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Chinese Macroeconomic Analysis

Chinese Macroeconomic Analysis

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Abstract

This is an analysis of the Chinese macro economy that has been one of the biggest growing economies in the world. To understand the Chinese economy better, this paper looks at several factors to draw a conclusion as well as build a recommendation that would make a difference in its economy. The factors addressed include the GDP, inflation and unemployment, economic expansion and contraction, fiscal and monetary policies, economic growth and its trading internationally. Further, the paper analyzes its economic policies and their influence on the economy in the whole country and their role ion controlling inflation, unemployment, GDP and maintaining a stable consistently growing economy for the last few decades.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chinese Macroeconomic Analysis

Introduction   

China, being the world’s most populated country in the world has grown economically to rise above other countries such as Japan to become the second largest economy in the world. However, considering the population that still renders tens of millions of people living under poverty, it is still considered developing. The country has been considered as the biggest market by many companies wishing to expand their businesses, which has led to massive investments in China by foreign investors. However, its might in terms of GDP does not reflect the same might in terms of economic strength. The past three decades have seen China’s economy grow after its centralized controlled economy was opened for international trading. This had led to the steady growth rate of about 10% for the last three decades, managing to topple many countries that had a bigger economy such as Italy, France, United Kingdom, Germany and Japan. China has been able to benefit from its exports mainly in the steel industry. The changed policies 30 years ago contributed to the steady growth rate.

Gross Domestic Product

Currently it has the second-highest GDP following the United States after it overtook Japan in 2010. The Chinese economy depends on many things, ranging from manufacturing, processing, agriculture, metal industry, ceramics, and natural resources. Agriculture had always contributed a significant part of the GDP, until recently when it started dropping. In 2010, agriculture accounted for just 10.9% of the GDP, while it contributed about 15.4% in 2002. The industrial industry has been growing steadily, with this sector contributing 48.6% and a 40.5% from the service industry. However, despite agriculture contributing 10.9% of the GDP, it is the majority employer, with 39.5% of the labor force working in agriculture. 27.2%  of the workforce in China is employed by the industry sector while 33.2 % is employed in the service industry. China is a world leader in some agricultural products such cotton, silk, sugarcane, tea and oil seeds. Other products come from minerals such as coal, oil and iron (China’s Macroeconomic Analysis & Forecasting, 2011).

The Chinese GDP has been increasing for the last 30 years at an average of 10%. In 2010, its GDP was 10.1% higher than 2009. Its investment in fixed assets has increased by 23.1 % higher than 2009, and might grow by more than 22% this year. The total consumer nominal increase in 2010 was growing at 18.3%, making up a contribution of 55.4% rate to the GDP. It is evident that the rate of contribution to GDP of consumer goods is higher than total investments deployed. This is to mean that the output is higher than the input. There was an increase of 32.4% trade, with the rate of import being at 36.1% while export was at 29.3%. The country had a purchasing power parity of $9.872 trillion in 2010 with a GDP, per capita of $7,400 in the same year. The people living below the poverty line in china are at 2.8% of the whole population, with an 819.5 million-labor force ranked as the first in the whole world (China’s Macroeconomic Analysis & Forecasting, 2011). Currently it has the second-highest GDP following the United States after it overtook Japan in 2010.

Unemployment and Inflation Rate in China

Unemployment rate has been increasing in many countries as well as inflation rate. The inflation rate in China is currently at 5.5%, which was a slowdown from last year, when it stood at 6.1% in September. This was because of moderated food prices that had been expected. .some of the staple foods such as pork ad the price of vegetables has reduced managing to slow down the inflation rate. The inflation rate in China has been at an average of 4.25% from 1994 to 2010, with the highest ever recorded being 27.7% in 1994. Currently the government is taking all measures to control inflation without affecting the economic growth.

