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Chinas Economics

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.. will continue for some time (Table 4).

Table 4. Urban per capita income Year Average Income (RMB) Growth Rate 1992 1,826.1 18.3% 1993 2,336.5 28.0% 1994 3,179.4 36.1% Source: Internet article: “How to Benefit from the Booming Retail Market in China” China has now developed large shopping centres and department stores in many provinces in order to bring up the standard of living, as well as to encourage consumer spending (Table 5). Table 5. Consumer spending in different provinces. Rank Area 1994 ( RMB billion ) 1993 ( RMB billion ) Rate 1 Guangdong 175.67 131.40 +33.7% 2 Jiangsu 124.73 93.50 +33.4% 3 Shandong 113.24 84.23 +34.4% 4 Zhejiang 96.37 67.44 +42.9% 5 Sichuan 93.33 71.79 +30.0% 6 Liaoning 86.80 67.22 +29.1% 7 Shanghai 77.07 62.19 +23.9% 8 Henan 70.25 49.72 +41.3% 9 Hubei 68.50 50.05 +36.9% 10 Beijing 66.67 53.18 +25.4% Source: Internet article: “How to Benefit from the Booming Retail Market in China” International Trade and Competitiveness Trading pattern Chinas international trade in 1928 was only 2.3% of the world total.

In 1977, when Chinas economy was still isolated, its trade was 0.6%. It did not gain an important economic position until 1993. As one of the WTO members, China has opened many closed sectors under the Western influences. The Washington-based Institute of International Economics estimates that Western exports to China could rise annually by US$21 billion. Economic reforms have transferred China into a major trading partner for many countries.

Chinese exports rose from $14 billion in 1979 to $184 billion in 1998, while imports grew from $16 billion to $140 billion. China’s ranking as a trading power rose from 27th in 1979 to 10th in 1998. China’s trade volume fell slightly in 1998 over 1997 for it is too affected by the global financial crisis. Chinas exports rise by 0.5% after the rising of 20.9% in 1997, while imports dropped by 1.5%.

Due to statistics, China has been running trade deficits in some years and surpluses in others. Over the past 5 years, China has run trade surpluses. In 1998 the surplus totalled about $44 billion (see Table 6). Merchandise trade surpluses and the large amount of foreign investment have made China to become the world’s second largest foreign exchange reserves, with a total $145 billion at the end of 1998. During the first nine months of 1999, China’s exports increase by 2.1%, while imports rise by 19.3%.

Table 6. China’s Merchandise World Trade: 1979- September 1999 ($Billions) Exports Imports Trade Balance 1979 13.7 15.7 -2.0 1980 18.1 19.5 -1.4 1981 21.5 21.6 -0.1 1982 21.9 18.9 2.9 1983 22.1 21.3 0.8 1984 24.8 26.0 -1.1 1985 27.3 42.5 -15.3 1986 31.4 43.2 -11.9 1987 39.4 43.2 -3.8 1988 47.6 55.3 -7.7 1989 52.9 59.1 -6.2 1990 62.9 53.9 9.0 1991 71.9 63.9 8.1 1992 85.5 81.8 3.6 1993 91.6 103.6 -11.9 1994 120.8 115.6 5.2 1995 148.8 132.1 16.7 1996 151.1 138.8 12.3 1997 182.7 142.2 40.5 1998 183.8 140.2 43.6 Jan.-Sept. 1998 134.2 98.6 35.6 Jan.-Sept 1999 137.0 117.6 19.4 Source: International Monetary Fund, Direction of Trade Statistics and official Chinese statistics. Trading partners China’s trade data differs significantly from its major trading partners statistics. This is due to the fact that a large share of China’s trade (both exports and imports) passes through Hong.

China treats a large share of its exports through Hong Kong as Chinese exports to a foreign country. However, China treats the imports from Hong Kong as provincial trading. According to Chinese trade data, its top five trading partners in 1998 were Japan, the United States, the European Union (EU), Hong Kong, and South Korea (see Table 7). Chinese data shows that United States is its second largest export partner and the third largest source of its imports. China’s trade with many of its Asian trading partners fell in 1998, while trade with the United States and the EU rose. Table 7.

