Governmental Economic Policies
|
This section of the Ministry of Commerce website focuses on the policies the government of the People's Republic is using in order to promote economic growth and development for the betterment of glorious China.
Given the interdependence of economic growth and economic development, and the fact that economic development hinges on the existence of economic growth, this page will talk mostly about economic growth, mentioning development, but finish with a concluding section on how all of these policies aimed at stimulating economic growth similarly stimulate economic development.
Understanding China's Economy
解讀中國經濟
NOTE: This information is not essential to the topic at hand, it is rather BACKGROUND INFORMATION on the Chinese economy to help you deepen your understanding on how Chinese economic policies help spur economic growth and development.
In order to understand how the Chinese government spurs economic development and growth, it is important to have a firm grasp on exactly how the economy of China works, and how it differs from other economies around the world. The economy of China is extremely unique, and is one of the last of its kind remaining in the world. It is, what economists refer to as a socialist market economy, meaning that there is a large state-owned sector, but also an open-market economy. China employs an open-market so that the state-owned sector and socialism within the nation can thrive. Privately owned enterprises, in recent years, have become vitally important to the Chinese economy however, the fundamental distinction between the Chinese and Western mixed-market economies lies in the degree of state-ownership. Western economies are typically characterised by some state ownership of production - usually of goods and services that the free market would not provide or would not provide at a reasonable price (e.g. defence, parks and sanitation), private enterprises competing against state owned enterprises and, finally, a flourishing and large private sector that will provide goods and services to the general public with varying levels of government regulation.
On the other hand, the government of the People's Republic generally has a hand in the controlling of most industries within the economy. However, in recent years, due to the liberalisation of the economy, many of the previously state-owned enterprises have been sold, resulting in a more efficient allocation of resources within the economy.
In order to understand how the Chinese government spurs economic development and growth, it is important to have a firm grasp on exactly how the economy of China works, and how it differs from other economies around the world. The economy of China is extremely unique, and is one of the last of its kind remaining in the world. It is, what economists refer to as a socialist market economy, meaning that there is a large state-owned sector, but also an open-market economy. China employs an open-market so that the state-owned sector and socialism within the nation can thrive. Privately owned enterprises, in recent years, have become vitally important to the Chinese economy however, the fundamental distinction between the Chinese and Western mixed-market economies lies in the degree of state-ownership. Western economies are typically characterised by some state ownership of production - usually of goods and services that the free market would not provide or would not provide at a reasonable price (e.g. defence, parks and sanitation), private enterprises competing against state owned enterprises and, finally, a flourishing and large private sector that will provide goods and services to the general public with varying levels of government regulation.
On the other hand, the government of the People's Republic generally has a hand in the controlling of most industries within the economy. However, in recent years, due to the liberalisation of the economy, many of the previously state-owned enterprises have been sold, resulting in a more efficient allocation of resources within the economy.
As such, this model of socialist market economics is one that employs a significant amount of public ownership of both the factors of production and the distribution of production. The large amount of industries that the Chinese government has total, near-total or significant control over (which reaches to over 117 industries and industrial sub-divisions), as illustrated above, and this model of economics (socialist market economics) shows what great power the government has over the means of production and the control of said means. Without a competitive private sector in state-dominated industries, any decision the government of the People's Republic makes on a macroeconomic scale can have significant run-off effects on state-owned enterprises, the factors of production and the distribution of production.
This large-scale public ownership is a product of the times before China became inextricably linked with the global economy through globalisation. Pre-globalisation, large-scale public ownership was beneficial for the People's Republic. However, as China has become more and more linked to the rest of the world and become a more internationally open nation, the effects of Western capitalism and private ownership have infiltrated a once centrally-controlled economy and promoted a more free market view point looking towards enhancing economic growth and development through the progressive liberalisation of the economy.
However, as will be explained within this page, although it may be easier to control the economy when the government has significant holdings, it is not always beneficial. The liberalisation of the economy, a move towards a more capitalistic, private-sector ownership economic policy and the last seventy years of immense economic reform within the People's Republic have given significant rewards in economic growth, demonstrating that although the government may have great control over industry, opening up some of these industries to the private sector and allowing competition is often in the best interests of economic growth and development.
IN SUMMARY - knowing HOW China's economy in the form of socialist market economics works is of vital importance to understanding how the policies the government makes have the power to influence almost every sector of industry and have wide-ranging effects over both industry and the life of the average Chinese. This power inevitably makes it easier for the government to manipulate the economy. However, the effect that this has on economic growth and development in the modern age is debatable and often negligble.
