Macro Economics Indicators - Example

Macroeconomics Research Paper Contents Introduction to the Country 3 Macro Economics Indicators: 3 Business Cycles/Growth 3 Productivity 4 Inflation 5 Unemployment 7 Government Budget deficits 8 Interest rates 9 Fiscal Policy (Direct & Indirect taxes) 11 Conclusion/ Future Outlook of the Country 12 Reference List 14 Introduction to the Country China is officially known as People’s Republic of China (PRC), situated in East Asia. It is a sovereign nation and Beijing is its capital. It has a population of over 1.35 billion and is considered as the world’s most populous country. The Chinese Communist Party governs PRC which is the single-party state. It is also the second largest country geographically covering 9.6 million square kilometers. China is a famous nuclear weapon state. China is also an integral part of various multilateral organizations by becoming an active member of WTO, BRICS, G-20, Sanghai Cooperation Organization, APEC and BCIM (Zhang, Meng and Getz, 2014). It is a recognized Socialist State which endorses Communism openly. The government of China has been described not only as a socialist and communist nation but also a corporatist and authoritarian. It imposes heavy restrictions on free access to internet, right to have children, freedom of press, freedom of religion, freedom of assembly, free formation of social organizations, etc. The electoral system of China is hierarchical in nature where direct election occurs for electing local People’s Congresses and indirect election takes place for electing all higher levels of People’s Congresses and National People’s Congress (NPC) by the local People’s Congress which is immediately below. There is decentralized political system. There are other democratic political parties such as NPC and the Chinese People’s Political Consultative Conference (CPPCC). The head of the PRC is the President of the People’s Republic of China (PRC). Xi Jinping is the president of PRC, General Secretary of the Communist Party of China and Chairman of the Central Military Commission (Hsu, 2015). Macro Economics Indicators: The current ranking and efficiency of an economy is indicated by some statistics which are known as the macroeconomic indicators. Business Cycles/Growth Jay (2015) defined business growth as the upward or downward movement of Gross Domestic Product (GDP) levels. Since liberalization, Chinese economy is considered to be the fastest growing nation which majorly depends upon it export import business. There are three main phase of a business cycle, Contraction, Expansion and Peak. China’s expansion is reflected in its growing GDP. The reasons can be attributed to its capital investments that it makes in the purchase of advanced technology and new machineries. It also invests heavily in infrastructures that help in raising output. Another reason for its expanding business is its policy of welcoming Foreign Direct Investments. It has encouraged the development of rural enterprises along with the growth of urban industrial sector. Hence, it has cleverly moved millions of workers from the farmlands into industries without the creation of urban crisis. There has been a boom in the economy since last three decades. In midst of few hurdles, growth rates have been close to 10% on average. In 1976, China recovered from insignificant FDI to being the world’s largest FDI recipient. In the same year, it also became the world’s largest accumulator of foreign exchange reserves (Li and Zhu, 2015). In spite of accelerating growth, China is currently facing some hiccups like manufacturing sector is slowing down as reported by Purchasing Manager Index (PMI) conducted by HSBC. It has also been noticed that the country is suffering from the problem of overcapacity due to excessive amount of investment that has being made in infrastructure. Its economy is believed to be imbalanced. The shares of Hong Kong market has also fallen which has lingered concern about its pace of growth (Jay, 2015). Productivity In terms of Nominal GDP, China is the second largest economy of the world. According to the International Monetary Fund (IMF), its nominal GDP is US $ 10.380 trillion (2014). Its economy with approximately PPP GDP of US $ 17.617 trillion (2014) is the largest in the world if Purchasing Power Parity is considered. However, the country was ranked 9th in Global GDP ranking in 2013, when its PPP GDP and nominal GDP per capita were US$12,880 and was US$7,589 respectively (McKelvey and Bagchi-Sen, 2015). It is known for its investment in manufacturing sector and is not only the largest manufacturing nation of the world but also largest exporter of goods. It has a growing consumer market. Labor productivity data reveals that manufacturing sector contributes the most accompanied by moderately high service sector and low agricultural sector