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ChinasEconomicReformStrategy

Background:

*Chinaisasocialisteconomy,formedwhenMaosCommunistforcesdefeatedtheNationalists
intheCivilWar1949.

*GreatLeapForward(1950s):
Attempttomoderniseagricultureandindustry,butfailedleadingtofamineandpoverty,

*CulturalRevolution(1960s):
Furtherattemptsofmodernisation,butprogressiveswerecriticalofMaosfailedeconomic
strategyandChinasisolationfromtheglobaleconomy.

AfterMaosdeath,Dengimplementedradicaleconomicreformsbetween1978and1997:

*Onechildpolicy(1979onwards):
Containpopulationgrowth.

*Agriculturalreforms(19781994):
HouseholdResponsibilitySystemwasintroduced.
Householdscouldmaketheirownproductiondecisionsandsellsurplusoutputinfreemarkets
oncethestatequotawasmet.
Thisledtoincreasedfoodproductionandsurplusincomewasinvestedinprivatelyruntown
andvillageenterprises,forlightmanufacturingofindustrialgoods.

*OpenDoorPolicy(1980):
SpecialEconomicZones(SEZs)establishedintheSandEcoastalprovincesofChina.
AttractedforeigninvestmentandTNCsthroughincentives(e.g.lowtaxrates,exemptionfrom
importduties,cheaplabourandpower,lessstringentgovernmentregulations).
InflowsofforeigncapitalincreasedChinasaccesstoexportmarkets,technologyand
managementskillstransferandsubstantialemployment.
1978TradeinexportsandimportsGNP:10%
1996TradeinexportsandimportsGNP:36%

*Taxationreforms(1994):
Taxeswerenowcollectedbythecentralgovernment(insteadofprovincialgovernment.
Improvedefficiencyandfinanceinfrastructurespending.
Targetedtaxevasionandavoidance,sincethereweremajorproblemsencounteredinraising
sufficientfundsforthegovernment.

*Bankinglaws(1995):
Systemofnetworkbanking.
Establishedstockexchanges.
Promotedamoreefficientcapitalmarkettofacilitatesavingandinvestment.

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*Cutstotariffs:(1995):
Encouragedgreaterdomesticefficiencythroughimportcompetition.
Attractedforeigninvestment.
1992Averagetariffrate:41%
1996Averagetariffrate:22%
2000Averagetariffrate:16%
2011Averagetariffrate:8%

EconomicGrowth

AnnualGrowthinGDPRates,pre2000s(fromWorldBank):

*China:
1980:7.8%
1983:10.9%(DoubleDigitGrowth)
1992:14.2%(Cutstotariffs)

*USA:
1980:0.3%
1983:4.5%
1992:3.2%

AnnualGrowthinGDPRates,post2000s(fromWorldBank):

*Forthemostpartofthelastdecade,Chinahassustaineddoubledigitgrowth.

*In2009:
Growthslowedto9.2%duetotheGFC(impactingexportsandfinancialflows).
Chinaseconomywasstillstrongrelativetotherestofworld(e.g.USA:3.1%)who
experiencednegativegrowthinGDP.

*Theyreturnedtotodoubledigitgrowthin2010(10.4%)butgrowthhasslowedto7.8%in2012
duetoreducedexportsandconsumerspending.

*IntermsofnominalvalueofGDPin2012,Chinawasthe2ndlargesteconomy.

ReasonsforGrowth:

*Chinahasmovedfromplannedtofreemarketeconomy.

*Chinahasmovedfromrural/agriculturaleconomytourban/industrialisedeconomy.

*Chinahascontributedsubstantiallytoglobaloutput,economicgrowthandtradeand
investmentasamajorworldeconomicpower.

*Chinahasmovedfrombeingdomestictotradeorientedfocused,capturingthebenefitsof

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globalisation.
Themaindriversofthehigheconomicgrowthwerebusinessinvestmentandnetexports.
In2006,investmentspendingaccountedfor45%ofGDP.
Investmentsweremadeininfrastructureandfinancingexportindustries.
Otherindicators:

*Largecurrentaccountsurpluses.

*LownetexternaldebttoGDPratio.

*Largeforeigncurrencyreserves.

*Netlenderofcapitaltotherestoftheworld.

EconomicDevelopment

Duetotheincreasedlevelofeconomicgrowth,Chinahasexperiencedaconsiderablereduction
inpoverty.

