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China's Economic Growth

Discuss About The Confrontation American Policy Toward China?

China is one of the largest economy around the world that possess 11.2 trillion US$ as its Gross Domestic Product (GDP) is racing towards 15 trillion at a rapid speed (Feng et al. 2018). This economy has transformed itself into a versatile private sector based economy that ranks second in the world arena with respect to its GDP. Owing to its high growth rate, Tian et al. (2018) argues that the country possess high scope to become the world leader in future. The country was nowhere in during the 1970s, however it faced a massive growth in its goods and services since 1980 and it has transformed itself into a great exchange with strong governmental expenditure to become where it is now (Vietor and Thomason 2015). From the figure 1 (Annual GDP growth of China) it can be seen the country has faced high growth rate during 2006 to 2007 and the rate of annual GDP growth has reached 14% mark. During last two decade, average growth rate of china was 8% and most of the credit goes to market centric reforms and opening up of the economy. Depending upon its export capability and reduced amount of import, Chinese economy has become largest exporter in the world that has almost 3.3 trillion dollars of foreign reserve. Among all the developing nations, this economy accumulated largest amount of Foreign Direct Investment (FDI) during 2010 to 2014 and fiscal policies acted as the stimuli for the Chinese economy. Coming to the other macro economic factors, from figure 2 (China economic condition), it can be envisaged that presently the country is facing GDP growth rate of 1.60% annually with an unemployment rate of 3.90% (Long, Chen and Park 2018). During 2016, the economy had faced the lowest amount of unemployment and it shows that the economy is growing at a regular rate.

However, during 2004, unemployment level was as high as 4.3% due to unbalanced and unsustainable growth of the economy. Considering the average unemployment rate of 4.11percentage, it can be envisaged that economy is steadily growing. Coming to the inflation and interest rate of china, they are 1.80% and 4.35% respectively that indicates inflation rate is comparatively low in the country (Chow 2015). Government debt to GDP is 46.20% that highlights government has high amount of public debt, besides this country has accumulated 547 USD HML that makes it one of the stable country (Vietor and Thomason 2015). However, economy of the country has facing a loss in its growth rate and the boom in the economy are over. Annual growth rate has dropped from 14% to 1.60% and the government debt has grown over time leading to instability in the economy. Besides this, the economy has 4.35% of interest rate that fails to attract required amount of FDI (Foster and Tseng 2017).

Integration into the WTO

During 1970s china was one of a poorly developed nation that had only $20 billion foreign reserve and it lies within the poor income group country with a large amount of population who were unemployed. Within next ten years, the nation turned itself into the economic centre of the south-east Asia. By the end of 2000, the paradigm shift of the country’s economy has aided it to have $475 billion of foreign exchange that made it the second largest country in terms of FDI inflow (Hopewell 2015).  Showing its great amount importance in the world market, 24th may on 2000, china got its permanent candidacy in the World Trade Organisation (WTO), which was the economic hub, which sets out the rules of international trade. Now, there are various perspectives regarding the conjugation of china into the WTO (Levy 2017).

China was developing during 2000s at a rapid speed and the main factor for this high growth was electronic and audio parts industry. However, once China got into agreement with the WTO it was forced to reduce its tariff and import quotas. The country was facing disciplinary precautions in order to protect the interest of the foreign industries. Besides this, china had to withdraw restrictions on the sales of goods and services in order to facilitate the foreign nations. Superior quality of foreign products enhanced he imports of the country, reducing the foreign reserve (Blustein 2017). Moreover, opening up of china forced Chinese ailing industries to stop their business in front of strong world industry competition. Besides these drawbacks, there were various benefits too, that helped the Chinese economy to become the second largest economy of the world. During 2014, china has registered highest amount of international patent and it become the economic hub of the south-east Asia that has largest amount of trade surplus in the world (Cooper and Zhang 2018). Thus, it can be stated that integration of Chinese economy in WTO has helped the nation to become the second largest economy, on the other hand stagnation or inflation of the world economy also contribute to the slowing growth of china.

Wen Jiabao was the premier of the Chinese republican government for the period of 2003 to 2013 and he is regarded as one of the leading participant that brought in the Beijing’s economic policy. According to him, country has grown rapidly depending upon the export based policies, which is not sustainable in nature. He argued in favour of internal consumption growth that will help the country to withstand against supply or demand side shock (Breslin 2016). Wen Jiabao mentioned various problems with regard to the Chinese economy, which are as follows (Lardy 2016):

  • The economy is based on the export based system of growth, which makes the system unstable.
  • Chinese economic growth is unsteady, uncoordinated, unsustainable and unbalanced in nature, which is not a long term economic formula for growth.
  • Private consumption of Chinese GDP is falling gradually over time; from 45.3% of GDP during 2002 to 37.1% by 2012 and structural changes are much needed for the economy (Shambaugh 2016).
  • Due to subprime mortgage crisis in the US economy, Chinese economy was struck hard back in 2008 and it was Wen Jiabao, who argued in favour of stimulus package from government that can put a hold on the reducing growth rate, with rising inflation and unemployment. According to the Wen Jiabao, this can happen with Chinese economy too, if it doesn’t transform itself into a sustainable economy.
  • Global recession caused the Chinese economy a fall in GDP growth and rise in inflation, unemployment leading to instability of the economy.