Unemployment rate in China is hard to tell considering many people will be self-employed in such a heavily populated country. However, the unemployment rate is currently standing at 4.1% towards the end of June when 9 million people were recorded unemployed. However, the ministry of Human Resource and Social Security has managed to create about 6 million job opportunities in the first half of the year, and managed to help around 3 million laid-off workers secure re-employment.  The government is willing to create more than 9 million jobs by the end of the year in an effort to reduce the unemployment rate. The unemployment rate has been caused by the slowing manufacturing industry that employs majority of workers in China. More so, just like other countries, China is affected by international economic affairs. However, this had been an improvement from the previous years, starting from 2004 when it was 10.1% to 9.8% in 2005, 9% in 2006 to 4.2 in 2007, which has now been ranging at that. This improvement had been due to the restructuring of the manufacturing industry since 2002 when many were laid off, but later were re-employed, hence the slowing unemployment rate.

Recession and Expansion

China is considered the fastest growing economy that has been resilient to the world wide economic down turn where it has continued to grow despite the recession worldwide. Among the reasons behind its growth has been consumption within the country that is going higher everyday, especially in 2009 when other countries experienced financial crisis. Another reason why there has been the growing investments in China, is due to many companies recognizing it as a big market for their goods.  This is despite the slowing export rate that is going lower. However, the economy is still growing, but at a slower rate than previous years. The industrial profits have slowed being part of the main contributors to the GDP, and other crisis around the world continue to affect China. Mostly, the recession is affected by employment, which has seen a few people lose their jobs, personal income, which are lowering as a measure to cut costs by the manufacturing industries, industrial production and sales volume in manufacturing and retail sector, where export sales have gone down, but retail has continued to grow. Currently the growth of the Chinese economy has slowed down from 9.5% to 9.1% this year considering slowing economies elsewhere such as Europe. Even though the country is affected by the recession, its economic growth has not stopped, the main reason being its stimulus package and the growing consumption.

Fiscal Policy

The Chinese fiscal policy this year is focused on managing to stabilize back to the normal position, with a forecast of improvement in the deficit of 2% of GDP, from 3% in 2009 and 2010 (Economic & Political Intelligence Centre, 2011). This will be through the elimination of rebates on tax and fiscal incentives, as well as a continued expansion of the tax base and improved collection of tax. This plan lays emphasis on more spending on social issues such as housing, infrastructure especially in energy and transport where there is an emphasis of efficiency and conservation. The government has a debt ratio of below 20% on GDP, which is healthy even with a significant stimulus package. The fiscal policy for this year is aimed at stabilizing the country back to its normal growth rate despite the current international crisis. More so, the government is focused to create a proactive fiscal policy that will handle between maintained growth and a fast economic development managing to reduce the inflation. Their aim is to stabilize prizes of commodities, stabilize people’s salaries and improve their livelihood through well-restructured fiscal expenditure.

Monetary Policy

Currently there is inflation of about 5.7%, which the central banks are trying to deal with through tightened monetary policies. The monetary policy for this year is expected to be prudent and tightened in order to control borrowing. This is with the aim of bringing it down to 19% from 32% in 2009. This is to be done through leveling bank loans and increasing the interest rate in order to reduce the inflation occurring from easy lending by the banks. More so, the central bank of china aims at controlling prices, which have hit 6.4% in June. The People’s Bank of China said it would continue with its strict policies to keep fighting inflation, which it swore to keep as part of their policy. The bank also aims at stabilizing prizes especially domestic ones whose inflation has been high.

“With inflationary abating, we believe that the central bank’s tightening cycle is now over. Nonetheless, inflation remains above target, rising 5.7% in May, while non-food, non-energy inflation remains elevated,” (Economic & Political Intelligence Centre, 2011). This has contributed to a slowed down tightening of some policies, although reserve requirements have increased to 450 bps for banks in October with the interests being raised to 96bps. Further, the government intends to use foreign exchange rate, interest rates, operations in the open market, requirements of the reserve and a policy tools mixture intended at maintaining, “a reasonable rhythm and scale in total financing,” (People’s Daily Online, 2011). More areas to be pursued by the central bank include liberalization of interest markets, encouraging extended loans by banks to finance government affordable provisions such as housing projects and to guard the hiking of prices within the “commercial properties,” (People’s Daily Online, 2011).