Now that we know HOW the Chinese economy works, we can now explore how the Chinese government uses various government policies to promote economic growth and development.
This large-scale public ownership is a product of the times before China became inextricably linked with the global economy through globalisation. Pre-globalisation, large-scale public ownership was beneficial for the People's Republic. However, as China has become more and more linked to the rest of the world and become a more internationally open nation, the effects of Western capitalism and private ownership have infiltrated a once centrally-controlled economy and promoted a more free market view point looking towards enhancing economic growth and development through the progressive liberalisation of the economy.
However, as will be explained within this page, although it may be easier to control the economy when the government has significant holdings, it is not always beneficial. The liberalisation of the economy, a move towards a more capitalistic, private-sector ownership economic policy and the last seventy years of immense economic reform within the People's Republic have given significant rewards in economic growth, demonstrating that although the government may have great control over industry, opening up some of these industries to the private sector and allowing competition is often in the best interests of economic growth and development.
IN SUMMARY - knowing HOW China's economy in the form of socialist market economics works is of vital importance to understanding how the policies the government makes have the power to influence almost every sector of industry and have wide-ranging effects over both industry and the life of the average Chinese. This power inevitably makes it easier for the government to manipulate the economy. However, the effect that this has on economic growth and development in the modern age is debatable and often negligble.
Now that we know HOW the Chinese economy works, we can now explore how the Chinese government uses various government policies to promote economic growth and development.
Liberalisation of the Economy and Economic Reform
經濟與經濟改革的自由化
Figure 1: Historical Growth of China's GDP 1952- 2005
Figure 2: Foreign Direct Investment (FDI) inflows into China
Figure 3: Historical value of Chinese exports
NOTE: It took time for the economic reforms to have full effect, which is why the rise in total export value is slightly later than the time in which the reforms were instituted (1976-1984 institution to 1986 fruition). Figure 4: Historical trends in Chinese Human Development Index (HDI) growth.
Figure 5: Historical trends in Chinese annual GDP growth rate
Figure 6: GDP growth per annum pre and post Deng reforms.
|
NOTE: Though there have been various economic strategies implemented by Chinese governments, this strategy is certainly the most significant ever undertaken.
The economic history of China is one of the longest spanning in the world, with China having had one of the world's largest and most advanced economies for at least the last two millenia. In the modern age, China found its economic roots in a closed economy, one that focuses on internal trade and self-sufficient production, rather than opening the doors for international trade and investment. As the international economy became more intertwined and globalised, this rich history of economic superiority became largely lost in the name of the closed economy. In the period 1930-1970, the economy of China stagnated and there was virtually no improvement in living standards. The economic progress of China lagged significantly behind other East Asian nations such as Japan and South Korea and, as a result, famine and poverty was rampant in the People's Republic. China had barely any exports and nearly no imports. They only imported what China could not manufacture. Following the death of Chairman Mao, the Communist Party of China leadership turned to market-oriented reforms to salvage the failing economy. In 1978, new Chinese leader, Deng Xiaoping began to reform agriculture and pull China out of the Great Leap Forward famine that killed tens of millions. By decollectivising agriculture, removing governmental monopoly over agricultural products and the move from the communist equality of distribution towards the capitalist ideology of work = money. It was a massive success; individuals now owned their own plots, and the responsibility of generating money for their families was up to them and their work in the farmlands. This pulled hundreds of millions of farmers out of poverty and increased living standards across China as a whole. Figure 1 marks 1978 as the beginning of China's rapid expansion of Gross Domestic Product, beginning with the agrarian reforms which stimulated the economy by rapidly expanding supply of food to meet the remarkably high demand, allowing for more goods and services (in this case, agricultural goods) to be produced within the economy. One of the greatest achievements of Deng's period of economic reform was his liberalisation of investment markets. In the time period between 1978-1984, Deng allowed foreign investment into china for the first time since the Kuomintang Era (1894), allowing the economy to begin to emerge from the crumbling closed economy model to the increasingly successful mixed economy. Figure 2 shown left shows the gradual increase of foreign direct investment flows into China after the liberalisation of the Chinese investment market, with the first surge in FDI inflows taking place in 1984-1986, before lifting off at a remarkably high rate 3-5% per year for most years following that, as investors saw China as a great possible investment opportunity. The effects of Deng's economic reform in liberalising the Chinese investment market are staggering. Graham (2001) argues