*TheWorldBankestimatesthatbetween1981and2010:
Chinahashad680millionpeoplemovingoutofextremepoverty.
Accountsforthemostdramaticdeclineoverthelast3decades.

*Chinaseconomyhaddoubledinsizeduringthe80sand90s,resultingin:
Higherrealincomes.
Improvementsinmaterialindicators(e.g.realGDPpercapita,CurrentAccountBalance)
Improvementsinnonmaterialindicatorsofdevelopment(e.g.lifeexpectancy,literacy,HDI)

IncomeandQualityofLifeIndicators

ChinasHDI:
*1980:0.407
*2013:0.699
*2013rank:101

ChinasHDIIndicators2013:
*Lifeexpectancyatbirth:73.7years
*MeanYearofSchooling:7.5years
*GNIpercapita(PPPUS$):$7945

Distribution:

*Chinahasthesecondlargestnumberofpeoplelivingunderthepovertyline,with128million
people.

*InlandprovincesofChinahavelowHDIvalues,whilethecoastalregionshavethehighestHDIs

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&incomeandemploymentopportunities.

DistributionofIncome

Largegeographicaldisparityinincomedistributionremainsacrossprovinces:

*Percapitaincomes:
HigherinurbanareasofSandEChina.
LowerinruralareasofNandWChina.
HigherinScoastalprovinces.

Thebulkofnationalincomeisconcentratedinmetropolitanandcoastalareas:

*Economicandsocialoutcomesinruralinlandislowercomparedtotheurbancoastalregion.

*CoastalareasarelocatednearSpecialEconomicZones(greatestemploymentandincome
opportunities):
Beijing(oneofthethreerichestcities)
Tianjin(oneofthethreerichestcities)
Shanghai(oneofthethreerichestcities)
Guangzhou
Shenzen

*Coastalregionshavelargeportsandharbourcities,beingthecentreofindustry,tradeand
exports.

*In1990s,annualgrowthrates(averaging13%)forcoastalregionswere5xthelevelofChinas
slowestgrowingnorthwesternregions(e.g.Tibet,Xinjiang).

MilleniumDevelopmentGoals:

*ChinaisoneofthefewcountriesprogressingwellwiththeMDGs.

*However,inincome,educationandhealth,onlysomepartsofChinawillachieveprogress,
leavingbehindthevastWinlandareas.

ChinasInternationalTrade

Statistics

*In2012,Chinacontributedto14.7%ofworldGDP.

*In2012,Chinawastheleadingworldexporter,with9.8%shareofworldexports.

*In2012,Chinasexportsoutstrippedimportsby$149billion(akatradesurplus)

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*Since1994,65%ofChinasexportgrowthhascomefromWesterncompaniessettingupin
China,withTNCsaccountingforabout54%ofChinastotalexports.

ReasonsforChinashighershareofimportsandexports

*Chinaisabletoprocesshighervalueaddedgoods(e.g.ICTequipment,machineryand
transport)

*pre.2005:UndervaluedcurrencywhengovernmenthadkepttheRMBundervaluedtotheUS
dollartomaintainpricecompetitivenessofexports.

CompositionofChinesetrade:

*Exportsaredominatedbymanufacturers.

*TopexportsforChina:
Electromechanicalproducts(57%).
Labourintensiveproducts(e.g.clothing,textiles,footwear,furniture,plasticproducts,bagsand
toys)(20%).

*Mainimportersofrawmaterials,energyandcapitalgoods.

*TopimportsforChina:
Electromechanicalproducts(43%)
Crudeoil(12percentoftotalimports)
Ironore(5percent)
Copper
Aluminium
Soybeans

*Chinaaccountsfor:
10%ofworldconsumptionofresources.
25%ofworlddemandforsteel.
35%ofworlddemandforironoreandcoal.
20%ofworlddemandforaluminium,copperandzinc.

MajorTradingPartners

*Majorexportmarkets:
USA
EuropeanUnion
HongKong
Japan
SouthKorea
Germany

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*AroundofChinasexportsaresoldintheAsianregion,NorthAmericaandEurope.

*Majorimportmarkets:
Japan
SouthKorea
Taiwan
USA
Australia(resourceexporter)
Brazil(resourceexporter)
SaudiArabia(resourceexporter)

ChinasMembershipinWTO

Chinasmembership:

*Membershipbeganin2001DohaConference.
RecognisedChinaaseconomicsuperpower.
Openedmassivedomesticmarkettoglobalexporters.
Chinahadaccesstoothercountriesmarkets.
Goalsachieved:

*DiversifyingofexportbaseincludingmorevalueaddedETMandserviceexports.