New Normal Policy Reform

New Normal confirmed by the Xi Jinping back in 2013 is a stimulus measurement for the deteriorating Chinese economy. Since 2002, there were rapid growth in the Chinese economy and it reached peak during 2006, when the GDP growth rate rose to the 14% level  (Hu 2015). However, recession in the world market caused by the subprime mortgage lead the economy to face reduced economic growth. New Normal from the Chinese government is meant to enhance the economic performance of the country. According to the Xi Jinping, there is huge scope for the Chinese economy in order to bring in productivity and efficiency in the market. Rapid growth of china during 2006 was not sustainable in nature, thus Xi Jinping announced the New Normal reform, which is slower in nature, however it has the potential to make the Chinese economy sustainable with innovation and increase in private consumption (Powell and Smith 2016). This new reform proposed initiation of State-Owned Enterprise and increase the social security coverage along with liberalization of the Chinese financial markets. Besides this, New Normal is meant to bring in land reform, which will address the overcapacity and manage the control gap in the case f capital flows along with the exchange rate.

New Normal is meant to provide china a sustainable growth that can withstand against any supply-side shock in long run. Implementation of this in the Chinese economy means, china will have much slower but balanced growth, where Chinese private consumption will grow besides other structural changes (Zhang and Chen 2017). However, one of the biggest issue in this regard is, whether New Normal the right policy for Chinese economy at this point and future growth of the country. After cannon balling the annual growth rate figures with 14% annual GDP growth rate, china is now growing at much slower rate of 6.9% annually (Wong 2016). During 2007, Wen Jiabao argued that, this rapid growth of china is leading the country towards an unsustainable economy. Thus, New Normal was introduced and it is meant to provide various reforms ranging from land to exchange rate reform, which will aid the country to have a better future prospect. China’s main driving force for its rapid growth during 2006 was its investment and export based economic structure, however presently it is aimed to transform its structure to a more sustainable private consumption based structure with the New Normal (Luo 2017). It is aimed that the transition of the market will create more jobs and increases the monthly disposable income of the Chinese labours, proving the economy a boost to grow steadily in future. However, consolidation of power by the Xi Jinping is one of the issues that bother the smooth transition, because government intervention in the market has grown substantially since 2013 and if this continues, economists argue that it will lead the New Normal reform towards a failure. So, to conclude it can be said that, china at this moment certainly need New Normal to make it a sustainable economy. 

New Normal is one of the economic reforms of Chinese government, which is aimed to provide the Chinese economy a sustainable and stable growth. It was promised by the Xi jinping back in 2013 and since then there has been various changes in the Chinese economy to adapt the new system. Among many, Chinese government has brought in land reform and labour market reform program (Vietor and Thomason 2015). Besides this, XI Jinping has initiated programs to enforce law and order of the country and eliminated all those factors that come in the path of the new system. Along with this, Chinese president has named himself as the head of the foreign policy, overtook the secret police and police and brought in the internet oversight to control the proceeding of the New Normal in the country. Though this polarisation of power according to Kohar et al. (2017) is not good for the economy, however, from the Chinese perspective it is the ideal way to promote New Normal in the country.

Relationship between china and US was never smooth and though these two nations are the permanent member of the UN Security Council, they often collide with each other if not in the battlefield but in the economic ground. Until 2015, these two countries traded goods and services of almost 650 billion dollars between them and with rising US China trade deficit, the relationship is now turning red (Gilboy 2016). Various issues have arise in front of the Trump government regarding china in recent days and US government need to check them if they want to remain the top exporter in the world. Three main economic challenges that Trump government is facing with china are as follows:

Stock market and real estate bubble – In order to address the china’s unstable growth back in 2006, Chinese government took reform programs that gave rise to the stock market and real estate prices. During 2008, bank lending got aggravated and price of the houses started to rise, whereas many project remained unfinished due to over capacity (Glaeser et al. 2017) It lead to fall in the price of the house by 2012 and real estate bubble started to rise once the government allowed foreigners to buy those properties. On the other hand, stock prices also got enhanced due to foreign investment in the Chinese housing projects, which were mainly originated from the US. It is leading the economy towards a Global Financial Crisis like situation and US government need to aware of that (Mera 2016).

Currency manipulator – China was the second largest exporter to the US and depending upon their large scale of operation in the US market, Chinese producers started to grow influence over the US labour and capital market. If, the trend continues, then it will bring in more Chinese workers to the US and make complete control over the US economy leading to instability in the country’s economy (Slaughter 2016).

Aggressive export policy – China has been living on the export based policy since 2003, and it becomes one of the largest exporters in the world that not only provides goods and services o the neighbouring nations, moreover shares a large amount of export to the western nations too. With aggressive export policy of the china, international trade of US gradually decreased during 2006 to 2013 (Stueck 2017). Situation becomes worse, when china US trade grown to 650 billion USD, where US imported 430 billion USD goods and services from the china. It hampered the balance of trade of US economy and leads the country towards a dampened export facility.

If trump government wants to overcome this situation, then they need to strictly impose tariffs on the import of Chinese goods and services. Besides this, it would be better for the trump government to try export campaign ranging from western countries to the south-east Asian countries, where china enjoys monopoly as an exporter.

China is a large exporter a famous for its cheap goods and services. Besides this, products from the Chinese companies are technologically upgraded and possess great value for money (Aksoy, Guriev and Treisman 2018). Thus for any brand, it is hard to compete with the Chinese goods and services. Keeping this in mind, being the CEO of a large American multinational company, performing market analysis would be the first step. Then, finding the weakness and strengths of the rival firms would be necessary and need to come up with those solutions, which can stand out among the others. China with their initiative, termed as Made in China 2025 is aimed to double up their biotechnology an aerospace industries that can give a crippling blow to the US companies (Butollo and Luthje 2017). Thus, in order to withstand against any kind of demand shock in future, being the CEO, it would be better to transform the firm in such a way that it can absorb those shocks. In order to do this, the firm need to invest more in their R&D department and trace new strategies to compete with the Chinese firms.


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