China_Economics

CHINA * China's economy "weathered" the global downturn better than most economies. In fact, the country’s Gross Domestic Product expanded by an average 8.45% in 2009, the fastest in the world. Yet, the astonishing recovery was supported by a vast fiscal stimulus and loose monetary policy. And looking ahead, China’s economy may overheat and bring inflation to elevated levels thus hampering future growth. Indeed, China’s growth in 2009 was largely a result of 4 trillion yuan stimulus package directed mostly to infrastructure projects and lending. For example, in December only, China's wide M2 measure of money supply and fixed asset investments grew almost 30% year on year. On the other hand, although putting a lot of cash into an economy during a slowdown may stop job losses, boost confidence and stimulate growth, can also create excess capacity and boost imperfection across the financial system. In addition, China has been keeping the value of its currency yuan pegged to the US dollar at very low levels.  And with greenback having depreciated significantly in 2009, the trade-weighted value of Yuan also declined, making foreign goods more costly in China. Adding to that already high food prices, a result of severe weather conditions in northern regions, and inflation may get out of control. So, under these circumstances there is a big pressure on wage growth and companies are likely to raise prices to cover costs which will depress spending among Chinese consumers. * Surging China recently overtook Germany to become the world’s leading exporter and will soon eclipse Japan as the second-largest economy in the world. Although China has received a great deal of praise for its response to the financial crisis and the country’s economic rise contributes to its global power, there are fears that bubbles and growing economic imbalances could constrain future growth. What it did was it took China from having the highest investment rate—probably in recorded history—and significantly increased it. It increased the importance of investment in China and it increased the probability that a lot of this investment wasn’t economically viable. What didn’t go into infrastructure investment went into expanding capacity in a world that doesn’t really need more capacity, it needs less capacity. So it went into expanding shipbuilding, steel production, chemicals, etc. So from that point of view it hasn’t been very successful. Especially if you consider that there may be a significant increase in non-performing loans and in non-economically viable investment which must be paid for in the future by the household sector, probably in the form of very low interest rates, which means that it will act as a constraint on future household income growth and therefore a constraint on future consumption growth. In a way, part of the expansion is going to push up production and part of it is going to constrain the growth of consumption. And China already produces more than they consume. So pushing them in the opposite directions is not going to help. But, if you think the purpose of the fiscal and credit expansion was to address a short-term problem of a surge in unemployment in China, then it has been extremely successful. With the collapse in net exports, we should have seen the economy grind to halt and unemployment soar. The purpose of the fiscal stimulus program was to address specifically that problem. Unfortunately, you have a conflict between the short-term policy objectives and the long-term policy objectives. The government, perhaps properly, addressed the short-term policy objectives. But that doesn’t mean that it resolved the long-term rebalancing problem—it probably made it worse, and China is going to have to rebalance one way or the other. 
How can China rebalance its economy' In the case of China, rebalancing has a very special meaning. It means that consumption must grow as a share of GDP. To give you an idea, five or six years ago private consumption was around 40 percent of GDP—that is an extraordinarily low number. Among Asian countries that have traditionally had high savings and low consumption rates, Malaysia had private consumption in the low fifties, and at one point after the crisis it declined to around 45 percent of GDP before climbing back to up around 51, 52 percent. That 45 percent was an anomaly. China, five or six years ago, was at 40 percent. You need to bear in mind that the larger the country, the less likely it is to be an outlier. 45 percent for China would have been worse than 45 percent for Malaysia. 40 percent for China was much, much lower. The government at the time decided that it was very important to raise consumption as a share of GDP. But, because I believe they had the wrong model for thinking about it, what happened over the next five years was that consumption as share of GDP actually declined from 40 to 35 percent. It’s not easy to do. What does China need to do it' My model, my way of thinking about it, suggests that consumption is a very low share because household income has been growing more slowly than national income—than total production which is equal to national income—and the reason for that is national income has been subsidized via low interest rates, via an undervalued currency, via sluggish wage growth, and to a lesser extent by the deterioration in the social safety net, environmental degradation, and one or two other things. But the first three are the most important. All of those subsidies have to be paid for by somebody and they are paid for directly or indirectly by the household sector. That’s what has kept production growing faster than household income, which has meant production has grown faster than consumption. China needs to eliminate those transfers or better yet reverse the transfers. To do that means undermining the profitability of infrastructure investments and large companies in China—and undermining them to such an extent that they may be running fairly significant losses. It cannot be done quickly. 
Can China reduce its trade surplus' In order for China to reduce its trade surplus, it’s not that consumption needs to grow—everyone says that we need Chinese consumption to grow—Chinese consumption has been growing very quickly. In the past decade it’s grown around eight or nine percent a year which is a much faster growth rate than in any other major economy. But that’s not enough. The problem is that Chinese production is growing faster than Chinese consumption and so the gap between the two is increasing. Why is it growing faster' I would argue that the reason it is growing faster is because Chinese consumption growth is more or less in line with the growth in Chinese household income. So that national income—that is the total amount of stuff that China produces—is growing faster than household income. And the reason for that is that the development model that China has followed—the very successful Asian Development model—one of it’s key components is that the household sector via low interest rates on their bank deposits, via an undervalued currency, and via a number of other mechanisms are effectively forced to subsidize producers. The simplest way to think about it is through interest rates. With interest rates so low on banking deposits, that means basically savers are getting a portion of their income taxed away. Those low banking deposits translate into very low lending rates—lending rates that are well below any definition of what the natural borrowing costs should be in China. So users of capital—which are mostly infrastructure investment and manufacturers—are getting very cheap capital and that cheap capital is being subsidized by the household sector. So unless China reverses this process of subsidy, it’s extremely difficult to get household incomes to grow much more quickly and therefore consumption to grow much more quickly.  And that’s the problem that we face, because if you do eliminate the subsidy—and even reverse the subsidy—the manufacturing sector—which is very heavily dependent on these subsidies—becomes unprofitable. So, we can’t do it quickly because if we do it quickly we’ll see a rise in unemployment in China. We have to do it slowly over six, seven, eight years. It won’t be easy but if it’s stretched out over many years it can be done. The problem is if the trade deficit countries want a very quick resolution then China is in a very difficult position because they cannot resolve it quickly.