*Attractingmoreforeigninvestmentfordomesticservicesector.

*EncouragingmoreinnovationanduseofICTindomesticeconomy.

Costofmembership:

*Higherstructuralunemploymentduetohighimportcompetition(e.g.retail,finance,
telecommunication,motorvehicles).

WTOGuidelines:

*ChinamustabidebyWTOsrulesforfreeandfairtrade.
e.g.intellectualproperty,includingcopyright,patents,licencefeesandroyalties.

RevaluationoftheRenminbi(Chinesecurrency):

*In2005,
ChinawaspressuredbytheUStorevaluetheRMB.
Chinaabandoneditspeg(fixedexchangerate)againsttheUSdollar.

*ChinaadoptedamanagedpegagainstabasketofselectedcurrenciesofChinasmajor
partners:
US

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Euro
Korea
Singapore
Thailand
Australia
Malaysia
Britain
Canada
Russia

*Provided:
Flexibilityinsettingitsexchangerate
AssistancetoPeoplesBankofChinaincontrollingmonetaryconditionsandinflation.

TradeandInvestment

Exports:

*In2012,exportsaccountfor27%ofGDP.
Between200308,thevalueofChineseexportsgrewby30%perannum.
Growthreflectstheexpansionintheprocessingofgoodsthathavebeenimportedfromother
countries.

Imports:

*In2013,importsaccountfor25%ofGDP.
Someimportshavebeensubjectedtovalueaddingandreexport.
Therestofthegoodsarefordomesticuse.
Thereistherefore,agrowingimportanceofChinesedomesticdemandasafuturesourceof
growth.

DomesticDemandandInvestment:

*Domesticdemandincludeshouseholdconsumptionandbusinessinvestment,financing
growthinChinasproductivecapacitythrough:
Factories,industrialcomplexesandtechnologyparks.
Retailshoppingmalls.
Commercialofficecomplexesandresidentialdevelopment.

*Between200308:
Chinesedomesticdemandgrewatanaverageannualrateof15%.
Annualinvestmentgrowthaveraged19%.

*Therehasbeenanincreasedamountofinvestmentinthedevelopmentofurbanareas.
Resultoftherapidincreaseinurbanisation.
Investmenthasledtoincreasedefficiencyofmanufacturingsector.

*Inthe2ndhalfof2008,theChinesegovernmentannounceda4trillionRMBtoboostpublic
infrastructureinvestmenttosupporteconomicgrowth.

ForeignDirectInvestmentandMultinationalCorporations

ForeignDirectInvestment:

*RemainsakeydriverofChineseeconomicgrowth.

*FDIhassupportedhighgrowthindomesticconsumptionandinvestment:
Openingthedomesticmarkettoforeigncompetition.
Surgeofforeigninvestmentduring2008fortheBeijingOlympics.

*Asof2012,ChinaisthelargestrecipientofFDI,receivingUS$250million.

*Mainsources:
HongKong
Taiwan
Japan
USA

*MNCs:
ManufacturegoodsforexportandforsaletoChinasgrowingmiddleclass(e.g.Beijing,Hong
Kong,Guangzhou,Shanghai).

EnvironmentalSustainability

Environmentaldegradation

*Therapidrateofeconomicgrowthhasledtohighresourceuse.

*Chinaisexperiencingsevereenvironmentalproblems.

*In2007,thegovernmentcommissionedtheOECDtoconductastudyoftheenvironment.The
reportfoundthatunlesspollutioniscontrolledthroughstricterenvironmentallaws:
By2020,therewillbe600000prematuredeathsinurbanareas.
By2020,therewillbe20millioncasesofrespiratoryillness.
13%ofChinasGDPcouldbelost(with7%ofGDPalreadybeinglostduetoacidrainon
crops,medicalcostsandlostoutputduetodisease&disasterrelieffollowingtyphoonsand
floods).

Environmentalproblems

*Asof2012,ChinahasthehighestlevelofCO
2
emissions:
Chinaaccountsfor29%oftheworldsCO
2
emissions.

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ofChinasemissionsisfromfossilfuelconsumption.

*Asmanyas300millionpeoplearedrinkingcontaminatedwatereverydayinChina.

*Lossofnaturalgrasslandsandforestsduetoagricultureandindustry.