that this initial move by Deng to open up China's economy to the world is the reason that, by 2025, China is expected to take over the US as the world's superpower and world's largest economy. Foreign Direct Investment (investments made by a company or entity based in one country into a company or entity based in another company) allowed businesses in China to expand and provide more goods and services to meet the growing demands of its now more wealthy (but still relatively poor by international standards) population. Further, this great influx of foreign direct investment allowed China to begin exporting more and more goods to the rest of the world. As shown in Figure 3 pre-1986, China virtually exported nothing. However, due to Deng's agrarian reforms allowing China to generate more agricultural goods and his move to remove restrictions on foreign direct investment, China realised a huge surge in the total value of its exports post-1986, with now, China being the world's largest exporter. Figures 1, 2 and 3 all match up in showing that in the time during Deng's economic reforms, China's levels of GDP, FDI and exports all rose dramatically. The subsequent trickle-down effect of this rise in exports, FDI and GDP is increased living standards (as shown in Figure 4, with rise in HDI from 0.349 in the pre-Deng period to over 100 points higher by the time the effects of Deng's reforms could be fully felt), life expectancy and disposable income for citizens, allowing Chinese people to live a better life. Therefore, in evaluating the success of Deng's economic liberalisation strategies and the strategies of the Chinese government and the Communist Party of China in allowing foreign direct investment and reforming the agricultural system had a direct impact on the growth of the Chinese economy, greater than any other reform or strategy ever undertaken in China. As aforementioned, rises in GDP, FDI and Chinese exports, three great indicators of Chinese economic growth, all grew by astronomical proportions following the globalisation of the previously closed economy. To see this information in a more sussinct form, look at Figure 5 which shows the GDP growth rate rise to ~16% per annum in 1983 after a gradual build-up from 1980, when the reforms were first introduced. Thus, it is starkly clear and obvious that the use of economic strategies, such as the liberalisation of Chinese investment markets and the agricultural industry under the government of Deng Xiaoping, translated to a direct and tangible growth in Chinese GDP, living standards, FDI and export values - all great indicators of overall economic growth - in this case, highly positive economic growth and development was felt by the introduction of these government strategies. Figure 6 is an excellent indicator of viewing the great surge of economic growth following the economic reforms in China undertaken during the Deng era. As can be seen, after the economy was liberalised in 1979, economic growth almost doubled. Thus, this strategy to increase economic growth and development within China can be seen as a raging success. |
These economic reforms have continued from the original Deng reformation period up until now. Though the original Deng reforms as discussed, had the most impact on the growth of the Chinese economy of any government strategy, the following reforms did also have a significant impact in raising the level of economic growth and development within China:
- In 1986, Deng began the process of removing controls on private businesses and significantly reducing government intervention, allowing competition to flourish and subsequently allow for a more productive allocation of resources within the economy, leading to a higher level of goods and services being produced within the economy and thus, this is a reflection of heightened economic growth.
- In 1992, though not a reform, the private sector "GDP" overtook the public sector "GDP" for the first time in China's history. This is a reflection on the much more efficient private sector following the reduction of government intervention. A healthier, more productive and growing private sector certainly manifests itself in higher economic growth levels, evident in the figures above.
- In 1997, large-scale privatisation occurred, in which all state enterprises, except a few large monopolies, were liquidated and their assets sold to private investors. State-owned enterprises felt a reduction of 48%. As aforementioned, this expansion in competition allows for a more diverse and efficient economy, thus allowing for higher rates of economic growth.
- In 2004 - present, the Chinese government continued to remove tariffs on imports in exchange for lower prices on exports through Free Trade Agreements with over 10 nations, the Association of South East Asian Nations and the territories of Hong Kong and Macau. This allows for China to export more of its goods on the international market, leading to a higher rate of economic growth.
NOTE: Some of these reforms will be addressed in greater detail below.
How did these important reforms impact on economic growth?
NOTE: the figures above, and the information above explain the effects of the liberalisation of investment and the opening of Chinese markets to foreigners and exports in detail. This is a succinct summary.
- Economists estimate China's GDP growth in the period 1978-2013 (post-Deng initial reformation period) to be between 9.5% to 11.5% per year.
- Since the beginning of Deng's reforms, China's GDP has risen tenfold.
- There has been a sharp increase in total factor productivity, with the increase in productivity due to increased competition accounting for 40.1% in GDP increase, compared with 13.2% for the Maoist period.
- Chinese GDP per capita increased 188.5% of Indian GDP per capita and 15.7% of USA GDP per capita.
