The Economic Growth Of China - Reasons For Variations In Growth Rates

Discuss about the Economic Growth of China.

For some time now, China has been experiencing sustained economic growth.  However, the level of economic growth experienced has constantly been diminishing since 2010. According to the World Bank (2017), China has one of the fastest sustained expansions globally. On average, its GDP growth level is about 10 percent per annum. The economy had reached all its Millennium Development Goals by 2015 and had contributed significantly to the achievement of these goals in other countries. Even so, according to the World Bank, China remains a developing country with its per capita income being only a small fraction of that of the advanced economies. Regardless, the economy is committed to moving from a middle-income economy to a high-income economy.

It is worth noting that the economy of China has been experiencing substantial economic growth over the past few years. In 2006, its annual GDP growth was recorded at 12.7 percent. In the following year, the level of growth substantially to 14.2 percent before falling back to 9.7 percent in 2008. Likewise, in 2009, the level of economic growth declined slightly by about 0.3 percent to 9.4 percent (World Bank, 2017). In 2010, the economy experienced substantial increases in the level of growth. More precisely, the annual GDP rose by 1.2 percent, to 10.6 percent (World Bank, 2017). Unfortunately, in the following years, the rate of growth started diminishing consistently. As at 2011, the level of economic growth dropped to 9.5 percent before further dwindling to 7.9 percent in 2012 (World Bank, 2017).

Likewise, 2013 realized further decreases in the level of economic growth. In the following year, the level of growth decreased further to 7.8 percent before dropping again to 7.3 percent in 2014. As at 2015, the annual growth rate of China had reduced to 6.9 percent (World Bank, 2017). Noteworthy, the level of growth decreased further in 2016 to 6.7 percent (Trading Economics, 2017). This was the lowest level of economic growth in China in the last 26 years. At the beginning of this year, the Chinese economy expanded by 6.9 percent (World Bank, 2017).

For many years, the Chinese economy enjoyed cheap labor, favorable government policy, unlimited supply of raw materials, and increased foreign investments. As a result, the level of growth of its economy was increasing at an increasing rate. However, this has changed over the years. Today, it can be noted that although the Chinese economy has been experiencing sustained levels of economic growth over the past ten years, the percentage growth rate has been declining consistently throughout this period.  More specifically, the growth of China has been slowing substantially over the years. Imperatively, this can be attributed to various factors in the Chines economy and the global economy.  

Reasons for Variations in the growth rates of China

It is vital to point out that the Global Financial Crisis had a significant impact on the economic growth the Chinese economy. During the 2008 financial crisis, the Chinese government responded by increasing its expenditure by about $586 billion (World Finance, 2016). Mainly, this was done as an expansionary fiscal policy meant to increase business activity in the Chinese economy. Indeed, this strategy was functional over the short term period. The level of business and commerce activity in the economy increased substantially in the country. However, over the long term period, this strategy has proven to be detrimental to the economic growth of the economy (The Economist, 2015). More precisely, the increased government spending during this period was financed mainly through debt. As a result, the country has accumulated significantly high debts that need to be repaid.

Likewise, in 2014, the country experienced significant decreases in the cost of borrowing. The low-interest rates on loans led to an increase in the level of borrowing in the country. Indeed, this strategy worked and was a substantial stimulus for the economy (Magnier, 2016). The level of aggregate demand increased substantially. Unfortunately, this was a short term solution to raise the level of growth in the economy. Currently, households are feeling the burden of repaying and servicing the loans they took during this period (World Finance, 2016). Thus, instead of spending the money on the purchase of real goods and services in the economy, Chinese households are forced to channel their income to the repayment of loans (World Finance, 2016). In turn, this has brought about decreases in the aggregate demand in the nation, resulting in the decreased level of economic growth in China.  

To make matters worse, China dropped its exchange rate peg with the dollar, and instead devalued its currency about three times in just one week. Although this was meant to be a fiscal stimulus for the economy, it has led to significant long term effects, thereby causing drops in the rate of growth. Initially, this decision was intended to make the country more competitive by making by making Chinese products cheap, thereby raising the level of exports from the country, while discouraging imports which would be expensive for Chinese citizens (BBC, 2017). In turn, this would bring about an increase in the country’s net export, this raising the level of economic growth. Markedly, this decision has led to the weakening of the Chinese yuan over time, something that has contributed greatly to the diminishing rates of economic growth.

The Global Financial Crisis

Characteristically, China is undergoing a transitionary period from a developing to a developed economy. Mainly, this implies that the economy has explored most of its production capacities and is producing on its production possibility frontier (Wall Street Journal, 2014). For this reason, high levels of expansions in the economy are rather farfetched. Thus, realizing growth rates every year is difficult (World Finance, 2016).  Most of the developed economies globally experience significantly low levels of economic growth since they have exhausted most possibilities and are therefore operating at optimal levels. In this regard, the Chinese economy’s growth is expected to continue, but at a diminishing rate.