*Lossoftopsoilanddesertificationduetoremovalofvegetation.

*Lossoflakesandwetlands.

*Shortageofwaterduetodroughtandlossofwaterduetoinefficientirrigationsystems.

*Inadequatedisposalofhouseholdandindustrialwastes,with70%ofwastedumpedintolakes
andrivers.

*Highincidenceofdisease.
Highestrateofchronicrespiratorydisease.
OutbreaksofSARS(2003)andbirdflu(2005)duetopollutionandlackofhealthandhygiene
standards.

ResponseofGovernment

*Targetshavebeensetforpollutionlevels.

*Increasinguseofhydroelectricandnuclearpowerinsteadofcoal.

*Establishmentoftradableemissionpermitswhichgivesfirmsanincentivetoreducepollution
levelsbytradingexcessrightsinamarket.

*Banningofloggingofdomestictimbersince1999.

*Environmentallegislation(e.g.EnvironmentalImpactAssessmentin2003).

*Increasedspendingonenvironmentalprotection.

*However,didnotagreetothesizeandtimeoftheglobalreductionpollutionreductiontargets
fortheimplementationoftheKyotoProtocolin2012.

EvaluationofChineseGovernmentEconomicPolicy

Marketsocialism

*TheChinesegovernmenthascontinuedtopromotepoliciescontrolledbyCommunistparty
rulethatendorseprivatepropertyrights,growingbusinessandtradesectors,coexistingwitha
largestateownedandrunenterprisesector.
Chinahascontinuedtoopenitseconomytomarketforcesbyembracingglobaleconomic

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integration.
ChinahasmaintainedgooddiplomaticrelationswithUS,despitepoliticaldifferences.
TheBeijingOlympicsshowcasedChineseachievementsinsport,culture,science,technology
andeconomicdevelopment.

*Chinahasthepoliticalpriorityofcontinuingeconomicdevelopmentandsocialstability.
From200809Chinastopprioritywastomaintainaneconomicgrowthrateof8%.
TheyapprovedafiscalstimuluspackageofUS$586billiontocountertheGFC,boostdomestic
demandandpreventariseinpoverty.
Thestimuluspackagewasfocusedonbuildingruralinfrastructure,upgradingpublichousing,
expandinghighways,portsandairports&acceleratingtheSichuanearthquakedisaster
reconstruction.
Chinaalsoimplementedalooseningmonetarypolicy,cuttinginterestratesandreserve
requirementsforChinasbanks.

Problemsindomesticeconomy

*Dualisticeconomy:
Vastinequalityanddisparityinthedistributionofincomeandemploymentopportunities.
GrowthanddevelopmentareverydependentontheSpecialEconomicZonesinSandE
provinces,dominatedbyMNCsthroughFDIandtechnology.
NandWprovincesarefarlessdevelopedandrelyonwhichhavelowvalueaddedagriculture
forincomeandemployment.
2012GDPPPPinTianjin:US$14570
2012GDPPPPinGuizhou:US$3100
2008HDIofShanghai:0.908
2008HDIofTibet:0.630

*Politicalandsocialinstability:
Vastinequalityhasledtopoliticalinstabilityandsocialdivisiveness,withapushfordemocratic
andeconomicreformstobeimplementedbytheChinesegovernmenttoreduceinequality.
TherearewidespreadpeasantrevoltsinChinaoveralackofhealthandeducationservices,
lowincomesandalackoffreedomtomigratetocitieswithopportunities.
Peasantsalsoresenttheonechildpolicybecauseitlimitspersonalfreedomandinfringeson
traditionandculture.

*Inflationarypressures:
Highratesofeconomicgrowthhasledtocontinualinflationarypressures.
In2007and201011,highinflationarypressureledtoimplementingatightermonetarypolicyto
raiseinterestratesandtightencontrolsonlendingstoreducedemandpressuresand
speculativeactivityinthestockandrealestatemarket.

*Agriculturalreform:
Chinaislookingtoimprovetheperformanceoftheagriculturalsectorbyestablishingaland
rightssystem,greaterfundsforfarmersandfreedomtomigratetocitiesforwork.

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*Reformofthefinancialsector:
Therearealargenumberofnonperforming(almostingdefault)loanstostateowned
enterprises(SOEs),withinvestmentfundsnotearningmarketratesofreturn.
Itisdifficultforthegovernmenttoachievetheprivatisationofbanksandandthebroadreformof
thewiderfinancialsector9e.g.accessforforeignbanks).
Needsmoreefficientpaymentsystems(e.g.foreignexchange,electronicfundstransfer,ATM
access).

