Economic Analysis of China - Research Paper Example

Economic Analysis of China Contents Emergence of the economy of China 3 Fiscal Policy 3 Monetary Policy 4 Trade Policy 5 Projections for the next fewyears 5 Works Cited 7 Appendix 9 Emergence of the economy of China The country of China accounted to just 10% of the worldwide growth in 2001. After the recession, when the World was paving the way to find the right path, the country contributed to almost 30% of the growth. So the country has managed to evolve as the second largest economy within a decade. A decade ago, the current account surplus of the country was at 2% of the Gross domestic Product while the reserves in foreign exchange were at 14% of the same or 166 billion dollars. In the year 2010, the current account surplus of the country was above 5% of GDP, while the reserves in foreign exchange declined to 2.85 trillion dollars or 50% of GDP of the country. The economy of the country has become one of the engines for growth since the country got enlisted in the World Trade Organization (WTO). The country emerged as the second largest economy at exchange rate of the market and the share in the output worldwide soared. The sudden emergence of the country has benefitted the globe but the other countries had to involve themselves in some adjustment processes to deal with the increase in the low skilled labor. The current account surplus for the country took the steep step with integration of the country into the global economy. The contribution of the country in global growth is increasing exponentially. The economic cycle of China has the potential to influence the rest of the World, with major influences on the OECD countries. The share of the imports of the country is increasing in the exports of the rest of the economies. The growth performance can be partly explained by the rapid expansion in the stock of capital as well as solid sufficiency gains. Fiscal Policy The approach towards deficit as well as debts acted as the constraint for the recognition of the fiscal policy for a long time. Government deficits were absent in the period of 1958 to 1978. In the period of 1979 to 1993, foreign as well as domestic borrowing took place but mostly limited. The borrowing of the government became significant after the year 1993 and government debt took the rising curve which reached to 22% of GDP in the year 2007. In fact the country adopted the fiscal policy of expansionary type after the financial crisis in Asia. As a result there were considerable fiscal deficits. The deficit in the budget witnessed an increase from 0.7% of Gross domestic product in the year 1998 to 2.6% of GDP in 2000. The economy experienced a contraction in deficit which includes the extra budgetary funds as well as the funds for social security. There were positive signs of the fiscal impulse in the two year period of 1998-2000. This is evident from Table 10. During the seven year period from 2001 to 2007, the growth curve was rising and fiscal policy withdrew the stimulus. The situation observed negative adjusted fiscal impulse during that time and the economy witnessed a shrink in the gap in output. The shift in the fiscal policy paved the way for a prudent fiscal policy. The fiscal consolidation will be larger if the balance of the funds of social security is taken into account for the recent years. Therefore, the adjusted fiscal impulse was again negative in 2007. The government of the country involved to stimulate the economy even in the turbulence of 2008. The importance of the fiscal policy lies in rebalancing the growth pattern towards domestic demand as well as production of services. Direct spending of the government can act to stimulate the short term growth possibilities of the country (kuijs and Xu, 20-21). Monetary Policy The monetary policies of the country in the recent years operated under tough constraints like fixed regime of exchange rates, a financial system not properly developed and weaknesses of many institutions. Macroeconomic instability can get accrued in the economy having a limited flexible exchange rate regime. Some of the considerations led the authorities to revalue the renminbi by 2.1% compared to the dollar in 2005 (Organization for Economic Development and Corporation, OECD, 21). It was also announced that the value of the renminbi will be set according to the basket of currencies instead of being pegged with the dollar. Since then, the renminbi has been able to maintain a steady level. However the authorities have shown intension to allow for greater flexibility across time. In order to stabilize the economy from the macroeconomic shocks the main objective of the monetary policy is to maintain low level of inflation. These kinds of initiatives have allowed the targeted inflation to follow the line with the actual inflation. This is depicted in figure 13. The authorities have relied on the monetary policy tools to control the rise in the food prices. The regulated lending rate for the year 2011 was 3% while the lending rate was 11% in the same year. In 2011, the interbank rate for one year was 100 basis points higher than the