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CHINA – UPHILL OR DOWNHILL

China, Uphill or Downhill

China, officially the People’s Republic of China, is a Communist nation in East Asia. It is the world’s most populous country, with a population of 1.357 billion (2013) followed by India, with a population of 1.252 billion and then the USA with a figure of 316.5 million. In fact, China’s population is equivalent to 19.24 % of the total world’s population. The population density in China is 145 people per km2. China is world’s second – largest country in terms of land area, covering approximately 9.6 million square kilometers. The landscape of China is very vast and diverse, encompassing grassland, desert, mountain ranges, lakes, rivers and 14,500 km of coastline. The Yangtze and Yellow Rivers, the third and sixth – largest in the world, runs from the Tibetan Plateau to densely populated eastern seaboard.

China has been the largest and the most complex economy in the world for the past 2000 years, during which it has seen both cycles of prosperity as well as decline. But with the introduction of economic reforms in 1978, China has become one of the fastest growing economies in the world, with growth rates averaging 10 % over past 30 years. As indicated by the data of 2014, China is world’s second – largest economy by Nominal Total GDP, amounting to  the US $10.380 trillion, according to International Monetary Fund (IMF). China’s economy is largest if we take into account Purchasing Power Parity, which is US $17.617 trillion. It is also the world’s largest exporter and second – largest importer of goods.

China is a recognized Nuclear Weapons State and has the world’s largest standing army, with the second – largest Defense Budget in the world. China has been a member of United Nations (UN) since 1971. China is also a member of several formal and informal multilateral organizations, including WTO, APEC, BRICS, the BCIM and the G-20.

China is a Great Power and a major Regional Power within Asia. China has also been characterized as a Potential Superpower.

Giving all the facts and figures about China, it’s now time to think what made China become Superpower ? Is China actually heading towards growth ? In the current scenario, why the rate of economic growth has slowed down in China ???

To answer all our questions, let us have an in-depth look into the economy of China.

We all know that China is a Global Manufacturing Hub and is the largest manufacturing economy in the world as well as the largest exporter of goods in the world. It is world’s fastest growing consumer market and second – largest importer of goods. China is the largest trading nation in the world and thus plays a vital role in international trade. It has increasingly engaged in trade organizations and treaties in recent years. It became the member of WTO in 2001. It has entered into Free Trade Agreements (FTAs) with several nations, including China – Australia FTA, China – South Korea FTA and ASEAN – China FTA.

One of the most important reasons for China’s growth is its opening to the world. In other words, China’s open economy has made it possible for them to be world’s fastest growing economy. Today everyone is talking about the fruits of China’s reform and opening – up policies. But have you thought what was China’s economy like before reforms were introduced in 1978 ?

Initially Chinese Economy was a Planned Economy. The first five – year plan in 1953 targeted at Industrial Development. When it was completed in 1957, the overall economic strength of the country greatly increased. All this was the result of Deng Xiaoping decision to adopt the reforms and opening – up policy. By 1978, the emphasis shifted to modernization and economic and political reforms. From then on, the road to modernization has begun. A step – by – step opening – up policy was introduced concurrently.

From 1980, Special Economic Zones (SEZs) were commissioned. Special economic policies and management mechanisms were adopted in these zones. SEZs have acquired much experience for China’s engagement in the international market in respect of foreign investment and outward trade, etc… By 1999, the hi – tech industry became the best asset for Shenzhen SEZ with an output of 81.98 billion yuan, representing 40.5 % of the city’s total industrial output and the forefront in China. In 1984, China opened – up an additional 14 coastal cities. A massive coastal economic open belt was brought into being.

As it is, China succeeds in opening itself up to the world in all directions, multi – layered and in a massive scale covering the coast, the rivers and frontier and inland regions. Thus, Deng Xiaoping has played an important role in opening – up of the Chinese Economy and has contributed greatly. He also remarked, “if we don’t go for reform and opening – up, we will be left to die.” This one initiative by Deng Xiaoping did its part in making China and therefore, world’s fastest growing economies.

The second main reason for China’s growing economy was it’s sudden industrial growth. It was the result of setting – up of SEZ with special economic policies and coastal economic open belt. China became a Hub of Manufacturing in no time. It was a time when each and everything from small to big used to come from china. It was a “Made in China” time, which was prevailing in the world.

In 1990’s Chinese leading exports were footwears and apparels. These products were produced largely from materials and textiles produced within China. More recently, the leading category of Chinese exports is ‘Computer Equipment.’ These exports are assembled using imported components. The ‘Domestic Content’ of exported computers is about 20 % (much lower than for exported apparel which is about 80 %). This shift to low domestic content exports resulted in a more rapid growth in imports and exports than in GDP. A sudden increase in industrial growth and rapid growth in imports and exports further led to an ever – growing Chinese Economy.