China’s Top 10 Trading Partners: 1998 ($Billions and % Change over 1997) 1998 Merchandise Trade ($) % Change over 1997 Country Total Trade Exports Imports Total Trade Exports Imports All Countries 323.9 183.8 140.2 -0.4 0.5 -1.5 Japan 57.9 29.7 28.2 -4.8 -6.7 -2.7 U.S.* 54.9 38.0 17.0 12.1 16.1 4.1 EU15 48.4 27.9 20.4 12.6 17.2 6.3 Hong Kong 45.4 38.8 6.7 -10.6 -11.5 -4.7 S. Korea 21.3 6.3 15.0 -11.6 -31.3 0.4 Taiwan** 20.5 3.9 16.6 3.3 13.9 1.1 Singapore 8.2 3.9 4.2 -7.2 -9.1 -5.4 Russia 5.4 1.8 3.6 -10.5 -9.7 -10.9 Australia 5.0 2.3 2.7 -5.2 13.9 -17.2 Indonesia 3.6 1.2 2.5 -19.6 -36.4 -8.1 Source: Official Chinese trade data. *U.S. trade data on U.S.-China trade differ significantly with Chinese trade data. **China and Taiwan do not maintain direct trade links.

Most trade takes place via Hong Kong. However, the US trade data differs significantly with Chinese trade data. According to the U.S. trade data, it indicates that U.S. market is an important market to China’s export, but it is not reflected in Chinese trade data.

Based on U.S. data on Chinese exports to the US, it is shown the exports have grown from 15.3% in 1986 to an estimated 38.7% in 1998. This would indicate that the United States is China’s largest export market. The importance of the U.S. market for China’s exports has increased in 1998 because of the global financial crisis in Asia. China has survived the financial crisis because U.S.

imports from China have continued to rise, whereas imports by several East Asian economies from China have fallen. There is an increasing level of Chinese exports from foreign funded enterprises (FFEs) in China. According to Chinese data, the total share of Chinese exports produced by FFEs has risen from 0.1% in 1980 to 44.1% in 1998. Many of these FFEs are owned by Hong Kong and Taiwan investors because they have shifted their labour-intensive, export-oriented, firms to China to take advantage of low-cost labour.

A large percentage of the products made by such firms are exported to the United States. Export and imports/Foreign trade China has gained more access to export markets through the long term restructuring of the Chinese economy. Reforms initiated by President Jiang Zemin and Prime Minister Zhu Rogji have tended to languish under political pressure and economic and cultural inertia. Another cause of increasing export is the wider opening of China’s industrial and agricultural sectors to Western style management and competitive discipline. The strategy that Chinese used was a currency devaluation to promote export growth. This would inevitably be followed by a new round of defensive devaluation throughout the region, accompanied by further capital outflows, deepening liquidity problems, a return to protectionism and delay in recovery.

(Roy 57) China’s cheap labour force has made it internationally competitive in many low cost, labour-intensive countries. As a result, manufactured products comprise an increasingly larger share of China’s trade. The share of Chinese manufactured exports to total exports rose from 50% in 1980 to 89% in 1998, while manufactured imports as a share of total imports rose from 65% to 84%. A large share of China’s manufactured imports is comprised of intermediates like chemicals, electronic components, and textile machinery that are used in manufacturing products in China. Major Chinese imports in 1998 included electrical machinery, textile products, specialised machinery, plastics, and telecommunications and recording equipment (see Table 8).

China’s major exports included articles of apparel and clothing, electrical machinery, textiles, office machines, and telecommunications and recording equipment (see Table 9). Table 8. Major Chinese Imports: 1998 Commodity Total ($Billions) % of Total Imports Electrical machinery, apparatus, appliances & parts, and household electrical appliances $16.5 11.8% Textile yarns, fabrics, and made-up articles 11.1 7.9 Specialized machinery for particular industries 8.3 5.9 Plastics in primary form 8.2 5.8 Telecommunications and sound recording and reproducing apparatus and equipment 7.9 6.6 Total top 5 52.0 37.0 Source: Official Chinese trade statistics Table 9. Major Chinese Exports: 1998 Commodity Total ($Billions) % of Total Exports Articles of apparel and clothing accessories $30.0 16.3% Electrical machinery, apparatus, appliances & parts, and household electrical appliances 13.9 7.6 Textile yarns, fabrics, and made-up articles 12.8 7.0 Office machines and data processing machines 11.9 6.5 Telecommunications and sound recording and reproducing apparatus and equipment 11.1 6.0 Total top 5 79.7 43.4 Source: Official Chinese trade data.

