The Factors Impending China's Economic Performance - Example

ANALYSES OF THE FACTORSFFACTORS IMPEDING CHINA’S ECONOMIC PERFORMANCE AND THE WIDER IMPACTS UPON THE WORLD ECONOMY (Student Name) (Course No.) (Lecturer) (University) (Date) The Chinese economy, which is the second largest in the world, has recently slowed down showing signs of serious economic deceleration in the future. According to the reports released by the government last year, the economic growth of the country reduced to 6.8% in the last quarter and 6.9% in 2015 (Institute of International Finance, 2015, p. 3-20). This reduction in the economic growth rate of China can result in serious implications on the economies of other countries and the world economy at large. Also, this economic slow -down in China also raises many questions as to the measures taken by the Chinese government to abate the reduction. The Chinese economy has been one of the fastest growing economies in the world for several years. Following the introduction of the market reforms in the country in 1978, there was the transformation of the country’s economy from a centrally planned to a market based economy, thus resulting into a faster economic growth and social development. In the following years, China recorded an average increase of 10% annually in its gross domestic product resulting in great reduction in the poverty levels within the population. Although China is a developing country, it has achieved nearly all the millennium development goals. The depreciation of the economy, therefore, is predicted to have many adverse effects not only on the country but also on the global scale. This is because of the increased investors’ concerns about the Chinese economy following the impacts it may have on their Chinese holdings as well as the non-Chinese holdings that have sales and profit exposure to the country. The concerns over the reduction in the economic growth of China were raised in the financial markets in summer last year, following the plunge of the Chinese stocks in the global market. Similarly, early this year, the country shocked the financial market by registering an 8% reduction in the United States equities. This paper examines the factors that hinder the economic performance of China, the causes of the decline in the economic growth as well as the implications of the decline of the Chinese economy on the economies of other countries and the global financial markets. The paper also proposes the recommendations that should be made to help in abating the economic slow- down. Chinese Position in the Global Market There has been a rapid increase in the share of the gross domestic product of China in the world market following the introduction of the market reforms which took place in 1978. The application of the purchasing power prices would further result in an increase in this GDP. Although China is a developing country, her increasing contribution in the economy of the world cannot be underestimated. This is because of the immense contribution of the country to global development as well as the expansion of global growth. Following the transformation of the Chinese economy into a market based economy, and the introduction of the economic reforms within the country in the last decade, China has registered an increase in trade, achieving the status of one of the largest economies in the world (Lin, 2010, p. 2-3). The expansion in the Chinese economy has caused the country to be one of the largest exporters and importers of goods globally, heightening its status in the global economy (Sen, 2010, p. 15). Among the goods exported by the country are electrical, optical and medical equipment, while the imports of the country include; oil, mineral fuels, metallic ores, plastics as well as organic chemicals. The introduction of the Chinese commodities into the global market has relieved the consumers owing to their reduced prices. As a result, there has been increased competition in the world market caused by these products (Breslin, 2005, p. 17). In the recent years however, Chinese economic growth has reduced causing panic in the countries whose economies significantly rely on the country’s economic growth. With the country consuming up to 20 % of the world’s platinum and 17% of palladium, the recent decline in its economic growth and the reduction in the demand for goods from other countries is likely to have adverse effects not only on the economies of its trading partners but on the global economy at large. Fig 2: China’s Annual Economic Growth rate Source: The National Bureau of Statistics of China Causes of Economic Decline The rapid growth rate of any country depends on the policies in place and the provision of the right environment that supports investments. However, after several years, this kind of growth often falls following reduction in the purchasing power parity. The Chinese case is not also different. The causes of the economic decline in China are numerous and varied. One such factor that has caused the economic decline presently experienced in China is the reduction in the export rates (World Economic Outlook, 2016, p. 1-6). China is considered the largest global exporter, thus its economy depends largely on the exports. Among the products that the country exports are; computers, office machine parts, integrated circuits and telephones. China exports such products to countries such as Japan, Hong Kong, Germany, South Korea and the United States of America. For several years, the