Economic Growth in China - Example

Economic Growth in China Economic Growth in China Introduction The purpose of this paper is to discuss the factors that contributed in demolishing the economic growth in China and to identify different macroeconomic policies implemented in last two years for pushing the economy of the country towards forward. The paper will also discuss how successfully the government and capital bank have turned the economy towards prosperity by discussing the growth in each sector separately. The economic growth in China badly suffered in last five years, which increased the concerns on its impact on the global economy. Since last two years the communist leaders have been trying to direct China towards growth depending upon domestic consumption rather than relying on trade and investment but the slowdown is associated with the risk of politically dangerous employment losses and the bolstered growth in the second quarter with mini-stimulus measures (The Guardian, 2014). Role of Government in Enhancing Economic Growth In order to uplift the economic downturn faced by China in past few years the Government of China and the Central Bank of China put efforts in particular areas. In the past two years, significant improvement has been observed in China’s economy. In order to study the economic growth in China in last two years, development in different sectors has been studied. Gross Domestic Product According to National Bureau of statistics of China, the GDP in China increased to 7.8% in third quarter 2013 (April-June) whereas 7.4% increase was reported last year in 2012. The industrial production and the first half fixed assets capitalization also exceeded the projections this year. The government enhanced the spending on the railway sector and decreased the reserve requirements to meet the target of 7.5% growth, which seem impossible due to loss in the property sector. Zhu Haibin the chief economist at JPMorgan Chase & Co (Hong Kong) supported the facts by saying that the current growth is hopeful and the government will continue investing in the sectors it is supporting now (Bloomberg News, 2014). Chart 1: China GDP by National Bureau of Statistics of China (Yan, 2013) Industrial Growth The industrial growth in last year was 9 percent whereas this year it rose to 9.2%. The retail sales increased 12.5% this year whereas in last year it was 12.4%. Fixed Asset Investment The fixed asset investment increased to 17.3% this year as compared to 17.2% increment in last year. Stock Market China, which is the second largest economy of the world, adjusted 2 percent in the last quarter as compared to 1.5 percent estimate in the first quarter. It shows an 8.2 percent annual growth this year as compared to 6.1 percent growth in January to March 2014. Commodities Inventories For supporting the real estate industry the government has lessened the curbs on house buying. The local government in different cities of China such as Hohhot and Jinan has taken the initiative. Statistical data shows that the sales of houses have been increased to 33% in last few months because of the government’s initiative. In the previous year 2013, the house sales decreased by 9.2 percent causing a loss of 2.56 trillion Yuan. It is reported that the real estate industry is liable to contribute 25 percent in the final economic growth of China and indirectly it also support the household industry including electric machinery, chemicals, metals and instruments. Chart 1: House Prices in China (Property Guide, 2014) Share from Services Services’ shares constitute a major part in China’s economy. In the first quarter of 2014 the services share was 7.8, which has increased slightly to 8 percent by the first half. The capital bank data showed that the aggregate financing has also spurred the economic growth in China due to increased fiscal spending and looser credit. Fiscal spending has increased 26.1 percent in 2014 with 8.8 percent increase in revenue. The government has lowered the price of Yuan around 2.5 percent than the Dollar. A 0.03 percent increase in currency has been estimated recently in Chinese currency. Global Demand Along with the other internal strategies by the government the global demand and monetary easing also supported the comeback of Chinese economy. Policy makers have tried to give limited support to areas such as railway and agriculture. The People’s Bank of China reduced the reserve requirements for the banks, which qualified to fund smaller companies and rural areas. The aggregate financing of China increased to 206.3 percent in second quarter from 202.1 percent in previous years. By the end of 2011 the reported percentage was 166.6; therefore a considerable growth was observed (Bloomberg News, 2014). Other strategies, which have supported Chinese economy, include easy credit for the local governments for supporting their stimulus plans. Based on the specific demands in each state the government has made initiatives to support the particular sector such as mining and infrastructure development in Heilongjiang province and railways, property and energy sector in Northern Hebei province (Bloomberg News, 2014). Source: China’s GDP and Credit (The Economist, 2014) Analyzing the overall growth in various sectors in last two years it is found the market demand in China is still not satisfactory. Although the strategies by government rose the economy to meet the target of 7.5% but the growth is very (Wei & Davis, 2014) therefore it could not develop any inflationary pressure. In 2013, the consumer prices increased to 2.5 percent only. Another troublesome condition is observed in the credit growth. As mentioned in the chart the GDP increase was as low as 9.5 percent based on outstanding financing to the private sector, which grew to 20% (see chart) (The Economist, 2014). Role of Capital Bank of China Capital Bank Policy Implementation Yi Xianrong has reported that due to downward pressure on present Chinese economic growth the Central Bank of China and the China Banking Regulatory commission has launched a new housing credit policy on 1st October 2014. The purpose of this policy is to enhance the housing demand and build a prosperous real estate market and boost the Chinese economy (Xianrong, 2014). This new policy will interrupt the periodic adjustment of the real estate market, transform the market expectations and also terminate the micro stimulus economic policy implemented in previous two years by Li Keqiang. This policy is not merely a real state policy. It is meant to trigger the housing consumption to preserve the agitated real estate market because of declining prices. Since last few years, the government of China has emphasized on establishing economical housing and rebuilding shanty areas instead of paying attention to the macro regulation of real estate market. In the same time, the government completely neglected the