Economic Challenges Faced By China And Government Policies To Overcome Them

Application of economic concepts and model

QUES: Apply the economic models learnt to discuss the economic challenges faced by the economy concerned and to explain the rationale for the economic policy (ies) chosen by the government to overcome the challenges.

Introduction

Application of economic concepts and model 

Key macroeconomic challenges faced by China

Causes of the problem

Impact on the society and economy

Policies implemented by the Government 

Conclusion

References

The report will analyze the macroeconomic issue faced by the economy of China. China has been growing at a slow pace.  It grew at the slowest pace in the third quarter in the five years. The reason for the slow growth rate of the country is the slumping real estate market. The domestic demand in the country has been weak. The slow industrial production in the country has pulled down the GDP of the country. For the first time in 1998, China has missed its annual growth target amidst the Asian financial crisis. The global markets have been stressed out in the mid quarter of 2014. The output in Japan and the euro zone area has been weak throughout the middle quarter. Another major concern was the low rate of inflation. The weak performance of the global economy could ruin the demand for the China equities, commodities and currencies. The growth rate of China is the lowest in 2014. The GDP is 7.3%. The growth rate of the country fell to 6.6% during the global financial crisis in 2009. Aftermath the global financial crisis, this is the lowest GDP of China. The major reason for the decline of the GDP of the country is the slow demand for the property sector in China. The real estate sector in the country accounts for quarter of the GDP of the country. The real estate industry in the country includes related industries like steel, appliances and construction. There has been a sharp decline in the sale of the houses. It fell by 10.8% during the first nine months of the year. This has resulted in the decline of the GDP of the country. China has to maintain a minimum growth rate of 7.2% of GDP so that it can create 10 million jobs. The population of the country is huge so it is mandatory to keep a minimum GDP rate of 7.2%. The Government must take necessary measures to ensure that the GDP will not decline further. China has planned a series of fiscal and monetary stimulus measures to control the slump of the growth rate. The policies of house purchase have been relaxed by the Chinese Government to increase the housing demand in the country[1].

Gross Domestic product can be defined as the monetary value of all the finished goods and services produced within the borders of the country within a specific period of time. The calculation of GDP is done on an annual basis. The GDP comprises of the private and the public consumption, outlays of the government, investment and exports of the country less the imports that takes place within the national boundary of the country.

Key macroeconomic challenges faced by China

GDP = C+G+I+NX

C = Spending of the consumers or the private consumption within the economy of the nation

G = Spending of the Government

I = Spending of all the businesses of the country

NX = Net exports of the country. This is calculated as exports minus imports of the country.

 The health of the economy of the country is indicated by the gross domestic product. The gross domestic product of the country helps to ascertain the standard of living of the people in the country. GDP does not indicate the material well being of the country but it serves as a parameter for ascertaining the productivity of the nation.

The GDP of the country is the crossing point of the three sides of the economy. They are expenditure, output and income. The three sides of the economy is interrelated to one another.

The GDP of a country will increase with the rise in demand (investment, consumption, expenditure of the public and exports). The GDP of the country will increase if the producers are able to meet the price requirements of the buyers. The quality requirements of the buyers have to be met by the producers. This will result in the rise of imports. If there is decline in the production of the country, the firms producing at full capacity will suffer. They will rise the prices of the goods and this will result in decline of the demand. The overall result of this would be inflation. The evolution of GDP is like a cycle. The two quarter reduction in the GDP of a country results in inflation[2][3].

In China, the gross domestic product of the country is segmented by three sectors. They are known as the primary, secondary and the tertiary sectors. The primary industry of the country is the forestry, farming, fishery and animal husbandry. It accounts for 9% of the GDP. 40% of the GDP is formed by the secondary sector which is the industrial sector and 9% of the GDP is formed by the construction sector. It is also a secondary sector. The rest 44% of the GDP is comprised of the whole sale, retail, real estate, transport and storage. The macro economic challenges affecting China are the slumping growth rate of the country to 7.3%. It is the lowest GDP recorded by the economy in the past 5 years. The major reason for the slowdown of the growth rate of the economy is the lower investment in the property sector, the credit growth of the country has been decreasing. The industrial production of the country has weakened in the third quarter of 2014.  The country is faced with a complex and the change in the external environment. This has created difficult situation for the economy of China. China will take time for to implement the reformative measures and make the policies fully effective. The low rate of GDP will lead to lower rate of employment in the country. The rate of inflation in the country has been stable.  The structural reform in China has resulted in the economic slowdown of the country. The housing market of the country was sagging which resulted in the slow growth of the country. The property sector of the country was suffering. The credit growth of the country had slowed down. The country faced subpar level of inflation[4].

Causes of the problem

 The new leadership in China is in a difficult place. The policy makers in the country are trying to move away from the growth model that is credit backed. The shift from the old policy will foster the domestic demand of the country and the value added exports of the country will increase. This will result in the achievement of a sustainable economy. The reason behind the slowdown of the growth of the country is broad. In June there has been considerable drop in the industrial production growth to 8.9%. The industrial production was 9.2% in May. There was considerable decline in the investment in fixed assets. In May the investment growth in the manufacturing sector was 17.8%. In comparison to the investment growth in the manufacturing sector in June is 17.1%.  The investment in the real estate sector declined from 20.6% in May to 20.3% in June. The footsteps of China have been important for the major economies to take their decisions. The global economy makes decision on the basis of the economic activity in China. The economy of China has grown in size and share. It has considerable influence on the economic activity of other countries. 13% of the economic activity in China is borne by China. In 2006 the contribution of China in the global economic activity was 6%. It has increased to 13% in 2014. The slowdown in the growth of the economy has resulted in surge in the demand for commodities and other key products. The economic growth in the country has declined as a result of downward pressure. In the second quarter, the country faced high investment in the infrastructure but in the third quarter the downward pressure in the country returned. The slowdown in the growth of the country has resulted in financial risks. The country has to control the financial risks to keep the sustainability of the economy. The shrinkage of the housing market has resulted in significant decline in the growth of the country. The shrinkage in the housing market has been 1.4% points from the GDP growth in 2014[5].