Ever wondered what was the reason behind the recent Chinese Stock Market Crisis ? Was it just a slowdown in the Chinese Economy or there’s something more to it ? To answer this, let’s have a look at what is currently happening in the Chinese Stock Market.

Stock markets in China are tumbling. A 3 – week plunge has knocked about 30 % off Chinese shares since mid – June. China’s securities regulator has warned of ‘Panic Sentiment’ gripping investors, many of whom are individuals that have borrowed heavily to play the stock markets. Hundreds of Chinese companies have suspended dealings in their shares in a bid to arrest a frenzy of selling. The authorities have stepped in with various measures, including surprise interest rate cut. But so far, the moves by officials have only served to heighten alarm.

Looking back at recent trends, China’s stock market had been the highest performing in the world and had even hit a seven – year peak in the middle of June. The Shanghai stock market surged more than 150 % in 12 months. This increase has been due to loosening monetary policy by the central bank. Investors have been piling in, encouraged by falling borrowing costs.

The trigger in China’s case is perplexing. Yes, the stock market is down one – third over the past month, but that has simply taken it back to March levels, it is still up 80 % over the last year. Growth, though slowing, has stabilized recently. Other assets markets are performing well. The property, long in the doldrums, is turning up. Money market rates are low and steady, suggesting calm in the banking sector. The anticipated correction of over – valued stocks hardly seems cause for much anguish. Due to speculation, the dramatic rise in China’s stock market was driven by momentum rather than fundamentals. Stocks were over – valued at a time when the Chinese economy was losing steam. As fear grew that the rise in many stocks was unsustainable, the selling started. All this ultimately leading to the  crisis.

The deeper problem is that China’s export – based model has stopped working. China’s stunning economic rise has been fueled by low – cost exports. But as its economy has grown, the export model has begun to crack apart. It has outgrown the export-led growth model that led it to rely on external demand and high internal investment. So now it needs to shift to a model that is more balanced between investment and consumption. The turmoil in Chinese stock market will spill into China’s real economy, the second – largest in the world and a huge engine of global growth.

COMPARING INDIAN ECONOMY WITH CHINESE ECONOMY

According to IMF director, Christine Lagarde, “India could outpace China as the world’s fastest growing economy as soon as this year.” Late last year, IMF had predicted that India’s economy would grow by 6.5 % in 2016, faster than China’s predicted 6.3 %. Since then, estimates for Indian GDP have been revised. As per IMF, India’s economy is expected to grow 7.5 % in the upcoming 2015 – 2016 fiscal year, which begins in April, up from 7.2 % in the current fiscal year. And if this happens and India reaches that rate, then India would be the world’s fastest-growing large economy.

However, even with the faster pace of growth, India doesn’t come close to China in terms of raw economic power. If we take figures given by IMF, THEN China’s economic output totaled more than $10 trillion in 2014, compared with India’s roughly $2 trillion. Still, the IMF director has described India as a ‘Bright Spot’ in the outlook for global economic growth.

The current Chinese Economic Crisis is an opportunity for India to overtake China. Also, this crisis would have a tremendous impact on the Chinese ambition to emerge as a global superpower and develop Yuan as a viable international currency challenging the monopoly of the US Dollar.

A former Indian Union Cabinet Minister Subramanian Swamy has predicted that the Chinese Economy would collapse by 2020 and as we can see, this is happening 5 years earlier.

CONCLUSION

Financial Crisis happen when markets have to re-evaluate an important investment premise all at once. In 2007, for instance, markets were forced to abandon the idea that sub-prime loans were low – risk. In 2010, they were forced to abandon the idea that loans made to eurozone members like Greece were safe.The biggest danger here is that a series of bad decisions by the Communist Party will force the world to re-evaluate a truly critical investment premise : that China’s government knows what it’s doing.

People are seeing now that the Chinese economy might now be too large and too complex for the government to be in control of it, and that would lead to a fundamental reassessment of the risk for China.”

Chinese stock market isn’t that big and because of regulations sharply limiting foreign investment, it isn’t that integrated into the world economy. So the consequences of a stock market crash aren’t that severe. But China is huge and fully integrated into the world economy. The consequences of political unrest in China, or a true crisis in its economy, could be very real, not least of all for the Chinese people.

Therefore, it is dangerous for the world to lose faith in China’s government as it plays an important role in international trade. Being the world’s fastest growing economy, China has the potential to affect the world and lead to another global crisis. As truly quoted by RBI Governor, Raghuram Rajan, “The world should be prepared for another global crisis and should act accordingly.”

MWB
MWB