role of real estate in macro regulation and tried to govern the real estate market via economic leverage (Xianrong, 2014). The Central Bank of China has promised to take policy support for encountering the risks to economic growth of China. The government of China hesitated to take aggressive steps for boosting the fiscal growth rather they have focused on developing policies related to specific sectors. People’s Bank of China has addressed this problem by mentioning that for certain duration during economic adjustment in China there could be some downward pressure and increased exposure to prospective risks. The Central Bank of China affirmed that it would make easy rules so that banks can lend loans to small scale organizations thus the government also took the initiative for targeting more banks to fund small-scale companies and farms. The central bank proposed to reduce the interest rates which was argued with the fact that decreasing the interest rate will further damage the real estate sector of the country (Wei & Davis, 2014). In China central bank does not operate independently. It is one among the many decision-making authorities. Previously the government officials ignored the suggestions by central bank chief Xiaochuan, which included limiting stimulus spending with respect to the global economic downturn in 2008 and 2009. Since past two years, the authority of Mr. Xiaochuan has grown. His allies have also been increased. Macroeconomic Policies for Economic Growth Monetary Policy The purpose of prudent monetary policy is to sustain the price stability, and it usually means a comparatively expansionary monetary policy when the economy gets down or a strict monetary policy if the economy is getting low. Fan-Gang, the former advisor of Central bank of China, acclaimed that the macroeconomic policies of the government are balanced. He declared that the growth observed in the previous years in China was based on controlled macroeconomic policies of the government (WorldBank, 2014). The monetary policy is meant to enhance the growth of economic operations and prevent the flooding of economic markets that could have further caused structural distortions and push up debt levels and inflation rates. Due to declining real estate business and export demand the official target of 7.5% growth was at risk. It highlights the requirement of more practical policies for increasing the economic growth in China (Xianrong, 2014). Fiscal Policy The Chinese government has been using the prudent fiscal and monetary policy from 2005 to 2007. In order to address the global financial crisis in 2008 to 2009, the Chinese government adopted the proactive fiscal policy and easy monetary policy for fighting against the inflation rate. For implementing the proactive fiscal policy to uplift the current economic downturn in China, the government increased the deficit and government debts along with tax reform and structural tax cuts. The government also optimized spending and improved federal management over local government (WorldBank, 2014). It is also reported that for maintaining the prudent monetary policy the government will improve its framework of practicing policy and governing macroeconomic controls. The government brought 13 percent reduction in broad money supply the least percentage since 2009. Wang Tongsan, a government representative, declared that the purpose of macroeconomic policies of China is to ensure economic growth, creating job opportunities, stabilizing the prices and keeping a balance in international payments. He said that it was time to add environmental protection as the next main objective in the macroeconomic policies of China (Siwu & Zhi, 2013). Housing Credit Policy This policy utilizes the real estate market as a tool for regulating the macroeconomics to make China continue its economic growth with a faster pace. The policy displays that the government is willing to resolve all the economic and social issues like over capacity, financing platform crisis, etc. and ensure the economic growth by developing a real estate market. The implementation of this policy has turned out the previous slow development of China economy (Xianrong, 2014). Conclusion It has been found that the economic growth in China has been raised due to heavy investment and exports turnover. However, policies appear to focus on other areas also, apart from exports. The government is seeking to develop an economy that depends less on state control and more on market. Research reveals that although due to policies and implementation of government strategies the economic growth in China has been boosted but it is continuing very slowly. This slow growth is dependent on the number of factors. A key challenge identified by economists is the management of China’s increasing local government’s debt. This current growth is slow but stable which is the result of growth measures taken in mid-2013. There is no contradiction in realizing that the current economic growth is still far low as compare to the growth levels in previous decades. The identified reasons might be the shift of focus from manufacturing to services (supply, from investment to consumption (demand) and the credit loss. The restructuring of China’s economy is not smooth. The government must not neglect any sector and focus on others. It was found that the most affected industry, which resulted in severe loss to the China’s economy, was the property and real estate market. Therefore, the main emphasis of the government was to reestablish the property industry by raising the prices of houses. Several strategies by government and Capital bank were implemented to drive the economy back on the road. There is a significant requirement for the government and the capital bank to modify the policies to focus on a long-term impact of the macroeconomic policies. List of References Bloomberg News, 2014. China’s Economic Expansion Accelerates to 7.5%. [Online] Available at: [Accessed 19 November 2014]. Property Guide, 2014. House Prices Worldwide. [Online] Available at: [Accessed 19 November 2014]. Siwu, C. & Zhi, W., 2013. China to continue "proactive fiscal, prudent monetary" policy. [Online] Available at: [Accessed 19 November 2014]. The Economist, 2014. China’s economy in three parts. [Online] Available at: [Accessed 19 November 2014]. The Guardian, 2014. Chinas economic growth falls to lowest in 5 years. [Online] Available at: [Accessed 18 November 2014]. Wei, L. & Davis, B., 2014. Chinas Central Bank Prevails in Policy Battles Over Economic. The Wall Street Journal, 8 June. pp.1-4. WorldBank, 2014. China Economic Update. Beijing: World Bank Office. Xianrong, Y., 2014. Guard against regressions in Chinas macroeconomic policy. [Online] Available at: [Accessed 13 November 2014]. Yan, S., 2013. China growth still strong but set to slow. [Online] Available at: [Accessed 19 November 2014]. Read More