Chinas Economic Development - Case Study Example

A Report on China’s Economic Development Name Institution Financial markets China’s central government controls the country’s banking sectors and it ensures that capital is given to the industries that it considers to be important to the economy. Most of the credit is given to state-owned enterprises at the expense of private firms which are forced to look for loans in other areas which usually have high-interest rates (Morrison 31). He further adds that most state-owned enterprises do not repay these loans thus affecting the growth of the banking sector due to the high number of non-performing loans. Although external borrowing is an important source of capital for all developing economies, excessive borrowing can lead to huge debts. Many sub-national governments in China borrow from financial institutions so that they can get the capital to support projects that help to boost the local economies such as infrastructural projects (Morrison 31). Excessive borrowing leads to a strain on the financial sector and it needs to be sorted. The economy sometimes faces money supply issues. The government can increase the amount of money in circulation by loosening the monetary policies which will enable the banks to increase their lending (He, Wang, and Xiangrong 3). For example, PBOC can advise the commercial banks to reduce the bank rates which is the interest that they charge on their loans. If the bank rate is low, people will borrow more thus, increasing the amount of money in circulation. The people’s disposable income continues to fall in China this is in part caused by poor policies adopted by the banks. According to Morrison (34), the Chinese government restricts exportation of capital forcing the people to put a huge share of their savings on the domestic banks. The government then sets the interest rates on the deposits which usually falls below the inflation rate thus, leading to low income for the households. With low disposable income, the people are not able to invest thus, denying them an opportunity to improve their standards of living. The People’s Bank of China (PBOC) reduces the reserve requirement ratio for all banks in China with the aim of boosting the lending rates and the growth rate. This reduces the amount of money that the banks should keep in PBOC which in turn increases the money that these banks can lend to the people (Liao and Tapsoba). This move would help to solve the deflationary pressures the country faces. China borrows money from the World Bank, the IMF and other external sources of capital so that it meet its capital needs. In a report conducted by McKinsey Global Institute (MGI), China’s debt from the government, financial institutions and companies had grown from $7 trillion to $28 trillion between 2007 and the mid-2014. There is a lot of government intervention in China’s financial markets that favour state-owned companies. According to Morrison (31), the government influences capital to flow to companies that it considers to be important to China’s economy. The government is biased when giving subsidies to companies as it gives most of them to state-owned companies at the expense of privately owned firms. State-owned companies operate as they wish instead of focusing on improving small and medium sized firms. This is due to lack of improving governance and transparency in the state-owned companies. The government makes it easy for state companies to get funding from the financial institutions thus giving them an advantage over private firms. This leads to low level of competition which leads to the production of low-quality products. Private companies are restricted from listing on the stock exchange. It is difficult for private firms to borrow from banks thus leading to the collapse of some of them. According to Morrison (32), China’s financial systems are underdeveloped for example its stock exchange. He further notes that the financial systems are not efficiently utilised due to the restrictions facing the market forces. A report by Brookings Institution showed that the stock markets in China are usually affected by speculative investments more than those in the Western economies (cited in Morrison 33). This is the case because the shareholders in the markets have less influence on the decisions made by the companies than those in the Western countries have and they are only concerned about the short-term prices instead of the focusing on the long-term stock prices. Borrowing from the World Bank has also benefited the Chinese economy. According to the World Bank, China borrowed $ 54 to help fund 376 projects in 2014. The projects included urban and rural development, water and energy resources development as well as transport and human development. These projects helped to improve the Chinese economy’s development of infrastructure which helps to attract investors who contribute positively to the growth of the economy International Trade Due to trade liberalisation, China has become one of the major economic powers in the world. Trade with foreign countries has enabled China to create a market for its surplus production (Bibow 4). The industrial performance in China has improved and this has enabled it to expand its export commodities to include communication, office equipment, household and electrical equipment. Its textile industry has also grown because it is able to export its surplus production. Through international trade, China has been able to create more jobs for its people, for example, people are employed in the industries that produce commodities for export and some work in the global market. Most Chinese industries especially those that are labour-intensive are highly competitive across the globe (Pei 5). China has a huge population which offers unlimited supply to the industries. It has attracted more foreign investments to China which helps to create more jobs for her people. It has led to the introduction of new technologies and materials (Golley and Song 2). The introduction of foreign products has forced the local industries to adopt new methods so as to improve profitability and competitiveness. It has also led to the introduction of new products and services. Various multinational investors have invested in China, for example, in the areas of automobile manufacturing and machinery (Pei 5). To ensure that China remains competitive, it is important to achieve and maintain long-term developments that will not be affected by global recessions. For China to improve her performance in the international market, she should establish proper marketing and sales networks internationally and also learn from multinationals that have already succeeded in the international market (Pei 6) China has a large domestic market but her involvement in international trade increases her market. Expanding her market globally increases demand for her products which in turn increases the level of profit. In addition, China has low production costs due to the use of technologies, this translates to lower commodity prices in the