Economic Growth

Since in the 1970s when China was opened to the international trade, it has been on a continuous economic growth with its GDP growing to become the second largest in the world after United States, with the likelihood of toppling the United States in about less than two decades to come. Chinese economic growth has been as a result of opening up to the international trade in 1978. Since then the GDP has been growing continuously at a rate of above 8%. As at 2004, China was ranked as the sixth largest economy in the world, and since then has risen to topple countries before it to become the second after America. Its participation in the international trade since 1978 has grown tremendously, rising from less than one percent to reach 6% in 2003, and now it is higher than that by far. Compared with the annual expansion of the world trade of 7%, Chinese international trade export and imports have grown by 15% year after year since 1979 (Prasad, 2004). More so, China is a leading manufacturer of many things, being among the largest exporters to developing countries. In addition, its agriculture and services have contributed to its growth, with the availability of the largest and cheapest labor force in the world. It has also been among the leading importers of raw materials that are turned into products, with the biggest market being there to consume the goods. Its population has also attracted many investors from other countries, managing to drive its economic growth.

International Trade

            As mentioned earlier, China entered the international trade in 1978 when it was opened to other countries. Before, it had remained closed, being controlled by a highly authoritative communal government, though it still exists today. China now operates on an open market across the world. Since it was opened to the international trade, its imports and exports have grown rapidly, managing to drive the economy higher. In 2008, china had a global share of 7.9% of the global trade with its global trade ranks coming in as the third after United States and Germany (Sun & Heshmati, 2010). In the 1980s, the exports of primary goods were 50.3% while that of manufactured goods was 49.7%. However, things have changed since then, where China has become among the world leading manufacturers, with export of primary goods taking up just 5.4% while that of manufactured goods took 94.6%. Currently China is has a sizeable share of exports to other countries that it never did trading with before entering the international market such. China has 18.5% export share to Japan, 12.5% in United States and 8.9% in European Union as at 2003. By now, the exports have almost doubled. Today China trades from a large assortment of manufactured goods ranging from textiles, ceramics, electronics, clothes, and to heavy manufacturing such as vehicles (Prasad, 2004).

Recommendations

To deal with the issue of inflation, the focus should be on regulation of prices to enforce stabilization. To stabilize the prices further, the government can engage in recycling of liquidity, management of the market rules, controlling supplies and demand by using different channels and encouraging “moderate price-releasing,” (China’s Macroeconomic Analysis & Forecasting, 2011). A regulation in the real estate sector needs to be insisted on since it will have an effect on the price regulation. This will be a control of the flow of money in the short run while in mid run it might result to a supply increase therefore, acting as a good strategy. The fiscal policy should remain proactive with the monetary policies should be prudent as it is to continue controlling prices. More so, “the consumer policy should be focused on the long-term institutional adjustment rather than the transient stimulations,” (China’s Macroeconomic Analysis & Forecasting, 2011 p. 3). In addition, the government should aim at starting the income-multiplying plan and improve the low-income consumer infrastructure. This should be an aim to promote the local consumption in China. More so with the aim of reducing wastage though efficiency especially in energy, construction of transport using subways would encourage reduced usage of personal automobiles.

Conclusion

From the above analysis, looking at the current Chinese macroeconomic status, aohws that it is bound to grow even further and probably overtake United States as the biggest economy. Despite being the second largest economy, China remained a developing country considering many millions of people are still living in poverty. However, Chinese economy seems to be driven by the international trade, and investments that are because of its market size. Any company investing in China has a chance of capturing a market with 1.3 billion consumers, and more so, there is a large supply of labor force. Currently, the GDP of China has reached over $6 trillion dollars in 2010, and still, it is expected to grow at almost the same pace it has been growing. However, it also continues to be affected by other world economic recession such as the European zone. Currently chin has a significant impact on the international trade, and it has to ensure proper policies to be secure. The above-mentioned recommendations provide some of the policies that China could use to maintain its growth rate as well as control its inflation rate and unemployment.

 

 

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