China Economic Cycle
Outline the main features of the New normal Phase of China's Economic Growth.
The economy of china has experienced outstanding amount of growth in their last few decades, which enabled china to become world’s second largest economy. During 1798- when china commenced the program of economic reformation, china was ranked ninth in the nominal gross domestic product with USD 2014 -13824. After 35 years, it jumped to second place with the nominal GDP of USD 9.2 trillion.
Ever since the introduction of economic reformation in 1978, china has turned into a worldwide manufacturing hub, where the secondary sector namely industry and construction represented the greatest share of GDP (Taussig and Frank William 2013). In the recent years the modernization of china has boosted the tertiary sector and during 2013 it emerged as the largest category of GDP with a share of 46.1% whereas the secondary sector comprised of 45.0% of the nations entire output. The weight of primary sector GDP has declined significantly since China is opened to the world.
China has managed the Global economic crisis better than the most of the nations. During November 2008, the council has revealed a CNY of 4.0 trillion with the objective of protecting the nation from the worst impact of financial crisis (Sloman et al. 2013). The massive amount of stimulus program has boosted economic growth largely with the help of investment projects that have triggered concern where the country might have build up the asset bubbles, additional investment and excessive capacity in some of the industries. The strong financial position of the government, the measures of stimulus has not derailed the public finance of china.
China had managed to exit the monetary crisis in better way with GDP growth of more than 9%. The policies applied during the crisis were to increase the economic growth exacerbated by the China’s macroeconomic inequity. Especially the stimulus program fostered investment whereas the household consumption stayed moderately low (Bernanke et al. 2015). To manage such imbalances, under the leadership of president Xi Jinping and Premier Li Keqiang, commencing from 2012 have reveiled economic measures that are aimed at promoting more balanced economic model on the expense of faster economic expansion.
Following the death of Deng Xioping in 1976, regarded as one of the core of the second generation of Chinese Leadership, he became the paramount leader of China and pushed forward the bold reformations that helped in shaping the nation’s economy. The measures comprised of role of market mechanisms with lower government control over the economy (Laibson et al. 2015). Those measures comprised of market mechanism, breaking down of collective farms and opening up the prospect of foreign investment in china. Additionally, china began participating in the worldwide economy and the aligned with International Monetary Fund.
Steep Decline in GDP
The fifth generation of leader came into the power from 2012, when President Xi Jinping and Premier Li keqiang took charge of China. The new china under the administration of Xi-Li revealed an ambitious agenda of reformation with the objective of changing China’s economic fundamentals by assuring a sustainable growth model. The authorities have expressed their enthusiasm to bear lower growth rates as the necessary conditions of pushing forward the economic reformation (Goodwin et al. 2015). Xi introduced a term Chinese Dream as his contribution to guide the ideology of communist party of China. The economic growth of china has witness an upward surge in the last few decades largely due to the China’s increasing integration in the global economy with the government bold support for economic activity.
Commenting on the challenges of Xi Leadership the Chinese Dream has also bore some pains as well. The economic growth has slowed down and in 2015; the Chinese economy has missed their targeted growth of 7.0% for the year by 0.1 percent. This marked for the first time in two decades that the growth under the leadership of Xi fell below target. Investment in the manufacturing sector and infrastructure is also slowing down as China shifted from an investment driven growth to focus more on consumer demand. However, the successful model of China’s economy that have raised millions out of the poverty and boosted the nation’s outstanding economic growth and social development has also presented several challenges (Conesa et al. 2014). This comprises of economic inequality, increasing environmental issues and aged populations forms the key challenges that the new management lead by President Xi Jinping will have to undertake in the coming future so that it can assure the nations sustainability.
Before 1978, China possessed a highly centralized fiscal system that largely reflected the country has strategic economic system. The central government of china collected all the revenues and distributed all the spending of administration and public establishments. In relation to the reformation applied in the country for Deng Xioping, the government began to regionalize the financial system (Babich et al. 2015). During 1994, the government introduced a brave financial system to fight against the fast decline in the GDP ratio. This reduces the government’s ability to conduct macroeconomic and restructuring policies. The reason behind the reformation was the adoption of the tax-sharing scheme where the central government managed the most profitable source of tax revenue such as VAT and Enterprise income tax. As a result of this reformation there was a steady increase in the revenue that led to a jump of 10.8% of GDP in 1994 to 22.7 of GDP in 2013 (Kubiszewski et al. 2014).
The new system provided the local government with lesser source of revenue since they had to remain dependent on the land sales and indirect borrowing to back their activity. However, the debt is still controllable a growing dependence on shadow banking and faster rate of debt accumulation is upsetting. In an attempt to increase the source of revenue for the local government in 2014, the national people of congress passed amendments to the budget law. This allowed the local government to issue bonds directly and increase lucidity. Such moves led the foundation of local government to raise the debt in the bond market (Coyle and Diane 2015). The local currency of china is denominated by the government debt and the government institutions own it. Furthermore, the situation protects the economy against the government debt crisis however in 2015 the public debt amounted to 15.6% of GDP.