global market which in turn increases the demand for her products thus increases the profit margin. China’s domestic market is also rapidly increasing and this will prevent a decline in her economy in case there is another global recession. China’s overreliance on foreign trade led to a decline in its economic growth during the 2008 global economic recession. Its level of exports declined, GDP growth rate declined and most people lost their jobs (Zhu 104). China is also conducting aggressive sales promotion in her foreign markets. This will help to increase her market size thus increasing the profits. Some of the weakness that China has in international trade is that she has limited experience in conducting sales promotion in foreign countries. A research conducted by Sun and Heshmati in 2010, revealed that international trade leads to unbalanced growth in China. The areas in the eastern region of China such as ShangHai and Jiangsu has better infrastructural developments, higher levels of technology and highly skilled labour due to favourable geographical and historical reasons (Sun and Heshmati 28). These favourable conditions in the Eastern area attract foreign direct investment which leads to economic growth in the region. Western regions in China such as Gansu still lag behind other areas due to lack of proper infrastructural development, environmental issues, lack of human resources and low resource endowment. These issues make it difficult for the region to fully participate in international trade. Sun and Heshmati (28), suggests that the western and central regions of China should increase their openness to international trade so that they can reap the full direct and indirect gains from trade. China faces some serious issues that need to be sorted so that it can fully benefit from international trade. These issues are poor terms of trade, environmental problems caused by trade, friction with her trading partners and unequal development in the country (Sun and Heshmati 29). It also has some trade disputes such as dumping, the Chinese government keeps on giving unfair subsidies and the valuation of the Yuan. China has various opportunities to improve her performance in the international market. International trade helps to boost China GDP which helps to accelerate economic growth in the country. China should use the internet to help her penetrate new markets. Through the internet, she can research the needs and preferences of a potential market and assess the problems that other investors have had in those markets (Lin, Yifu, and Li 7). Through international trade, Chinese companies are able to open new branches in foreign countries that help to increase their profits. Some of the threats to international trade include China’s government imposition of industrials policies and non-tariff measures that discriminate foreign competition. Chinese investors suffer from language barrier in global markets and China has some strict importation regulations. Sustainability of the Economy China can improve its economy by ensuring that she uses her resources efficiently, for example, energy. The government must also put measures in place that will ensure that firms can easily obtain the finances that they need. Some of China’s plans to improve its business environment includes proper resource allocation to firms, to reform the governance of state-owned enterprises and to reduce the capital problems faced by new firms. To ensure sustainability of the economy, China must ensure energy efficiency, this can be done by reforming the energy markets in the country so that the prices can reflect not only the demand and supply but also the energy’s environmental and social costs. The country should also put proper regulation in place. Green and Stern (15), suggests that China should ensure that the price of energy sources should reflect the externality caused by its consumption. China should ensure come up with effective city planning which accommodates a dense urban population and has accessible public transport (Green and Stern 35). The cities should also incorporate other features such as cycling infrastructure and low pollution levels. This will enable China to attract creative talents around the world and capital which will enable her to not only improve technological innovations but also in offering professional services. The corporate sector is mainly financed through credit. The problem facing most companies is that they borrow too much but the company’s profits keep on falling. This means that these companies cannot be able to repay their loans thus leading to huge debts. Another major challenge affecting the economy is that China’s economy has not completely transitioned to a market economy. According to Morrison (30), the government allows free market forces but it still plays a key role in the economic growth of the country. This needs to change so that China can fully benefit from a free market economy which has no government interference. According to Green and Stern (35), China can achieve sustainable growth by phasing out coal. The economy is heavily dependent on coal for its industrial production and other energy needs. The Central Government should come up with incentives that help to reduce the amount of pollution and GHG emissions. The government can help to reduce the use of coal by introducing a tax on coal consumption (Green and Stern35). They further added that the government should also impose the tax on other fossil fuels. Imposing these tax will lead to an increase in the price thus, forcing the consumers to shift to cheaper sources of fuel that have low carbon levels which in turn would help to reduce the level of environmental pollution. Coal also contributes greatly to water shortage in China. According to Luo et al., if China does not reduce the coal production and consumption then the water competition between agricultural and industrial users will continue to rise (cited in Green and Stern 22). China should improve innovation, research and development. According to State Council, the government has given low-carbon innovation a central position in its development plans (cited in Green and Stern 26). Reducing the level of consumption of fuels that pollute the environment will help to reduce health and other environmental costs. This will, in turn, help the country to focus on creating attractive cities that will attract investors (Green and Stern 22). The People’s Bank of China increases its interest on short-term loans every time the country is facing inflation. By increasing the interest rates, people will borrow less from the banks which will help to reduce money supply which will, in turn, reduce the level of inflation. According to John Ross, to ensure economic growth, China needs to continue increasing the level of investments (Roberts 4). China can do this through increasing division of labour which will lead to an increase in investments in mechanisation and productivity which will ultimately lead to a boost in productivity. According to John Maynard Keynes, an increase in the level