growth. Corporate sector has performed well over the past years. The income of this sector has grown and is incrementing rapidly. However, the rate of growth of production is slowing down. Since, 2005, the role of labor has diminished extensively from an annual average of 1.7 percent to 1.05 percent in 2006-11. In 2008, capital has started playing a major role. In 2009, more than two-thirds of aggregated growth has been contributed by the Capital accumulation. However, so much investment has a negative impact on the capital efficiency. Although its capital output ratio has risen to 4.89 in 2008-09 but capital expansion has crowded out the growth in productivity ((Li and Zhu, 2015). China’s capital to output ratio (Total Productivity Factor) (TFP) has risen from 3.79 in the 1990s to 4.25 in 2000-07 and to 4.89 in 2008-09.8 The expansion in capital, in other words, looks to have ‘crowded out’ productivity growth. The estimation explained that the productivity growth of China has accelerated at an average of 4.7 % in 2001-07 which implied that growth fell noticeably. However, it improved 2.8% which was marginal in 2010 and it remained below 2001-07 average because the program of mass reallocation of workers from low productivity sector to high productivity sector is declining (Pan, Huang and Chiang, 2015). Figure: China’s Growth Graph (Source: Ernst and Young, 2012) Inflation The important parts of Chinese CPI are food (31.8% of total weight) and residence (17.2 %). Others include education, recreation, transportation, telecommunication, household facilities, tobacco, liquor, etc. The rise in CPI is the main reason behind inflation. The inflation rate which is already set by China is 3.5% by the policymakers (Park, Lee and Lee, 2015). The consumer prices have been incrementing again which has made the government conscious. Rising prices without the rise in wage rate can cause turmoil in the economy and policymakers are desperately trying to avoid the situation. The country’s inflation basket mostly comprises of increased food prices. Since the economy is losing its pace, inflation would limit the ability of the central bank to improve its monetary policies and shore up growth. China has always been affected from inflation. As noted in 2007-08, inflation remained at 7% annually and rose to 8.7% in February, 2008 and decreasing in March, 2008. As instructed by the government, refineries produced fuel at low prices which resulted in the shortage of gasoline and diesel fuel in 2007. However, this price was soon increased slightly above world price in November, 07 (Zhang, Meng and Getz, 2014). This worried the policymakers declared that it would take measures to stabilize prices. Pork is a major part of Chinese food market. In 2007, there was worldwide increase in its price associated with rise in manufacturing of ethanol from corn which inflamed the pork prices in China. Due to increased cost of production, the growing demand of the pork could not be fulfilled. The demand was growing because of increased income of the people. The government, in response, subsidized pork prices for urban poor, students and advised for increasing its production ((Li and Zhu, 2015). Again, the country faced inflation which rose to 7.1% in 2008 because of the winter storms in January. It further got expanded at 8.7% in February, 2008 due to food shortages. In summer the inflation fell down to 6.6 % in October, 2008. In April, 2015, the inflation rate recorded by National Bureau of Statistics was 1.50% which is very low thereby, imposing the threat of deflation (Ernst and Young, 2012). (Source: Zhang, Meng and Getz, 2014) Unemployment China is infected by underemployment in urban and rural areas and there is a threat of explicit unemployment. It is a labor intensive country but it has increased its capital stock which has caused unemployment rate to rise up. In 2003, 186 million people remained unemployed. At the end of September, 2014, the unemployment rate was 4.07 % in urban area which was slightly lower than the rate recorded in the second quarter. It is difficult to maintain such rates because of migration of workers. A new internal measure of urban unemployment which is a survey based figure that calculates migrant worker unemployment is said to be developed by the National Bureau of Statistics. This figure was 5.05% in June, 2013. However, China claimed to have created a total of 10.82 million jobs at the end of that year (Zhang and Rasiah, 2015). Jay (2015) explained that unemployment rate has remained fixed since the fourth quarter of 2014 at 4.10% when recorded in 2015. The average unemployment rate in China is 4.13% since 2002. Though it reached its peak on fourth quarter of 2003 when it recorded 4.30% and it also dropped down to 3.90% in 2002 (Zhang and Rasiah, 2015). Amidst growing youth unemployment rate around the world in China