*Reformoffiscalpolicy:
Thereiswidespreadtaxavoidanceandanongoingproblemwithbudgetdeficits.
Taxreformsandmoreefficientspendingprogrammes(e.g.cuttingsubsidiestoSOEs)are
thereforeneeded.

*ReformofSOEs:
SOEsareinefficientandareheavilysupportedthroughsubsidiesandloansfromthecentral
bank(PeoplesBankofChina),increasingbudgetarypressuresandinflation.
OverhalfofSOEsrecordedlosses,outstrippingtheprofitsmadebytheotherSOEs.
Bureaucraticcorruptionwithdecisionsbeingmadeforpersonalgaininsteadogeconomic
efficiency.

*Infrastructuredevelopment:
Duetorapideconomicgrowth,domesticfreightandlogisticsystemshavebeenpressured
passedcapabilities.
Thisleadstobottlenecks(limitedbyresources)inmovementofgoodsandservices.
InadequateelectricityproductioncapacityanddistributionplacesalimitonChinese
manufacturing.
Socialinfrastructure(e.g.transport,electricity,schools,hospitals)arepoorlydevelopedin
somepartsofChina.

*Legalinfrastructure:
Commerciallawsandregulationsneedtobeimplementedtoprotectprivatepropertyrights,
investorsandcreditors.
Environmentallawsareneededtoprotecttheenvironmentandeliminatedcorruptionin
corruptioningovernmentandbureaucracy.

*Socialsecurityreform:
Chinaneedsalargesocialsecuritysystemwithunemploymentbenefitsandpensions(todeal
withtheageingpopulation).
Thelackofsocialsecurityisoneofthemainreasonsforthehighsavingsratesandrelatively
lowconsumption.
In200910,theChinesegovernmentannouncedthat$120billionofexpenditurewillgotowards
providingbasichealthcareto90%ofChina,inparttodiscourageexcessiveprecautionary
saving.

*Unemployment:
ChinahasbeenpumpprimingtheeconomytokeepGDPgrowthrunningatcloseto8%,to

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keeptheunemploymentraterisinguptoofast.
Chinasunemploymentrateseemssteadyataround4%.
However,Chinasofficialunemploymentrateisunreliable,notcountingtheestimated10million
workersmaderedundantduetofailedSOEsandunemployedpeasantsinruralareas.

*Reformsofthelabourmarket:
HouseholdResponsibilitySysteminChinarestrictsthefreedomofpeopletomovefromrural
areastocityareas.
Itisaninefficientuseoflabourresourcessinceallocationisnotresponsivetotheforcesof
demandandsupplyinthelabourmarket.
ThereisalackofOHSregulations,exposingworkersindangerousindustriestounnecessary
accidentsandhealthrisks(hasledtothousandsofdeathsandinjuries).
Exploitationofworkersthroughunderpayment/nonpaymentofworkers.Insomecases,child
labourhasbeenexploitedtomeetordersandgeneratehigherprofits.

*Overall:
TheChineseeconomyshouldmoveawayfrominvestmentandexportdrivengrowthto
sustainableandnoninflationarygrowthgeneratedbystimulationofhouseholdconsumptionand
servicesector.
Regionalisation,ratherthanglobalisationwasseenwhenduringtheGFC,countrieswithhigh
savingsandcurrentaccountsurplusessuchasChinawasabletoinsulatethemselvesfromthe
effectsexperiencedbycountrieswithlowlevelsofsavingsandcurrentaccountdeficits.
AsChinacontinuestogrowrapidly,beingthesecondlargestproducerandconsumerofenergy
aftertheUS,Chinamustcontinuetoinvestinandsecureenergyresourcesprojects&increase
developmentintheuseofrenewablesourcesofenergytoreducepollution.

Globalisation

Statisticalanalysisofimpactsofglobalisationaredominatedbytherisingeconomicpowerof
China,sinceChinahasthelargestpopulation.

TheriseofChinaisamajorstructuralchangeintheglobaleconomythathasbeenoccurring
concurrentlywithglobalisation.

TradehasbeencentraltoChinasrapidgrowthasexportorientedmanufacturingindustrieshas
ledtheirrapidindustrialisation.

Chinasgrowthisalsoassistingwithglobalisationasitdeepeningtradeandfinanciallinks
amongeconomies.