of savings will lead to an increase in the level of investments (cited in Roberts 4). According to Green and Stern (33), China can ensure sustainable economy by coming up with fiscal and governance reforms. These reforms should be done by the local authorities as well as by the Central Government. They suggest that the local authorities should come up with fiscal reforms that aim at reducing negative externalities caused by the transport sector. For example, charging traffic congestion and air pollution from vehicles. The revenue collected could help to finance infrastructural development (Ahmad and Wang cited in Green and Stern 34). They further added that China can draw insights from London and Singapore that have successfully used congestion charging initiatives. Economic Policies This section provides policies that the government can put in place so that it can solve the problems affecting international trade, the financial markets and the issues that hinder sustainable economic growth in China. The use of coal and other fossil fuels leads pollution of the environment which causes health complications and in extreme cases, it leads to death. To reduce the number of deaths caused by air pollution, China should come up with measures that will help to reduce air pollution caused by motor vehicles. For example, it can ensure that it improves the fuel quality and tax vehicles according to their level of emission (OECD 9). To ensure that China fully benefits from the international trade it should ensure that it uses advanced technology in processing its exports. High-quality products will be competitive in the foreign market which will lead to increase in demand which will increase its exports thus, leading to a favourable balance of payment. According to Sun and Heshmati (p. 30), China should reduce the production of exports which causes a high level of pollution, are labour intensive, consume a lot of energy and which have low-value addition. The PBOC should order the commercial banks in China to increase the interest rates of deposit as this will enable the people to save more and make investments that will enable them to make profits thus, improving their standards of living (Qin 3). The issue of unbalanced growth in China should also be addressed. The government should come up with measures that will increase foreign direct investment in the western regions so that it can reduce the disparity between the eastern and western regions. According to Sun and Heshmati (30), the disparity in the level of development between the eastern and western regions can be addressed by improving infrastructure and human capital in the western regions. Infrastructural developments in energy, transport and hydropower should be funded by the central and the regional government (Sun and Heshmati 30). Sun and Heshmati, (30) further suggests that the western and central regions of China should take over the labour-intensive industry in China because the cost of labour has significantly increased in the eastern region. They further add that the eastern region could focus on developing capital and high technology-intensive sector by taking advantage of foreign direct investment and availability of infrastructure in the region. China should also take part in making the rules that govern global trade and help in resolving trade issues between global partners. This will enable it to propose rules that will benefit it and to oppose the rules that would be detrimental to the Chinese economy. China’s export-driven growth has been dropping in the past few years, this is due to the decline in demand for its exports. This can be solved by increasing domestic demand for its locally produced goods. Raising domestic demand will lead to the creation of more job opportunities for its people (OECD). It will also prevent the economy from suffering during a global economic recession. The government needs to protect innovative private firms because they help to drive the economy. For example, information technology firms like Lenovo and Huawei and others should be protected. China can make more profits by producing goods that it has a comparative advantage in producing and importing the commodities from trading partners that have a comparative advantage in producing. For this to happen China must ensure that it produces high-quality products for its domestic and global markets. The government should facilitate market entry so as to create competition in the state-owned corporations. This can be done by lowering barriers to entry which will dismantle monopolies. This will promote the growth of small and medium enterprises which will lead to production of high-quality products due to increased competition thus, promoting economic growth (IMF 20) The government, however, needs to the settle the debt problem affecting the country. According to IMF (7), the huge debt is brought about by the heavy borrowing by companies combined with declining profits. According to IMF 2016 (10), the corporate debt can be resolved through identification of companies facing financial difficulties. The companies that are viable should be restructured and those that are not viable should be liquidated, this will help to prevent debt accumulation. The debt problem can also be resolved through burden sharing, the losses should be shared among banks and investors, a cost should be imposed on those that are directly responsible for the debt (IMF 10). It also adds that the local governments should improve their fiscal discipline. The government needs to stop lending to companies that are not in a position to repay their loans which end up diverting resources from ventures that could have benefited the economy. References Bibow, Jörg. "How to sustain the Chinese economic miracle? The risk of unravelling the global rebalancing." (2010). p. 4 Golley, Jane, and Ligang Song. "Chinese economic reform and development: achievements, emerging challenges and unfinished tasks." China: The next twenty years of reform and development (2010): 1-18. World Bank 2017. China. Overview. http://www.worldbank.org/en/country/china/projects IMF, 2016. 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Green, Ferguson, and Nicholas Stern. "An innovative and sustainable growth path for China: A critical decade." London: Centre for Climate Change Economics and Policy and Grantham Research Institute on Climate Change and the Environment. (http://www. lse. ac. uk/GranthamInstitute/wp-content/uploads/2014/05/Green-and-Stern-policy-paper-May-20141. pdf) (2014). OECD., China’s Employment Policies and Strategies. [Online] http://www.oecd.org/employment/emp/37865430.pdf Qin, Tianbao. "Challenges for Sustainable Development and Its Legal Response in China: A Perspective for Social Transformation." Sustainability 6.8 (2014): 5075-5106. Lin, Justin Yifu, and Yongjun Li. "Export and economic growth in China: a demand-oriented analysis." China Economic Quarterly 2 (2003): 779-794. Zhu, X., 2012. Understanding China’s Growth: Past, Present and Future. Journal of Economic Perspectives, 26(4), p. 103-124. Read More