China has pursued a trade strategy of import substitution. This means Chinese only import the goods necessary to its economic development that cannot produce itself, and once it attains a domestic production capability, it stops importing those goods. This approach even carried over to China’s exports, which have consciously been used primarily as a means of generating foreign exchange for the purchase of advanced foreign technology. China’s imports fall mainly into one of two categories: raw materials (food, energy, lumber, wool and synthetic fibres, fertilizer, chemicals, steel, etc.) from the developing countries, and advanced technology (machinery, software, etc.) from the developed countries. Chinese exports, in keeping with China’s comparative advantage, are mostly relatively cheap labour-intensive manufactured goods, which are particularly attractive in lower-income countries. In other words, China generally “buys in the core and sells in the periphery”.

Thinking that higher-tech products earn higher profits on the capitalist world market, China is running trade surpluses with developing countries and trade deficits with developed countries. China’s foreign trade has grown exponentially since the opening to the world market. Exports comprised about 2% of China’s GDP in 1980; in 1996, they account for 10%. (Roy 89) Total trade between China and the United States rise from $4.8 billion in 1980 to $85.4 billion in 1998, making China the 4th largest U.S.

trading partner. China has become a major supplier to the U.S. market with its variety of low-cost U.S. consumer goods, such as toys and games, textiles and apparel, shoes, and consumer electronics. China has been a major buyer of U.S. aircraft, fertilizers, and machinery.

In recent years, U.S. imports from China have far exceeded U.S. exports to China. In 1998, U.S. imports from China totalled $71.2 billion while U.S.

exports to China were only $14.3 billion. As a result, the U.S. trade deficit with China has increased to nearly $57 billion in 1998. (China-U.S. Trade Issues). Foreign investment China has kept out all foreign investment until 1979, the heavy restrictions were loosened to allow all kinds of foreign investment in China.

This way, China can gain more access to foreign technology. Western investors began to rush into China in the 1970s but decreased in numbers in the early 1980s because they realised that China is still a difficult place for them to do business. Several reasons for this is that China has many regulations, corruption scandals and the assumptions that foreigners are wealthy and therefore should pay extra for everything. In the early 1990s, the Chinese government has reformed and clarified many laws concerning foreign investment to stimulate foreign investment in China. (Roy 90) In 1998, foreign capital investment in China has reached US$58.9 billion, with foreign direct investment (FDI) of US$45.6 billion. Within the countries that made direct investment in China, Hong Kong ranked first with 40.6% of China’s total foreign investment (see Table 10).

Table 10. Foreign Direct Investment Countires % in total Hong Kong 40.6 United States 8.6 Singapore 7.5 Japan 7.5 Source: China’s economic conditions. In the first quarter of 1999, FDI totalled to US$7.34 billion. In the first half of 1999, FDI reached US$18.6 billion.

As a result, FDI has brought new technology and more capitals into China. Conclusion Further Outlooks 1999-2002 is the switch period for China from its command economy to a market economy. Therefore the Chinese government develops macro economic policies reinforce things like reform, development and stability. The governments main objectives in this period are to maintain a low inflation economy and improve employment rate while the restructuring is under its way. The long term outlook for the Chinese economy remains mixed. China has been able to weather out the effects of the Asian financial crisis, although this has done at the cost of delaying economic reforms to the SOEs and banking system.

Continued support of money-losing SOEs draws resources away from more potentially productive enterprises, and thus undermines future growth. China’s commitment to join the WTO appears to represent a major commitment on the part of the Chinese government to significantly reform its economy and provide greater access to its markets. Some China observers believe that the Chinese government views accession to the WTO as an important, though painful, step to making Chinese firms more efficient and able to compete in world market (by exposing them to competition from abroad). In addition, the government hopes that liberalized trade rules will attract more foreign investment to China. Economists argue that over the long-run greater market openness in China would boost competition, improve productivity, and lower costs for consumers, as well as for firms using imported goods as inputs for production.

Economic resources would be more likely redirected away from money-losing activities towards more profitable ventures, especially those in China’s growing private sector. As a result, China would likely experience more rapid economic growth (than would occur under current economic policies). Goldman Sachs estimates that WTO membership would double China’s trade and foreign investment levels by the year 2005 and raise real GDP growth by an additional 0.5% per year. In the short run, however, widespread economic reforms (if implemented) could result in disruptions in certain industries, especially unprofitable SOEs, due to increased foreign competition.