- Per capita incomes rose at a rate of 6.6% per year.
- Average wages rose sixfold since initial reforms.
- Absolute poverty declined from 41% of the population to 5% of the population in the period between 1978-2005.
- As aforementioned, Figure 6 is an excellent source of viewing the DIRECT TRANSLATION that economic reform had on economic growth.
Therefore, it is obvious, the liberalisation of investment markets and the opening of China's economy to globalisation and to the global economy has undoubtably led to economic growth and development on an irrefutable and remarkable level.
The rise of China from a poor, stagnant country to a major economic power within a time span of only 28 years is often described by economists as one of the greatest economic success stories in modern times. The Deng Reforms were the catalyst for this unprecedented level of economic growth.
Privitisation of Industry
工業私有化
Figure 7: The effects of privatisation on a curve (hypothetical economy)
Figure 8: Chinese labour productivity
|
As mentioned briefly above, during the Deng reformation period, China embarked on a series of moves to privatise many previously government owned industries. The Chinese government had almost exclusive monopolies on over 117 different industries. Competition was nearly non-existent. However, the Deng economic reforms led to a 48% reduction in state-owned enterprises.
Why is this important? In order to achieve competition, China had to let go the reins and privatise some of its state-owned enterprises in inefficient and unproductive sectors. As shown in Figure 7:
This all results in a more productive allocation of resources within an economy, evident in Figure 8 wherein total factor productivity was up over 3% per year since the pre-Deng period. This rise in productivity and reallocation of resources within the economy towards more productive businesses and industries due to the privitisation of industry has spurred economic growth, largely in the form of increased exports: with higher rates of production, internal wants and needs are satisfied more quickly and more goods and services are able to be shipped overseas, resulting in increased economic growth (see Figure 3 for more details). |
Free Trade Agreements
自由貿易協定
Figure 9: The benefits of Free Trade Agreements (FTAs)
Figure 10: How a tariff works
Figure 11: How a tariff works (graph)
Figure 12: The world's largest exporters by share of world exports
Figure 13: Chinese-New Zealand trade after the introduction of a FTA
Figure 14: Standard Long Run Average Cost (LRAC) curve
Figure 15: An expanded production possibilities frontier
|
Free Trade Agreements (FTAs) are a key aspect to promoting economic growth and development within any economy. China began the process of signing Free Trade Agreements in the early 2000s, opening up Chinese markets to the international community. Speaking on a general basis, we should first determine why an economy (not necessarily China) would engage in a free trade agreement and why they are great at stimulating economic growth.
As Figure 9 shows, generally, countries engaging in Free Trade Agreements find that their average GDP per capita increases rapidly (more than 2x in the figure shown). Why is this so? Free Trade Agreements work by mandating that all or some agreed upon goods produced within one nation can be imported to another nation (or group of nations, but this is usually a 'trading bloc' with the exception of the multilateral free trade agreement that is the China-Association of South East Asian Nations FTA (ASEAN) (CAFTA)) without any tariffs or levies placed on import, and vice-versa. For example, if Country X was a manufacturer of cars, and Country Y was also a manufacturer of cars, in order to stimulate economic growth locally within the economy, Country Y might introduce protectionist policies in order to encourage its citizens to buy local-made cars. This is usually in the form of a 'tariff' or a tax levied on imported goods. The effect of the tariff is that it makes imported goods generally more expensive than locally-made goods and as such, makes the locally-made goods cheaper to buy; stimulating employment. However, protectionist policies have a habit of making industries unproductive and inefficient. If a company knows its goods are going to be cheaper than international goods, there will be little competition with foreign markets, and, as such, the company will not work as hard to make their products cheaper, their factors of production more efficient and won't invest in as much capital. However, if Country Y was to allow Country X's cars to be imported without tariff, then the automotive industry of Country Y would, generally, have to work harder to ensure that they can compete with these new foreign markets, thus allowing a more productive allocation of resources within the economy. This act of allowing a country's good(s) into another country with no tariff is known as free trade, and the formalised agreement between two (or more) countries is known as a free trade agreement. This aforementioned process can be depicted graphically in Figure 10 and Figure 11:
How is this important to China, and how does it stimulate economic growth within China? As shown in Figure 12, China is the world's largest exporter. It has a market share of 12% of total world exports. China is the largest manufacturing nation in the world, and most would find in their home many products bearing the label "Made in China". China has risen, through the Deng economic reforms strategy, which, in themselves, strongly promoted economic growth and development, to become the world's largest exporter. Looking at Figure 12, the effects of the Deng reforms on export growth can be seen as a rise in 2% between 1970-1990. However, when China began the process of making its products more internationally competitive by introducing free trade agreements and removing tariffs on its exports from other countries, its dominance in the world export market surged from 2% to 12% in a matter of under 20 years. Increased exports in China have led to an increased GDP and thus, a huge increase in economic growth and development. To show in the form of hard, undeniable data, that Free Trade Agreements lead to an increase in exports, see Figure 13. Chinese-New Zealand trade has boomed since their 2008 Free Trade Agreement, and their trade with other nations (in this case, Taiwan) has stagnated. When the Chinese goods found their way into New Zealand's markets, and when Chinese goods find their way into markets globally, they tend to be the cheapest goods in the market (due to the aforementioned labour laws) and thus increase their market share often at the expense of the host country's trade with other nations. This increase in exports to New Zealand, and the increase in exports to many nations has the following effect:
Therefore, to summarise, when China and other nations signed free trade agreements, allowing their exports to compete on the same level as locally-made products, China was able to price their products significantly cheaper than the goods of other nations (largely due to the lower wages and cheaper factors of production) and thus, grow its exports significantly. This increase in exports is reflected in a surge in total GDP and economic growth. This is China's most recent, ongoing, large-scale attempt to increase economic growth and to stimulate economic development, and it is a great success. |
Tourism
旅遊
Figure 16: Chinese tourism statistics. Blue represents inbound.
Figure 17: Percentage change in the supply and demand of hotel rooms, pre, during and post 2008 Beijing Olympic Games
|
Tourism, in any economy, is a huge investment. Since the opening of China's economy and the moving away from the old en-masse human rights abuses that were rampant across the Republic, there has been a steady and large increase in the amount of tourists visiting the nation. Inbound tourism has increased dramatically, especially given China's recent pushes to host international events that attract tourism, namely the 2008 Beijing Olympic Games. China has become one of the world's largest tourism hotspots, with in 2013, attracting over 129 million tourists. As can be seen in Figure 16, each year has brought consecutive increases in inbound tourism. Last year alone the tourism industry in China and inbound arrivals to China brought over US$60 billion. Figure 17 shows the supply and demand of hotel rooms over recent years. Massive growth in tourism post-olympics has seen demand far outweigh supply in recent years showing the great interests in foreign tourists in visiting China. Moves by the Chinese government in recent years to increase tourism yield the following effects on the Chinese economy:
In summary, the recent influx of inbound tourism into China is making tourism a lucrative pursuit for the Chinese economy. Recent attempts to increase tourism into China, such as the 2008 Beijing Olympic Games (at this time alone, 6.5 million tourists were in China) have caused an increase in GDP and therefore, economic growth due to tourists spending money in China. |
Special Economic Zones (SEZs)
經濟特區
Figure 18: FDI inflows into China
|
While China’s rapid rise has become a hot topic for development debate among policy makers, business people, and scholars all over the world, the numerous special economic zones (SEZs) and industrial clusters that have sprung up since the reforms are undoubtedly two important engines for driving the country’s growth. A Special Economic Zone (SEZ) is a geographical region that has economic and other laws that are more free-market-oriented than a country's typical or national laws. SEZs generally have the aim of increasing foreign direct investment, that is, investments from companies from other countries into companies in the host country. For example, an American company taking a majority stake in a Chinese company is an example of foreign direct investment.
|
How have the Chinese Special Economic Zones increased Foreign Direct Investment?
Figure 18 shows graphically how, in the period when Special Economic Zones were beginning to be introduced and gain ground within China ~1990, foreign direct investment into China skyrocketed, growing from US$ 1 billion in 1990 to $US48 billion in 1997. The fact that SEZs in China have significantly more relaxed restrictions for FDI to flow in compared to the rest of the nation means that foreign investors will be much more interested into creating businesses and investing in businesses in these areas.
Because China had just reopened to foreign trade and investment, the SEZs had an almost immediate impact. In 1981, the four original zones accounted for 59.8 percent of total FDI in China, with Shenzhen accounting for the lion’s share at 50.6 percent. Three years later, the four SEZs still accounted for 26 percent of China’s total FDI. By the end of 1985, realised FDI in the four zones totalled US$1.17 billion, about 20 percent of the national total. With one SEZ encompassing 50% of the entire FDI market in China, it is obvious that SEZs are a true attraction for investors. This is largely due to their more relaxed investment restrictions, and the effects of this relaxation on investment can be seen in the great increase in FDI amongst Chinese SEZs.