is comparatively low. Recent data reveal that there is a growing unemployment as well as shortage of labor. The reason cited was lack of skilled labor in the country. The companies are unable to recruit the desired candidate. The new companies are establishing while the old companies are shutting down reflecting corporate and economic reforms leading to the increase in inflow and outflow of laborers’ into and out of the organizations. The decline in matching efficiency is because of imperfect information that prevails in the market. A rise in productivity has also lead to rising mismatch between companies seeking skilled workers and job seekers. Unemployment rate from 2004 to 2001 is given below. (Source: Park, Lee and Lee, 2015) Government Budget deficits Government budget deficit occurs when government spending exceeds its revenue. In China, it is projected that central government deficit is going to increase in six years. It was forecasted to be nearly 2.3 % of GDP. However, the actual deficit is believed by the finance minister of China to be near 2.7%. The reason behind such expansion is China’s commitment towards expansion of its fiscal policy to combat domestic and worldwide economic slowdown. From previous year’s budget, unspent money has been added in the government’s funds. This excess spending is justified by the government as a policy that has been taken keeping in mind the Keynesian wisdom that government spending can reduce the worst effect of a slowing economy. This instrument proved accurate in 2009 and 2010 when this policy raised its GDP by 2.6% and 0.6 % respectively (Congleton and Hillman, 2015). China spends in education, public housing lavishly and since manufacturing is an important sector of the country, so, government continues to spend in infrastructure. Still the spending in infrastructure is termed as inefficient. However, spending in poor sectors like social service has proved to be effective as it has not only improved China’s GDP but has reduced social inequality. In early 2000, statistics showed China’s fiscal spending as one of the most proficient in Asia (Hsu, 2015). The biggest worry for the China’s fiscal spending is that the spending by the local government has not been proper and effective. However, their careless attitude was caught by the national audit and they have shown positive attitude since then. It is anticipated that funds are being spent to boost the agricultural sector and railway projects. There has been a budget shortfall in 2015 of 1.62 trillion Yuan ($258 billion) which amounts to around 2.3% of GDP (Zhang, Meng and Getz, 2014). It has been declared as being the widest since 2009. The unemployment rate from 2006- 2014 is graphically shown below. (Source: Park, Lee and Lee, 2015) Interest rates The role of a central bank in China has been played by the People’s Bank of China (PBOC). It has more financial assets than any other bank in the world. The interest rate prevailing in a country reflects its monetary condition. The country is hit by a slow economy along with weak exports and unsteady investment. So, the People’s Bank of China took a strong step by reducing its interest rate since December 2008. This has worried the policymakers that they might fall behind others. For the third time, China has cut its interest rate in six months in May, 2015 in order to reduce the borrowing cost of the companies. Analyst predicted that although the move was good but the reserve requirements would have to be relaxed by the policymakers. PBOC also lowered its benchmark that is; it reduced its 1 year lending rate by 25 basis points to 5.1 percent. PBOC is still concern with the low level of domestic prices and higher real interest rates. The country is pressurized by the soft demand both at home and abroad. However, the bank has lifted the restriction from the deposit rates to 1.5 times the benchmark level (Congleton and Hillman, 2015). It is believed that lowering interest rates will boost up investment again. Since, it will be easier to borrow money for the companies and individuals so that they can start spending. PBOC announced that there would be a drop in the regulated one-year corporate lending rate to 6.31% (Li and Zhu, 2015). It also said that lending rate would be further decreased by the commercial banks. However, savers will get upset since commercial banks will reduce lending rate as well. There will be a drop in one-year deposit rate to 3.25% as pointed by PBOC. This reducing policy has shown that China has made a shift from policy fine-tuning to a stage of policy easing. The fluctuating interest rate from 2014 to 2015 is shown below. (Source: Hsu, 2015.) Fiscal Policy (Direct & Indirect taxes) The fiscal policy of Direct and Indirect tax are a set of tool of the government to increase their revenue earning. Given the present scenario, it is essential for