For decades, the Chinese economy has built on the manufacturing industry. Typically, the economy was viewed as the factory of the world. Markedly, this role was functional when the economy had a huge and growing population that could provide cheap and affordable labor. However, over the years, the one-child policy has led to a substantial drop in the population of the country (World Finance, 2016). In addition, a majority of the people in China are aging and are therefore not active in the workforce. In turn, this has significantly led to a decrease in the nation’s labor force. Besides, the new generation of workers is unwilling to accept low paid jobs, thereby increasing the labor costs for companies (Shepard, 2016). Subsequently, this has adversely impacted the manufacturing industry in the country, thereby reducing its contribution towards the growth of the economy.

In addition, China’s government is working towards a shift of the economy from manufacturing towards a service economy. Furthermore, it is shifting from an export driven economy to a domestically driven one. As a consequence, the volume of exports from the nation are dropping significantly (World Finance, 2016). In turn, a decrease in the level of exports while the imports are still increasing has caused a decline in the level of the country’s net exports. The past few years has seen china’s net export dwindle significantly. A decline in the net exports intermittently has brought about declines in the rate of economic growth in the Chinese economy.

The past few years has also seen China experience significant increases in the level of capital outflow. More specifically, the foreign investors who used to pump billions of dollars into the Chinese economy have reduced and moved their money to other promising economies. Mainly, this can be explained through the considerable declines in the Chinese foreign currency reserves. In order to keep its currency cheap to raise the level of exports during the financial crisis, the economy accumulated about $4 trillion dollars in its reserves (World Finance, 2016). When the economy changed to the flexible exchange rate regime, the Chinese government would print fresh dollars whenever the yuan strengthened against the dollar. This additional currency would then be used to buy dollars. As a result, the supply of Chinese currency in the market increased significantly while the supply of dollars shrunk. Over time, this led to the weakening of the Chinese yuan.

Transition from developing to a developed economy

Markedly, the weakening of the Chinese currency over the years has made investors wary of investing in the country. As such, investors fear to make capital losses in the event that the currency would weaken further (Philips, 2015). Thus, they have been withdrawing their capital from the Chinese economy and investing them in other countries. Besides, the change of the country’s exchange rate regime from the pegged system to the flexible exchange rate regime has made investors to view the currency as volatile. For this reason, their confidence on the yuan has dropped significantly forcing them to withdraw their fund from the Chinese economy (Zhibing, 2014). Fundamentally, the withdrawal of capital funds from the Chinese economy has led to a decrease in the level of productivity in the country. In turn, this has led to a decrease in the rate of economic growth in the Chinese economy.

As noted earlier, the Chinese economy has been experiencing significant declines in the rate of economic growth over the past few years. Mainly, this is due to the fact that the economy is undergoing significant challenges in its bid to increase the rate of economic growth in the country. Today, china’s main challenges pertain to overreliance on investments, deflation and high rates of corporate loan defaults (Dorn, 2013).

Deflation

As at 2016, the Chinese economy was in danger of a looming deflationary period. Predominantly, this can be attributed to the overabundance of homes in the country. As such, the increased supply of homes in China is expected to result in a decrease in their prices, thereby creating deflationary pressures in the economy (The Economist, 2015). In addition, the continued drop in the value of the yuan against the US dollar may further result in continued deflation in the Chinese economy.

Overreliance on investment

In the past, China relied heavily on debt and investments to fuel the expansion of its economy. However, the overreliance on investment and debt has become unsustainable for the Chinese economy and leaders must instigate measures to enhance economic growth in the economy. Unfortunately, tampering with the interest rate level could be harmful to the economy (Badkar, 2012).

The economy is also suffering from a high level of loan defaults.  In 2015, the rate of loan defaults in the country were estimated at 43 percent. Between the first quarter of 2014 and the third quarter of the rate of loan defaults was estimated at 73 percent (Li, 2015). Noteworthy, this high rate of loan defaults is detrimental to economic growth. Most corporations in the industrial sector are experiencing continued losses. Yet, the country’s banking system relies heavily on the corporate sector. Therefore, the whole economy is affected by the corporation’s defaults on their loans. In turn, this has affected the Chinese economy adversely.

China’s Transition from manufacturing to service industry

The Chinese government has taken an active role and has instigated various measures with the goal of restoring the country’s economic growth to the initial levels. Essentially, it has instigated various measures to enhance the level of economic growth. Firstly, the government has set up measures to control the supply of houses in the economy (Baldang, 2016). Although the outcome of this action may be wide, the government expects to reduce the rate of deflation that has become imminent over the past few years. In addition, it has also initiated policies that aim to strengthen the yuan against the dollar. Mainly, this is meant to regain the confidence of investors in the country’s currency and therefore attract investors into the economy (Cassidy, 2016). Typically, a rise in capital inflows into the economy is expected to stimulate business activity in the aggregate economy, thereby lead to economic growth.

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