The Chinese Government is trying hard to maintain a balance between adequate growth in order to maintain the financial balances of the country. China has to maintain a GDP rate of 7.5% in order to provide jobs to more than ten million of the population. The population of the country is huge. The slowdown in the rate of growth in the country will result in the decline in the number of jobs. It will result in recession. China has increased its trade relations with other countries in the world. The decline in the growth rate of the country will affect the trade realation with UK and US. This will impact the foreign trade relations.

The Government has undertaken several measures to control the growth rate of the country. The measures are implemented so that the rate of growth of the country does not fall below 7.5%. The Government of China has started a broad based stimulus program to revive the economy of the country. The slowdown in the growth of the country has affected the equity and commodity market of the country. The Government has taking several fiscal and monetary stimulus measures to revive the economic growth of the country. The Government has undertaken the fiscal and monetary stimulus measures to revive the economic growth of the country. Otherwise the country could suffer from recession. More than 10 Million individuals will be jobless. In order to revive the economic growth of the country the central bank of the country has planned to inject 200 billion Yuan into the banking system. The policy of the Government is providing loan facilities to the public will be eased. This will increase the demand of the housing sector and the real estate sector of the country will perform. The Central bank of the country has taken earlier measures to infuse 500 billion Yuan into the country’s five major state owned banks. The authorities in China have eased the restriction on the cities of the country in purchasing property. However there was danger of overheating. The house loan facilities in the country have been ease. The interest rate of the country has been lowered. There have been considerable cuts in the reserve bank holds with the central bank so that the flow of money from the central bank to the indigenous banks is less expensive. The measure by the Government is important to bring the economic position of a country to a stable position. Otherwise the real estate sector of the country will suffer. The suffering of the property sector of the country will result in the suffering of the related industries like the steel industry, appliances industry and the construction industry[6].

Impact on the society and economy

Conclusion

The report will dissect the macroeconomic issue confronted by the economy of China. China has been developing at a moderate pace. It developed at the slowest pace in the second from last quarter in the five years. The purpose behind the moderate development rate of the nation is the drooping land market. The local request in the nation has been powerless. The moderate mechanical generation in the nation has pulled down the GDP of the nation. Without precedent for 1998, China has missed its yearly development focus in the midst of the Asian budgetary emergency. The worldwide markets have been worried in the mid quarter of 2014. The yield in Japan and the euro zone region has been frail all through the center quarter. An alternate significant concern was the low rate of expansion. The feeble execution of the worldwide economy could demolish the interest for the China values, wares and monetary standards. China needs to keep up a base development rate of 7.2% of GDP so it can make 10 million employments. The number of inhabitants in the nation is colossal so it is obligatory to keep a base GDP rate of 7.2%. The Government must take fundamental measures to guarantee that the GDP won't decay further. The Central bank of the country has taken earlier measures to infuse 500 billion Yuan into the country’s five major state owned banks. The authorities in China have eased the restriction on the cities of the country in purchasing property. However there was danger of overheating. The house loan facilities in the country have been ease. The interest rate of the country has been lowered. There have been considerable cuts in the reserve bank holds with the central bank so that the flow of money from the central bank to the indigenous banks is less expensive. The measure by the Government is important to bring the economic position of a country to a stable position.  China has arranged an arrangement of financial and fiscal jolt measures to control the droop of the development rate. The approaches of house buy have been loose by the Chinese Government to expand the lodging request in the nation.

References

Bloem A and Shrestha M, Comprehensive Measures Of GDP And The Unrecorded Economy, Issues 2000-2204 (2014)

Brezina C, Understanding The Gross Domestic Product And The Gross National Product (2014)

SPRING J and SHAO X, 'China's Growth Slowest Since Global Crisis, Annual Target At Risk' (Reuters, 2014) 

the Guardian, 'China's Economic Growth Falls To Lowest In 5 Years' (2014) 

Wong L, 'China GDP Beats, But Growth Rate Slowest Since Crisis' (CNBC, 2014) 

WSJ, 'China GDP Growth Rate Is Slowest In Five Years' (2014) 

[1] WSJ, 'China GDP Growth Rate Is Slowest In Five Years' (2014). 

[2] Corona Brezina, Understanding The Gross Domestic Product And The Gross National Product (2014).

[3]Adriaan M. Bloem and Manik L. Shrestha, Comprehensive Measures Of GDP And The Unrecorded Economy, Issues 2000-2204 (2014).

[4] JAKE SPRING and XIAOYI SHAO, 'China's Growth Slowest Since Global Crisis, Annual Target At Risk' (Reuters, 2014) 

[5] Li Wong, 'China GDP Beats, But Growth Rate Slowest Since Crisis' (CNBC, 2014) 

[6] the Guardian, 'China's Economic Growth Falls To Lowest In 5 Years' (2014)