The economy of china experienced an expansion of 6.9 per cent in march quarter of 2017 in comparison to 6.8 per cent growth in the fourth quarter of 2016 with slight above market consensus growth of 6.8 per cent. It is regarded as one of the strongest expansion of china since September 2015 assisted by rapid increase in industrial output, retail sales and fixed asset investment. From the period of January to March 2017, the non-farm fixed asset investment increased to 9.2 per cent after a rise of 8.1 per cent in January to February and surpassing the market anticipation of 8.8 percent rise (Long and Bryan 2014). This is regarded as the strongest growth since May 2016 since investment from states firms increased to 13.6 per cent whereas investment from the central government declined to 7.1 percent. The government spending have increased to 21 per cent in comparison to 14.1 percent from the last year.
The industrial production increased by 7..6 per cent in comparison to 6.3 per cent rise in January to February 2017 whereas the market was anticipated to rise 6.3 percent. It is considered as a rapid growth since December 2014 because the output increased at the faster rate. Figures released earlier this year represented that the export increased by 16.4 per cent in march 2017 that rebounded from 1.3 percent drop in the last month which was very high than the market estimates of 3.2 percent rise. Imports have increased to 20.3 per cent in comparison to 38.1 percent growth in the month of February, which was beyond the consensus rise of 18 percent (Costanza et al. 2015). Considering the opening quarter of 2017, the final consumption comprised of 77.2 percent of the Chinese economy. In the meantime, investment contributed a growth of 18.3 percent and the net export comprised of 4.5 percent of the GDP.
For the year 2017, the Chinese government anticipates the economy to experience growth by around 6.5 percent in comparison to 6.7 growths in 2016, which was regarded as the slowest growth in 26 years. The officials have assured to drive ahead with the process of reformation. The central bank has implemented a strong monetary policy and has increased a short-term interest rate numerous times this year (Fleurbaey et al. 2013). Based on quarterly basis, the Chinese economy has advanced by 1.3 percent in the first quarter of 2017 that slowed from a 1.7 percentage growth in the earlier three months by missing the market anticipation of 1.6 percent growth. This is regarded as the weakest expansion since March quarter of 2016. China recorded a government debt, which was equivalent to 42.60 percent of the nation’s GDP in 2015. The government debt of china to GDP averaged 28.28 percent from the year 1995 to 2015 reaching as high as 42.60 percent in 2015 and as low as 20.40 per cent in 1997.
China is currently undergoing a transformation from an emerging nations that relies on the disproportionately on the export and the investment model of growth to a mature industrial economy where domestic consumption represents a large share of aggregate demand. In past the experience of other countries are associated with the slowing growth. The growing slowdown is conjunction with the increasing troublesome circumstances in the Chinese banking sector (Korotayev et al. 2016). The choice of turning into the extension of bank credit as the strategy to increase the growth that has resulted in a debt to GDP ratio which is now above the 250 percent.
As capital outflow commenced in the country the Chinese authorities have allowed the renminbi exchange rate to move more than in the past in relation to the market forces. This is considered instrumental in pursuing entry of the renminbi in the SDR basket however the Chinese policy makers are trying to walk a very narrow path by allowing some weakening of the currency to foster growth (Huang et al. 2016). The reformation process is about cleaning up the banking sector before attempting to internationalize the currency.
The action plans lays down the momentous challenges which china faces in short-term macroeconomic management with longer-term structural transformation of the economy. Such action plan could result in turning point of china’s economic development since it reflect a marked shift in emphasis from high growth to the quality and the sustainability of that growth. The action plan focuses on controlling the prices through several policies that evidently highlights that the major short-term priority for the government is to administer the inflationary pressure (Baber et al. 2013). The long-term objective of the action plan is to reorient growth in order to make more balanced and sustainable from different perspective of economic, social and environment. However, the action plan will face major challenges to put in place the needed reformation so that it rebalance the growth model and moving from the capital intensive production, to reducing the dependence on the export, generating more employment and allowing more amount of benefit to filter the average household. The action plan provides a direct and unambiguous message to the government provinces that they must shift their focus only on growth to wider economic and social considerations (Hebous et al. 2017). The action plans reflects that further step will be undertaken to liberalize the controls on the capital flows since it identifies the inflow of money that have added to domestic liquidity and have assisted in inflationary pressure.
The essay clearly highlights the objective of Chinese government towards financial reformation and moving forward to capital account convertibility. The economic reformations is largely based on the creating an impact on the Chinese households for controlling the information, increasing the wages and strengthening the employment. The essay has clearly highlighted the economic expansion of china by outlining the changes bought under the new president. It has also considered the aspects of GDP and the government efforts to reform the economic system of chin
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