Now that we know how China's Special Economic Zones have increased Foreign Direct Investment, we must answer the real question: how then has Foreign Direct Investment stimulated economic growth in China, and thus, by extension, how have the SEZs stimulated economic growth?
The combination of favourable policies and the right mixture of production factors in the SEZs resulted in unprecedented rates of growth in China. Against a national average annual GDP growth of roughly 10 percent from 1980 to 1984, Shenzhen grew at a phenomenal 58 percent annual rate, followed by Zhuhai (32 percent), Xiamen (13 percent), and Shantou (9 percent).
This contrast of regional SEZ GDP and nationwide Chinese GDP shows the stark growth SEZs within China have been harnessing due to increased levels of FDI. The economic growth in these regions has been staggering, and for each extra USD of FDI funnelled into these 'investors paradises' is an extra USD towards the total Chinese nationwide GDP. To assess the impacts of FDI, consider the following hypothetical example:
Therefore, in conclusion, growth in FDI leads to a growth in GDP and leads to a surge in economic growth and development.
Figure 18 shows graphically how, in the period when Special Economic Zones were beginning to be introduced and gain ground within China ~1990, foreign direct investment into China skyrocketed, growing from US$ 1 billion in 1990 to $US48 billion in 1997. The fact that SEZs in China have significantly more relaxed restrictions for FDI to flow in compared to the rest of the nation means that foreign investors will be much more interested into creating businesses and investing in businesses in these areas.
Because China had just reopened to foreign trade and investment, the SEZs had an almost immediate impact. In 1981, the four original zones accounted for 59.8 percent of total FDI in China, with Shenzhen accounting for the lion’s share at 50.6 percent. Three years later, the four SEZs still accounted for 26 percent of China’s total FDI. By the end of 1985, realised FDI in the four zones totalled US$1.17 billion, about 20 percent of the national total. With one SEZ encompassing 50% of the entire FDI market in China, it is obvious that SEZs are a true attraction for investors. This is largely due to their more relaxed investment restrictions, and the effects of this relaxation on investment can be seen in the great increase in FDI amongst Chinese SEZs.
Now that we know how China's Special Economic Zones have increased Foreign Direct Investment, we must answer the real question: how then has Foreign Direct Investment stimulated economic growth in China, and thus, by extension, how have the SEZs stimulated economic growth?
The combination of favourable policies and the right mixture of production factors in the SEZs resulted in unprecedented rates of growth in China. Against a national average annual GDP growth of roughly 10 percent from 1980 to 1984, Shenzhen grew at a phenomenal 58 percent annual rate, followed by Zhuhai (32 percent), Xiamen (13 percent), and Shantou (9 percent).
This contrast of regional SEZ GDP and nationwide Chinese GDP shows the stark growth SEZs within China have been harnessing due to increased levels of FDI. The economic growth in these regions has been staggering, and for each extra USD of FDI funnelled into these 'investors paradises' is an extra USD towards the total Chinese nationwide GDP. To assess the impacts of FDI, consider the following hypothetical example:
- Nike Shoes, an American-based company, builds a factory to create shoes in Shenzhen, a Chinese SEZ.
- Due to the relaxed restrictions on investment within these regions, Nike is able to funnel immense amounts of money into this factory, allowing it to grow rapidly.
- This factory can now afford to hire workers, a form of economic stimulation in itself as it allows for more individuals to buy goods and services and thus leads to an increase in demand and a subsequent increase in supply.
- This factory creates goods which add to the Chinese GDP - the total of all goods and services produced within an economy thus stimulating economic growth.
Therefore, in conclusion, growth in FDI leads to a growth in GDP and leads to a surge in economic growth and development.
Macroeconomic Policies
Fiscal Policy
財政政策
Figure 19: Impact of stimulus on the Chinese economy.