the Chinese government to increase its expenditure and for that revenue has to be increased so that expenditure is channelized towards the creation of adequate social safety and health facilities. However, Zhang, Meng and Getz, (2014) suggested that the rate of increasing tax rates should not exceed the rate of growth of GDP. Income tax is the key form of direct taxation. However, currently, China lacks two direct taxes such as Property tax and an Inheritance tax which would have made the tax system more efficient. China levies many taxes on transactions in relation to residential property. These act as additional tax revenue. Booming export sector has also lead to higher VAT revenues. There is a strong corporate income tax existing in China which leads to a high increase of 31.8% in tax earnings raised from non-resident businesses in 2011 which reflected the positive impact of the 2008 corporate income tax reform. The government at the sub central levels in China lacks their own taxing powers. The income tax is progressive in the country at 3%-45%. The corporate tax is 25% for foreign and domestic companies. However, there is a different rate of corporate tax, where small companies pay 20% and big companies pay 15%. There are two types of VAT payers: General VAT payers and small-scale VAT payers. The rate for general VAT payer is 17% and rate of small scale VAT payer is 3%. Business tax fluctuates in 3% to 20%. Interesting feature to be noted is that there is no capital tax and transfer tax. A Stamp tax varies from 0.005% for loan agreements to 0.1% for leasing agreements. Gift tax is also not imposed in China (Hsu, 2015). Figure: Tax System of China (Source: Cho and Choi, 2014) Conclusion/ Future Outlook of the Country The country has lost its pace in this time of economic crisis. There have been slow productivity accompanies by inflammatory issues, unemployment, government budget deficit, fluctuating interest rates, etc. The situation also calls for a reform in its tax structure. To control rising price levels, the government has to curb the supply of money in the market. The government will try to ensure the supply of CPI by monitoring the supply and prices of sugar, grain, cooking oil and staple vegetables for winter consumption along with prices of gas products. Transportation costs of foods have to be reduced. The government is also considering providing lower income households with high subsidies. It is also advisable to improve the education system of the country so that the problem of unemployment can be mitigated. This is the only way by which the problem of matching efficiency can be reduced. Along with that, it also needs to make a balance between both the labor and capital stock of China. Proper investments planning have to be sketched out so that it properly gets channelized in different sectors especially, agricultural sector. The budget procedure is required to become transparent by incorporating audits and fiscal discipline. The tax structure is undergoing transformation and PBOC is trying to strike a balance between this reforms and growth. Data implies that banks are unable to pass on low interest rates to borrowers and there is obstruction in the flow of funds to other sectors. This needs to be checked by both the fiscal and monetary policies. Reference List Cho, S. and Choi, P. P., 2014. Introducing Property Tax in China as An Alternative Financing Source. Land Use Policy, 38, pp. 580-586. Congleton, R. D. and Hillman, A. L., 2015. Companion to the Political Economy of Rent Seeking. Cheltenham: Edward Elgar Publishing. Ernst and Young, 2012. China’s Productivity Imperative. [PDF]. Available at: [Accessed on 1 June, 2015]. Hsu, S., 2015. Chinas Road to Greater Financial Stability: Some Policy Perspectives. Pacific Affairs, 88(1), pp. 167-169. Jay, J. W., 2015. Diasporic Chineseness after the Rise of China: Communities and Cultural Production. The China Journal, 73(6), P. 300. Li, S. M. and Zhu, Y., 2015. Residential mobility within Guangzhou city, China, 1990–2010: Local Residents Versus Migrants. Eurasian Geography and Economics, 55(4), pp. 1-20. McKelvey, M. and Bagchi-Sen, S., 2015. Innovation Spaces in Asia: Entrepreneurs, Multinational Enterprises and Policy. Cheltenham : Edward Elgar Publishing. Pan, J. N., Huang, J. T. and Chiang, T. F., 2015. Empirical Study of the Local Government Deficit, Land Finance and Real Estate Markets in China. China Economic Review, 32, pp. 57-67. Park, D., Lee, S. H. and Lee, M., 2015. Inequality, Inclusive Growth, and Fiscal Policy in Asia. London: Routledge. Zhang, C., Meng, C. and Getz, L., 2014. Food Prices and Inflation Dynamics in China. China Agricultural Economic Review, 6(3), pp. 395-412. Zhang, M. and Rasiah, R., 2015. Globalization, Industrialization and Labour Markets in China. Journal of the Asia Pacific Economy, 20(1), pp. 14-41. Read More