Chinese economy depended on the exportation of goods, reaching an annual growth rate of 20% between 2000 and 2008. However, following the 2008-2009 recession that affected the globe, the growth rate of the Chinese exports in the global financial market has declined to 9.2% thus seriously affecting the economy of the country. China currently faces a challenge of maintaining its share of the world’s exports. Another important factor that has affected Chinese economic growth is the declining labour migration (Lam et al., 2015, p. 4). The availability of labour is an important factor that determines the success or failure of an economy. The transformation of the Chinese economy to a market based economy has led to the migration of labour from the rural areas in China to the urban areas. Currently in China, many of the people aged between 18 and 40 years working in the urban areas hail from the rural areas causing a reduction in labour in such areas and impacting adversely on the economy. Also, there are many Chinese that are aged 65 and above. This age limits cannot allow such individuals to be economically productive, further impacting negatively on the economy as such individuals have to be taken care of by the government, causing a reduction in the total factor productivity of the country. Figure 1: Showing the trends in the Chinese total factor productivity Source: Asian Productivity Organization Productivity Database. Another factor that has caused the economic decline presently experienced in China is the reduction in the export rates. China is considered the largest global exporter, thus its economy depends largely on the exports. Among the products that the country exports are; computers, office machine parts, integrated circuits and telephones. China exports such products to countries such as Japan, Hong Kong, Germany, South Korea and the United States of America. For several years, the Chinese economy depended on the exportation of goods, reaching an annual growth rate of 20% between 2000 and 2008. However, following the 2008-2009 recession that affected the globe, the growth rate of the Chinese exports in the global financial market has declined to 9.2% thus seriously affecting the economy of the country. China currently faces a challenge of maintaining its share of the world’s exports. The other cause of the Chinese economic decline is the overheated investments. The increased investment rates in the country over the years has also been a major contributor to the economic decline experienced today in China (Buiter, 2015, p. 14). The investment rates in China currently stand at a share of the gross domestic capital of 50%. This investment growth rate was primarily because of the need to fill the three decade gap in transport and housing investments. However, following the filling of this gap, investments currently produce low returns in China, impacting negatively on the economy of the country. The other factor that has been identified as a major cause of the slowing down of the Chinese economy is poor consumption (Collins, 2015, p. 3). To curb the problem of investment in China, it is important for the country to increase the household consumption of these investments. The household consumption in China is limited thus contributing to the slowing down of the economy of the country. Household consumption in China can be increased by devising methods of ensuring the faster growth of the wages rather than the GDP (Morrisson, 2015, p. 350). Another factor affecting the Chinese economy is the presence of debts. The Chinese total debt, that is, the combination of the government, housing and corporate debts has increased to 250% of the gross domestic product since 2008. According to the economists, this debt enabled the country to command its investments throughout the recession period. The challenge however, lies in the repayment of these debts. Additionally, most of the credit flowed to the property developers with the number of unsold homes in China hiking. Such occurrences impact negatively on the economy, thus causing a great reduction in its growth. Effects of the Economic Decline As one of the largest economies in the world, the deterioration in the Chinese economy is likely to affect the financial markets and the global economy at large. One major effect of this economic slow -down is on the export products (Godement, 2015, p. 4). China’s economic decline is accompanied by the reduction in the demand for commodities both locally and globally. This has contributed to the phasing out of the demand driven decade long price cycle that occurred between 2002 and 2012. As a result, many of the countries that export their products to China have been adversely affected. One of the affected commodities is cotton, with the Chinese government to buy much of its domestic cotton following the increased costs in 2011, seriously impacting on the cotton exporting countries. Similarly, a report released by the World Bank in 2014 mentioned the reduced demand in China as a major factor that caused the decline in the global metal prices. Following the excess amounts of iron ore in the market and the policies initiated by China impeding importation, the prices of iron in the global market fell far below the desired levels. During this period, the demand for gold in China also reduced significantly causing the country to fall below India in gold consumption. The other commodity that was also negatively impacted following the economic decline in the country