say liberalizing prices for capital, establishing better business environment, recycling of natural resources etc. Government is giving more & more emphasis on such reforms; else the economy is likely to face major difficulties in upcoming years which may lead to progressive deterioration (Vreeland, 2006). Hence, Government will have to put more emphasis in the issues like poverty eradication, environmental degradation, health, pollution & social instability. So, in order to have a stable economy, Government & Central bank should continue with their transformational economic approach- from growth oriented to sustainable & application of such reform should more on the areas of requirement. References An, J., 2005. Chinese company law explanations. Beijing: LawPress. Ho, D., Lau, A. and Young, A. 2012. Enterprise ownership and control in China: Governance with a Chinese twist. Vol.55(1). Leng. J., 2009. Corporate Governance and Financial Reform in Chinas Transition Economy. Aberdeen: Hong Kong University Press. Vreeland, J., 2006. The International Monetary Fund (IMF): Politics of Conditional Lending. New York: Taylor & Francis. Yu., G., 2012. Comparative Corporate Governance in China: Political Economy and Legal Infrastructure. New York: Routledge. Yusuf., S and Saich, T., 2008. China Urbanizes: Consequences, Strategies, and Policies. Washington: World Bank Publications. Read More