regulated rate of deposit. The appreciation of the renminbi witnessed strengthening of the effective exchange rate. But the high rate of inflation in the country was offset by the weakness of the dollar in the recent months. A clearer picture is shown in figure 15 (Goodfriend and Prasad, 3-4). Trade Policy In the year 2001, the country got included in the World Trade Organization regime. Several authorities were created to deal with the trade policies like antidumping and some other type of policies. The state agencies of the country underwent reorganizations and many new institutions were created. The State Economic and Trade Commission (SETC) were dismantled. The restructuring processes have strengthened the apparatus of creating new policies of trade. The country seems to abide by the rules of the WTO in order to deal with the interests it has in raising the volume of trade (Zeng, 11).Since 1980, the export and the import volumes have grown by around 135 from the year 1980. The FDI stock for the country was over 550 billion dollars in 2004. It experienced a rise of almost 525 billion dollars in fourteen years. The combination of trade and FDI paved the way for the country to penetrate into the world economy. The country involved itself to improve the transparency in the trade policies so that it would fall in line with the WTO laws. The barriers to trade were removed and regulation was reduced. The restrictions on exports as well as the import licensing activities were taken care of. The foreign investment restrictions were lifted and offered faster liberalization to the foreign suppliers. The country was concerned about the innovation policies as well as the effect in restricting the access for products of foreign countries. Projections for the next few years The International Monetary Fund forecasts the economy of China to grow at the rate of 9% under the assumption there will be no turbulence in Europe. The economic outlook of the country is considered by the companies engaged in business with China. The companies that are engaged in business with other companies that are engaged in business with the Chinese companies will take into account the upside as well as the downside potential of the country. It has been stated that in the year 2012, the growth of the country will be in line with the projected growth. The current account surplus will remain at 3-4% of GDP but the net exports can slightly drag the growth process in the next two years. It is expected that the rate of growth will be around 9% but will speed up in the latter part of the year. The picture is clearer in Table 1. The role of the macroeconomic indicators can be observed from figure 2 (International Monetary Fund, 5). The country will enter the period where inflation will be moderate. The consumer prices are expected to rise in 2012 as the costs of labor and the energy will take the rising curve. The government is following the policy of tightening the property market and so it is expected that the sales will decline and the price level will finally take the declining curve. The private market will weaken but a collapse in the market is not expected. In the next year or so, the social housing will be the support system for the overall construction. There is also possibility for the country to expect deficit in trade in the coming years. The trend of declining exports for the country will continue. However analysts are not too pessimistic on the prospects of the exports of the country. The international significance of the currency can be hampered if the currency looses the potential to appreciate (Chen, 255). Works Cited Kuijs, L and Xu, G. “China’s Fiscal Policy—Moving to Center Stage”. scid.stanford.edu. 2008. Web. 10th May, 2012. http://scid.stanford.edu/group/siepr/cgi-bin/scid/?q=system/files/shared/kuijs_10-16-08.pdf Goodfriend M. and Prasad, E. “A framework for independent Monetary Policy in China”. books.google.co.in. 2006. Web. 10th May, 2012. http://books.google.co.in/books?id=jKz2Wm_fj8AC&printsec=frontcover&dq=monetary+policies+in+emergence+of+the+economy+of+china&hl=en&sa=X&ei=8Y2rT4f3C4nprQfuiYkZ&ved=0CD0Q6AEwAQ#v=onepage&q=monetary%20policies%20in%20emergence%20of%20the%20economy%20of%20china&f=false. OECD, “China’s Emergence as a Market Economy: Achievements and Challenges”. oecd.org. 2011. Web. 10th May, 2012. http://www.oecd.org/dataoecd/27/17/47408845.pdf. Zeng, K. “ China’s Foreign Trade Policy”. books.google.co.in. 2007. Web. 10th May, 2012. http://books.google.co.in/books?id=mkjUBjE0OJwC&printsec=frontcover&dq=trade+policies+in+emergence+of+the+economy+of+china&hl=en&sa=X&ei=DJurT7OcEcvJrAf_9M3uDw&ved=0CD8Q6AEwAA#v=onepage&q=trade%20policies%20in%20emergence%20of%20the%20economy%20of%20china&f=false. International Monetary Fund, “China Economic Outlook”. imf.org. 2012. Web. 10th May, 2012. http://www.imf.org/external/country/CHN/rr/2012/020612.pdf. Chen, J. “The China Economy Yearbook”. books.google.co.in. 2009. 10th May, 2012. http://books.google.co.in/books?id=Vo4nAQAAIAAJ&q=forecast+of+china+economy&dq=forecast+of+china+economy&hl=en&sa=X&ei=AbCrT5DRBMqHrAeI-6lJ&ved=0CEYQ6AEwAA. Appendix Read More