is energy, thus impacting negatively on the oil producing countries. Fig 2: showing commodity performance following the Chinese economic depreciation Source: Standard and Poor’s Goldman Sachs Commodity Index (S&P GSCI) Also, the slowing down of the economic growth in China has serious effects on the country’s trading partners (Miles et al, 2012, p. 420). The trading partners of China in the African continent such as South Africa have already started experiencing these effects. The entry of China into trade with the African continent was largely because of the need for natural resources which were readily available in Africa. (Drummond and Liu, 2013, p. 10-19). The slowing down of the country’s GDP has led to the reduced demand for these resources causing a negative effect on their economies. The South African Rand, for instance, has fallen following the selling off of stocks in China, the country’s largest trading partner. This reduction in the demand African goods by China is expected to cause major crises within the continent. Other countries that have been negatively affected by the economic slow- down of China are the South American countries which greatly rely on its exports to China such as Venezuela, which is currently registering very high rates of economic recession. Other countries such as Brazil are also experiencing rising levels of unemployment and political problems due to the reduced gross domestic product of China, which is the major importer of its goods. A number of countries have also been indirectly affected by the reduction in the economic growth rate of China. The demand Chinese demand for fuel, for instance, has also slowed down thus causing the oil producing countries such as Saudi Arabia and Russia to also slow down their economic growth because of their dependency on oil exports to China. Other economies likely to be adversely affected by the recession in China are the United States of America and Germany, for whom China is a major market. Another important area of concern in the Chinese economic decline is the foreign direct investment. Foreign direct investment refers to the business ownership in one country by an enterprise in another country (Morrisson, 2015, p. 25). Foreign direct investment and a country’s economic growth are directly linked. An increase in the influx of investments into a country will impact positively on the country’s economy through job creation. However, when the foreign direct investment slows down, it is likely to affect negatively on the economy of the country. Since the introduction of the economic reforms in 1992, there has been an increase in foreign direct investments in China, thus causing a boom in the economy. The foreign direct income of the country has, however, not been affected by the slowing down of the economy. According to a report released by the KPMG International Cooperative last year, China recorded an inflow of the foreign direct investment of 119.6 billion US dollars, a 1.7% increase from the previous year (KPMG International Cooperative, 2015, p. 24-30). This means that the country still remains an important destination for the foreign investors despite the decline in its overall economic growth. It also suggests an increase in the market opportunities following increased consumer consumption. Although the country recorded substantial increases in the FDI in 2015, there has been a decline this year with foreign investors finding it difficult to invest in the country because of the looming economic crisis. Fig 3: recent trends in Chinese FDI Source: Ministry of commerce of the people’s republic of China. The decline in the Chinese economic growth rate also has serious implications on the prices of commodities both locally and internationally. China is one of the largest exporters of commodities in the world and a substantial importer, making the country a key player in the global economy. With the country experiencing a reduced economic growth in recent times, the implications on the commodity prices are also expected to dwindle both in the foreign and the local markets. Over the last years, the prices of commodities in the markets have increased as a result of the increased demand of the products in China. However, following the economic recession, there has been a reduction in the prices of the goods in the global market due to a shrinking demand from China. China for instance, consumes large amounts of metals such as iron, platinum and palladium. The country also has a wide consumption of precious metals such as gold and silver. Following the economic decline, the country’s demand for these products have reduced, causing them to be surplus in the world market thus recording very low prices. Other commodities that have also been affected by the reduced economic growth are the agricultural products such as cotton. The middle class and disposable incomes The rise of the middle class is another major issue of concern following the economic depreciation of China in the recent years. Although the Chinese economic growth is slowing down at an alarming rate to the global world market, the middle class is of important concern since it contributes greatly to the economic growth of the country. For the last three decades, the booming economy of China has provided many consumer companies with many growth opportunities, making it one of the world’s largest economies that exports a wide range of products and a significant import of other commodities such as metals. This