Economic Growth Performance of China and Hong Kong - Case Study Example

Economic Growth Performance of China and Hong Kong Module Group: Module Assessment Assignment ID Number: Date of Submission: Table of Contents Introduction 3 Factors affecting the Growth Performance of China and Hong Kong 3 Evidence of growth performance in China and Hong Kong 5 Conclusion 7 References 9 Introduction China’s rapid growth rate had a huge impact on the surrounding economies. Its shares in the trade, production as well as investment have increased to a greater extent. In early 2000, China was considered as an ideal place for the Foreign Direct Investment and many of the countries preferred to invest on China and the country would compete with other developed economy (Li & Atuahene-Gima, 2001). However, FDI led to the industrialisation within Chinese economy but the domestic private sector within China was still not developed. The stocks of China were about $19 billion in 1990 which rose to about $300 billion in 1999 (Li & Zhou, 2005). The majority of FDI in China has been originated from other developing nations of Asia and Hong Kong, being a self-governing autonomous region of China has been the largest source of FDI. Through this study, the researcher plans to carry out an analysis on the growth performance of the China and Hong Kong. It also offers the scope to the economist to understand the various factors affecting the growth performance and the fluctuations in growth rates of China and Hong Kong since 1990. Factors affecting the Growth Performance of China and Hong Kong The great depression that led to the slowdown of trade surplus within the developed economies affected the rise in domestic demand in Chinese economy. However, there was a gradual increase in the per capita income which led to investing in environmental protection factors. The rise in per capita income also led to the increase in domestic demand within the Chinese economy (Zhang, 2001). The researcher studied that the global economic crisis that took place in 2008 was the main reason for the slowdown of the growth rate in China and Hong Kong (Jefferson, et al., 2000). As a result of the economic crisis, there was a decline in the FDI inflows and the GDP growth rate and there occurred a problem of unemployment as many workers lost their jobs. The Chinese Government in order to deal with the situation loosens the monetary policy in order to increase the bank lending and provided various incentives to increase the domestic consumption. The study indicated that China’s GDP growth rate was around 9.6% from 2008 to 2012 (Rodrik, 2006). However, the GDP growth rate has been slow in the recent years which were measured by the World Bank that indicated that the real GDP grew around 7.75 in both 2012 and 2013. It was predicted by some of the economists in World Bank that China is expected to overtake US as a developed economy in the next few years (Li, et al., 2008). However, the ability of China to handle a rapid economic development is depending on the initiatives taken by the Chinese Government to adopt comprehensive economic reforms that results in transition of China to a free market economy. The reforms would be based on the measures that involve increasing competition with the developed economies as well as growing economic efficiency within the nation. Figure 1: Chinese Real GDP Growth: 1979-2013 (Percent) (Source: Li, et al., 2008) The FDI flows within China have been a major source of productivity gains in China and rapid economic growth. The study revealed that there were around 445,244 foreign-invested enterprises that registered in China which employed 55.2 million workers (Peng & Luo, 2000). This indicated that there was a rise in employment opportunities within Chinese economy that in turn led to the increase in the production within the economy and also the output growth (Zhang, 2001). The foreign invested enterprises in China led to 47.3% of the Chinese exports and 44.8% of the Chinese exports although the level was low compared to that in 2006 (Chen, Li & Zhou, 2005). In 2000, the Chinese Government adopted a new ‘Global Strategy’ which aimed at encouraging the Chinese firms to invest overseas. The reason behind the outflow of FDI from China is mainly due to the accumulation of foreign exchange reserves within the country. Another factor affecting the FDI outflow in China is that acquiring the natural resources such as oil and minerals are necessary for that rapid economic growth in China. The Chinese Government has the aim of developing a globally competitive economy and thus it decides to invest in foreign firms in order to obtain management skills, technology and internationally recognized brands from other developed countries. During the era of mid-1982, Hong Kong was suffering from some sort of confidence crisis as there was a significant outflow of capital from Hong Kong (Sin, et al., 2003). However, this outflow of local capital was outweighed by an inflow of foreign capital to Hong Kong. After two decades of rapid