Figure 20: Chinese budget deficit
Figure 21: Chinese education spending
|
Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply. Fundamentally, fiscal policy works in the same way in China as it does in other countries: governments spend money to generate economic activity. However, China's centrally planned economy, its backlog of development and infrastructure needs, and large fiscal resources, meant that it is well placed to quickly direct large amounts of spending into the economy. China has many fiscal policy policies, but, the most predominant one in recent years has been the injection of stimulus into the economy during the Global Financial Crisis. Figure 1 shows how China's GDP continued to grow during the GFC. The country has been, in recent years, characterised by its amazing ability to have survived the GFC and end up on the other side of the crisis in a better economic state that it had when it entered. The global financial crisis came at a time when China's economy had been growing strongly and the Central Government had been seeking to moderate activity to contain inflationary pressures. Fiscal policy settings were prudent, with a modest fiscal deficit and relatively low levels of Central Government debt. The package was predominantly investment-focussed, in contrast to the packages announced in many advanced economies, which had significant upfront consumption elements. In Western countries, the first response was to put money into the pockets of consumers to get stimulus spending into the economy quickly. In many cases, investment spending came later, given implementation lags. In China's centrally planned, investment-orientated economy, investment was seen as the most direct and effective method of stimulating activity. Consumption-based measures played a relatively minor role in China's stimulus package, although there were some tax-related policy measures implemented and direct consumption subsidies introduced. This spending was financed in part through the Central Government budget. The budget deficit was expanded from around ¾ per cent in 2008 to 2¾ per cent in 2009, before narrowing to 1¾ per cent in 2010. This was a relatively modest turnaround in the budget position given the size of the package. Figure 19 shows the state of China with the recent stimulus and without. It is obvious that if the stimulus packages had not been introduced, China would have suffered lower economic growth. By using prudent fiscal policy, the Chinese government was able to grow the economy in a time where economies all around the world were plummeting into deep recession. China is now moving out of the proactive fiscal policy stage and towards a prudent fiscal policy environment. In western times, a proactive fiscal policy is one that is expansionary in nature, where as a prudent fiscal policy is one that is neutral. Therefore, China will not continue investment packages or raise government spending above the current levels, in an attempt to control budget deficit. Viewing Figure 20 shows that, during the GFC period, budget deficit peaked at 2.8% of GDP. however, it has steadily decreased since that time due to this new form of budgetary policy. By maintaining a similar amount of spending and removing any further stimulus, China has been able to reduce the size of its budget deficit without impacting on economic growth and development. The Chinese budget is shrouded in a veil of ambiguity and secrecy. Unlike western nations, the government does not release details of where the money in the budget is going. It gives a very brief overview, putting spending into categories like "internal security" and "intellectual spending". Therefore, besides stimulus and the stance of fiscal policy there is not much to discuss regarding the Chinese budget as we are not able to determine the effect specific budget items on economic growth as we don't know the value of items in the budget. However, the Chinese government does release detailed spending reports on two aspects: education and defence. Education in all economies is an investment in the future. A more educated workforce is one that is more productive and skillful and therefore, one that is able to produce more goods and services in existing industries, but also to create new industries that China previously didn't have educated individuals to pursue. For example, as Figure 21 shows, due to the rapidly increasing education budget, there have been significantly more individuals attending universities and within seven years, three-quarters of Chinese school children will graduate with a high-school education, as opposed to 1998 where only one in five children had this qualification. This more educated work force allows China to create new industries (the Chinese government wishes to venture into alternative energy, bio-technology, high-end equipment manufacturing and new energy vehicles, for example), become an international leader in these industries, export the goods and services from these new industries and thus see economic growth. Economic growth will also be increased by a more productive workforce that will be able to more efficiently produce goods and services and find returning economies of scale and reach the technical optimum on the LRAC curve. |
Monetary Policy
貨幣政策
Figure 22: Chinese interest rate movements
Figure 23: Chinese inflation rate
|
NOTE: This section on Chinese monetary policy is quite short due to the fact that much of the monetary policy of China is shrouded in secrecy and not released to the public.