As a result, many firms would likely go bankrupt and many workers could lose their jobs. How the government handles these disruptions will strongly determine the extent and pace of future reforms. The central government appears to be counting on trade liberalization to boost foreign investment and spur overall economic growth; this would enable laid-off workers to find new jobs in high growth sectors, especially in China’s growing private sector. However, the Chinese government is deeply concerned with maintaining social stability. If trade liberalization was followed by a severe economic slowdown, leading to widespread bankruptcies and layoffs, the central government might choose to delay (or even rescind) certain economic reforms rather than risk possible political upheaval.

The Chinese government has recently taken a number of steps in preparation for China’s WTO entry. For example, In January 2000, Zhen Peiyan, Chairman of China’s State Planning Commission, stated that the government would eliminate all restrictive regulations against private enterprises in China in preparation for China’s WTO accession. Currently, private firms in China face a variety of discriminatory government policies, including lack of access to borrowing from state banks, that have made it difficult for such firms to develop. China’s entry into the WTO will require the government to establish a level playing field for Chinese firms to compete against foreign firms.

This could greatly expand the role of the private sector in China’s economic development and accelerate China’s transition to a market-oriented economy. Economic Growth – China want to expand its domestic demand to promote its economy. For the next few years, domestic demand, that is, the consumption and investment will slightly increase. Researchers say that after the year 2000, the impact of the financial crisis will gradually reduce, whereas the international environment will gradually improve.

Chinas economic growth rate is expected to be about 7% and its CPI to be around 3% in this period. Investment – Foreign and local investments in fixed assets will continue to be the main driving force in Chinas economic growth. Due to the changes in policies, it is known that investment in the state sector will increase, as well as the investment in the non-state sector will also speed up gradually. The estimated average increase in the investment in fixed assets will be 12% or so in 1999-2002. The Chinese government has also pursued policies to improve the amount of foreign investment.

Foreign Direct Investment is expected to rise after 2000. Employment – In the period between 1999 and 2002, the working population will be over 11 million and 85% of them will enter the labour market. As the reform of the state-owned enterprises continues and the economic restructuring speeds up, it is estimated that the registered unemployment rate will be 3.5%. China is speeding up the development of its economy to create more employment outlets and to deepen labour market reforms. The government is also thinking of building of a social security system that will improve the standards of living among people in the future.

(Roy 57) Table 11 China: Overall Economic Performance 1992 1993 1994 1995 1996 1997 1998 GDP and Major Components (% change from previous year, excepted as noted) Nominal GDP (billion US$) 483.00 601.10 540.90 697.60 816.90 903.00 960.90 Real GDP 14.20 13.50 12.60 10.50 9.60 8.80 7.80 Total Consumption 14.20 9.30 8.00 9.20 9.30 6.10 6.80 Private Consumption 14.30 9.40 7.70 10.10 9.60 5.80 6.10 Government Consumption 13.60 9.10 9.10 5.90 8.40 7.20 8.90 Total Investment (1) 12.90 24.90 15.60 15.50 10.40 7.10 14.40 Private Investment Government Investment Exports of Goods and Services (2) 18.20 8.00 31.90 22.90 1.50 20.90 0.50 Imports of Goods and Services (3) 26.30 29.00 11.20 14.20 5.10 2.50 -1.50 Fiscal and External Balances (% of GDP) Budget Balance -0.97 -0.85 -1.23 -1.00 -0.78 -0.78 -1.50 Merchandise Trade Balance (f.o.b.) 0.87 -2.03 0.99 2.41 1.51 4.46 5.48 Current Account Balance 1.33 -1.98 1.42 0.23 0.89 3.29 3.03 Capital Account balance -0.05 3.91 4.68 4.74 4.89 2.54 0.00 Economic Indicators (% change from previous year, except as noted) GDP Deflator 7.90 14.60 19.50 13.10 6.10 1.50 -1.30 CPI 6.40 14.70 24.10 17.10 8.30 2.80 -0.80 M2 31.30 32.40 34.50 29.50 25.30 19.58 15.30 Short-term Interest rate (%) 8.10 8.80 9.00 9.00 9.72 7.65 6.34 Exchange Rate (Local Currency/US$) (4) 5.50 5.76 8.62 8.35 8.31 8.28 8.28 Unemployment Rate (%) 2.30 2.60 2.80 2.90 3.00 3.10 3.10 Population (millions) 1172.0 1185.0 1199.0 1211.0 1224.0 1236.0 1248.1 Source: APEC Members Economy Report.

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