economic boom in China led to the economic growth of the Chinese middle class, lifting most of the Chinese population from poverty. Today, many companies throughout the world are realizing the economic potential of the Chinese middle class which is fast growing. China’s middle class is defined as households within the country with per capita incomes ranging from $6,000 to 25, 000. Since the establishment of the economic reforms in China, there has been a rapid rise in this segment of the population from close to zero in 1995 to 87 million in 2005. This rise of the middle class has been attributed to the rising incomes caused by the rapid economic growth. In 2006, 39% of the urban households were middle class, a trend which is still increasing to date. The purchasing power of the middle class in China, which is the disposable income minus the savings has also increased. The slowing down of the Chinese economy is likely to have serious impacts on the middle class. Although there has been a massive increase in the middle class, an economic recession would mean a reduction in the purchasing power of the middle class due to a reduction in their income levels (World Bank, 2015, p.11). The reduction in the economic growth has led the country to cut off some of its imports. This would result in the populations salary cut offs and retrenchment of the workers of such companies. If the trend continues for a long time, the Chinese middle class is likely to reduce and the income levels of the middle class is also likely to be adversely affected (Bryson, 2015, p. 2-5). Trade Agreements Trade agreements are important in efficiently conducting trade between different countries. Free trade agreements allows the trading countries to conduct tax free trade between their borders (Bendini, 2014, p. 20). China and Australia entered a free trade agreement in 2015, owing to the fact that China is the largest export market for Australian products. Implementation of the trade agreement between China and Australia requires that the export products from Australia to China are not taxed. The agreement also provides liberalization of the Australian market for investments from the Chinese companies. Apart from entering free trade agreement with Australia, China has also entered into similar agreements with other countries such as New Zealand and Japan. With the recent Chinese economic decline, these trade agreements are likely to be adversely affected. With the Chinese appetite for imports reducing, countries that export their products to China such as Australia are likely to be affected as China can no longer stick to the trade agreements due to the recession. However, the investment sector in Australia is likely to benefit from this economic decline as many Chinese investors transfer money to the Australian real estate sector due to the reduction in the property market in China (LaSalle Research & Strategy, 2015, p. 3-10). Conclusion From the above discussion, it is evident that the slowing down of the Chinese economy has serious implications on the economies of various countries and the global economy at large. These Spillovers are likely to destabilize many countries especially the African countries that already have many problems. It is, therefore, important for policies to be put in place by the Chinese government to enable it maintain or raise the current levels of the economy. References Bendini, R. (2015). Exceptional measures: The Shanghai stock market crash. European Parliament, p. 5-10. Bendini, R. (2014). In-depth Analysis: Trade and economic relations with China 2014. European Parliament, p. 20. Breslin, S. (2005). How China Changed the Global Economy and the Global Economy Changed, p. 17. China: Thirty Years of Investment and Trade Bryson, J.H. (2015). Chinese Stock Market Crash: A Bad Omen for China? Economics Group, p. 2-5. Buiter, W. (2015). Is China Leading the World into Recession? willembuiter.com/China2015.pdf, p. 14. Collins, M. (2015). Are We Headed for a Global Recession? Fidelity Worldwide Investments, p. 1-4. Drummond, P and Liu, E. X. (2013). Africa’s Rising Exposure to China: How Large Are Spillovers through Trade? International Monetary Fund Working Paper, sourced from; https://www.imf.org/.../pp/.../2013/070213, p. 10-19. Godement, F. (2015). China’s Economic Downturn: The Facts behind the Myth. European Council of Foreign Relations, p. 4. Institute of International Finance (2015). China’s Economic and Financial Outlook, p. 3-25. KPMG International Cooperative (2015). China Outlook 2015, p. 24-30. Lam, R, Liu, X and Alfred Schipke (2015). China’s Labour Market in the “New Normal, p. 4. LaSalle Research & Strategy. (2015). China’s impact on Australian Real Estate. p. 3-10.Source, www.lasalle.com/.../China_Impact_on_ Lin, J.Y. (2010). China and the Global Economy, p. 2-3. Miles, D., Scott, A., & Breedon, F. J. (2012). Macroeconomics: understanding the global economy, p. 420. Morrison, J. (2015). Business Ethics: New Challenges in a Globalised World, p. 350 Sourced from; www.palgravemacmillan.com.au/.../index?...new. Morrisson, W.M. (2015). China’s Economic Rise: History, Trends, Challenges, and Implications for the United States. Congressional Research Service, p. 25. Sen, S. (2010). China in the Global Economy. Levy Economics Institute, p. 15. World Bank. (2015). China Economic Update. World Bank Group, p. 11. World Economic Outlook. (2016). Subdued Demand, Diminished Prospects, pg 1-6 Sourced from; https://www.imf.org/2016/pdf/0116.pd. Read More