NOTE: This section on Chinese monetary policy is quite short due to the fact that much of the monetary policy of China is shrouded in secrecy and not released to the public. Immediately after the collapse of Lehman Brothers in September 2008 (the beginning of the GFC), China unveiled a ¥4 trillion ($720 billion) stimulus package. The economy rebounded quickly, with the growth rate soaring to 12.1 per cent in the first quarter of 2010. The People's Bank of China immediately lowered interest rates to 5.3% in order to sustain this level of economic growth and to ensure China did not enter recession. This strategy was a success, as, as aforementioned, Chinese growth hit 12.1% of GDP in a time where many economies were plummeting into spiralling recession. To rein in a housing bubble and pre-empt a rise in inflation, the People's Bank of China tightened monetary policy in January 2010, raising interest rates progressively over the next two years to 6.5%. This caused a downfall in economic growth, however it did so at the sake of controlling increasing inflation caused by the surge in economic growth. So, in the long run, though it may have decreased the economic growth figure on paper, in reality this tightening of monetary policy resulted in decreased inflation, as seen in Figure 23 (the inflation rate reached a high of over 8% after stimulus in 2008, but then plummeted to deflation after the tightening of Chinese monetary policy, followed by an eventual return to a more stable inflation rate, fluctuating between 2-4% by 2012 due to the loosening of monetary policy at a reasonable rate to spur good quality economic growth), and thus money was worth more in China. This can be seen as economic growth in its own right, as if there was no value to the economic growth that was occurring due to inflation, it really would not be valuable economic growth. Of course, if the Chinese government wished, China's growth rate in 2014 could still surpass 8 per cent. But the country's new leaders don't want to pursue growth at the expense of structural adjustment, which has been delayed for too long. It seems that the government has established a floor for growth; as long as it is not hit, there will be no more fiscal or monetary stimulus. |
Economic Development
經濟發展
Figure 24: Poverty in China
Figure 25: Disposable income per capita
Figure 26: Yearly average wages
Figure 27: China historical life expectancy
Figure 28: China government spending
Figure 29: Higher education in China
Figure 30: China tertiary education
Figure 31: China's health spending
Figure 32: The rise of millionaires in China
Figure 33: China's infant mortality rate (historically)
Figure 34: China HDI growth
|
So far, in terms of economic growth, we've addressed the following:
Now, we need to address the following question: How do these government policies improve economic development in China? Through the government policies of economic reforms, the privitisation of industry, free trade agreements, the creation of Special Economic Zones and the use of monetary policy, economic development (the improvement in the lives of citizens, not measured by income) saw a rapid increase. Let's compare the pre-Deng and the reformation periods. In the pre-Deng period, ruler Chairman Mao partook in none of these policies. China was closed both economically and socially. No one got in, no one got out and no investment flowed in or out. This means that there was little economic growth. The nature of economic development and economic growth are intertwined. In order to have economic development, an economy has to have levels of economic growth in order to fuel this development. Retrospectively, in order to have higher levels of economic growth beyond what is already given, an economy needs to engage in economic development activities. Therefore, what we can deduce is that China, in the Maoist time period, had low levels of economic growth and therefore, low levels of economic development. Here's how we can tell this:
As we can see, to say it quite simply, the life of the Chinese was well and truly miserable. They died early, they had unfathomably low qualities of life, recieved no education or healthcare, made nearly no money and had very little disposable income. However, after the departure of Chairman Mao, new Premier Deng instituted sweeping economic reforms which included: opening the country up for both tourism and investment, creating free market 'Special Economic Zones', engaging in Free Trade Agreements, making China the 'exporting king' of the world and privitising industry. This all spurred grand levels of economic growth. However, this is worth little until it is reinvested into the economy in the form of economic development. That is exactly what Deng did. He reinvested massive amounts of money through the use of fiscal policy into improving the quality of life of Chinese. In turn, the economy was rewarded by higher levels of economic growth. Economic growth was not just due to these economic reforms. China would certainly not be the economic powerhouse it is today without the high levels of economic development that it sustained. Deng used fiscal policy to pump money back into the pockets of citizens, and create a better environment for Chinese, giving them access to more goods and services, giving them more money etc. This is the very definition of economic development. So... what changed following Deng's reforms?
How do these increases in numbers equate to economic development? In summary, now, following reforms, Chinese:
This is what we call economic development at its finest. All of this has resulted in a higher quality of life - what economic development aims to achieve. And, all of it was created by spending money made from economic growth on the Chinese general population. So, how did these increases in economic development then, in turn, contribute to economic growth? This is very important. Any economist will tell you that no investment is worthy unless you're going to make a gain. This type of economic development works the same way. Governments aren't going to spend money unless they will be rewarded with economic growth in turn. And, they did:
In conclusion, high levels of economic growth within China have only been possible due to astronomical reforms by Premier Deng. These policies were aimed at developing the economy and raising the standard of living of Chinese. This great rise in living standards then translated directly into economic growth, allowing for a more prosperous, wealthy and happier China. |
Resources
資源
Documentary: Deng Xiaoping and the Opening of China
Documentary: Deng Xiaoping and the Transformation of China
Infographic: Top three countries by economic dominance
Infographic: Global Rise of the Yuan
|
News Report: China's Economy Set to Overtake US
Documentary: China Rises - China or Bust
Infographic: Growth of China
|