growth within the economy, there was some structural transformation that took place in Hong Kong. The researcher has analysed that there are two reasons behind the rise in exports and income of Hong Kong. Firstly, in the past two decades there was a high growth rate in world trade and the ability of Hong Kong to conduct product diversification by the local firms. There was diversification in various fields that is towards more capital intensive as well as technology intensive products within the existing industries of Hong Kong such as electronics and clothing. It was expected that in the later years, Hong Kong’s exports will be more supply determined than being demand determined (Allen, Qian & Qian, 2005). The exports of Hong Kong will depend on the goods produced within the economy. Thus, there are several factors that affect the growth performance of Hong Kong and China such as the GDP growth rate, exports and imports of the countries and the FDI outflow and inflow within the economies. Evidence of growth performance in China and Hong Kong The rapid growth pattern of China has increased the demand for fuels such as coal and petroleum and this demand as contributed to the factor in determining the prices of Crude Oil. The researcher has indicated that China has gained a position as the world’s largest energy user by 2009 (Bai, et al., 2004). Further, the Chinese Government has maintained an active policy in raising the trade and investment ties with other developed economies. An IMF report of 2009 estimated that a fixed investment related to the tradable goods and the net exports together has contributed to 60% of the GDP growth in China from 2001 to 2008. However, the Chinese economic growth slowed down to 7.4% in 2014 and is expected to decrease further in the next few years. The performance was slowest in China since 1990 and the growth rate is expected to fall 6.3% by 2016 (Whalley & Xian, 2010). By 2000, the contractual FDI received by China has increased to $676.1 billion (Child & Tse, 2001). Figure 2: Exports of goods and services (% of GDP) (Source: World Bank, 2015a) After the economic reforms in China, the country had a huge comparative advantage in producing labour intensive products and hence the country adopted more labour intensive technologies. The reason behind Chinese Government’s initiative to adopt labour intensive technologies is that it would provide employment opportunities to most of the potential workers and thus the production would increase within the economy (Wu, 2001). Due to the up gradation of the endowment structure within the economy, the availability of labour will gradually reduce to its scarcity and the availability of capital will increase within the economy (Zhang, 2001). The cost labour is expected to rise and the cost of capital would fall within the economy. As capital income is considered as the major source of income for the rich and the labour income is the major source of income for the poor, hence the changes in the relative prices would lead to an achievement of both growth and equity simultaneously. Figure 3: Imports of goods and services (% of GDP) (Source: World Bank, 2015b) The fiscal policy adopted by the Government in Hong Kong has led to the economic growth. The fiscal policy is such that the individuals are economically rewarded due to their own endowments instead of following an elaborate redistributive policy (Morck, Yeung & Zhao, 2008). The growth rate in Hong Kong has increased in the recent decades due to several factors such as immigration, innovation and technology transfer within the economy. Innovation refers to the new type of technology adopted by the firms and immigration deals with the effort to improve the technology adopted by the firms (Zhang, 2001). However, the technology transfer refers to the transfer of technology within the firms that creates an opportunity for the firms to absorb advanced technologies from developed countries. Conclusion The rapid economic growth in China has led the Chinese economy to move to a path of development and compete with other developed economies. There are several factors that affect the growth rate in China such as the GDP growth rate, FDI inflow and outflow, import and export with the Chinese economy. China enjoys a comparative advantage in producing labour intensive goods within the economy and thus recruits several labourers within the economy. The employment opportunity within the economy increases and further the production also increases. The multinational enterprises within China are conducting the FDI outflows from China in order to sell Chinese goods to other developed economies at lower rates and earn huge profits. The growth rate in Hong Kong was due to the fiscal policy adopted by the government that comprised of innovation and the technology transfer within the economy. The firms within Hong Kong adopted new technology in order to invent new products that can compete with the products of the developed economies. 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