  What are China's prospects for short-term and long-term economic growth' We will probably see very good growth again this year. You can get any level of growth you want if you put in a significantly high investment. If the United States wanted to, it could achieve six percent growth next year. The United States wouldn’t do that because it would involve a huge increase in debt and the growth itself would be inefficient. That increase in debt, since it must be repaid at some point in the future, will end up representing a contraction in the ability of U.S. households to consume. Whatever growth it gets today, it would give back more than 100 percent of it in the future, unless the investment is all appropriate and economically viable. In the case of China, we are probably going to get another good year of growth. People talk about a significant contraction in the amount of lending—it’s not a contraction in the amount of lending. The typical amount of annual lending for the last five or six years has been between three and four trillion renminbi. Last year, it was above 10 trillion renminbi, an extraordinary number. This year the target is 7.5 trillion, which many people are hailing as a significant tightening of policy—it’s not a tightening of policy. It’s a very, very loose policy, but much less loose than what it was last year which was extraordinarily loose. So the question is, how many years can they keep doing this' And that I would argue is really a function of debt capacity. Unfortunately, we don’t really know the true debt levels of the government, it’s something that we are all working on trying to understand. If government debt levels are sufficiently low that means we could do several years of this in the hopes that eventually the global economy recovers and China can once again use net exports as a way of absorbing all this capacity. We’re not sure that is likely to happen. We’re not sure that the global economy will recover and, more importantly, that U.S. consumption will begin growing much faster than U.S. production. And we don’t know what the debt capacity is—how many more years we have of this. In 2009 China's GDP growth rate, though lower than the double-digit average of recent years, has held up well, rising from 6.1% year-on-year in the first quarter to 7.7% in the first three quarters of the year. This means that year-on-year GDP growth was around 9% in the second quarter. A similar rate of growth (9%) is expected in the final quarter, ensuring a rate of over 8% for 2009 as a whole. Following the upward revision of 2008 GDP growth at the end of 2009, there is now a strong expectation that the first three quarters GDP statistics will also be revised upwards, possibly by more than the 2008 figures, so that growth may turn out to have been even higher. GDP | 21,781.7 | 7.7 | Primary  | 2,250.0 | 4.0 | Secondary | 10,647.7 | 7.5 | Tertiary | 8,884.0 | 8.8 | This is an astonishing performance considering that China's major export markets have dried up. Why has it happened' Mainly because of the stimulus package and the accompanying rise in short-term credit (China, unlike the rest of the world, has not experienced a credit crunch). However, there are now serious fears that this robust growth may not be sustainable. As short-term credits fall due, they will have to be refinanced, and much of this refinancing may have to be done by taking out longer-term loans, raising the banks' non-performing loan ratios and threatening the long-term stability of the financial system. Infrastructure projects brought forward in the plan period will be completed early, leaving a gap while new ones are planned. And the US consumer is unlikely to come to the rescue of the Chinese economy when it slows further. Country | Interest Rate | Growth Rate | Inflation Rate | Jobless Rate | Current Account | Exchange Rate | China | 5.31% | 10.70% | 1.50% | 4.30% | 134460 | 6.8333 | Year | Mar | Jun | Sep | Dec | Average | 2009 | 6.20 | 7.90 | 9.10 | 10.70 | 8.48 | 2008 | 10.60 | 10.10 | 9.00 | 6.80 | 9.13 | GDP | $8.8 trillion (PPP; ranked 2nd; 2009)$4.9 trillion (nominal; ranked 3rd; 2009) | GDP growth | 8.7% (2009) | GDP per capita | $6,500 (PPP; ranked 100th; 2009)$3,742 (nominal; ranked 104th; 2009) | GDP by sector | agriculture (primary) (10.6%)industry (secondary) (46.8%)services (tertiary) (42.6%)note: industry includes construction (5.5%) | GDP by component | Private consumption (36.4%)Government consumption (13.7%)Gross fixed investment (40.9%)Exports of goods/services (39.7%)Imports of goods/services (-31.9%) | Inflation (CPI) | -0.7% (2009)[1] | Populationbelow poverty line | 10% (2004) | Gini index | 46.9 (List of countries) | Labour force | 812.7 million (2009; ranked 1st) | Labour forceby occupation | agriculture (43%), industry (25%), services (32%) (2006) | Unemployment | 4.3% (official);[2] | Main industries | mining and ore processing, iron, steel, aluminum, and other metals, coal; machine building; armaments; textiles and apparel; petroleum; cement; chemicals; fertilizers; consumer products, including footwear, toys, and electronics; food processing; transportation equipment, including automobiles, rail cars and locomotives, ships, and aircraft; telecommunications equipment, commercial space launch vehicles, satellites | Reason’s for unemployment in China The word unemployment got importance from the great depression days in US. There after all the governments started giving importance to the unemployment rates. If the people are unemployed, there is bound to be social unrest. The governments do not want the social unrest. It is natural that they try to find some solution to this problem of unemployment. In this short article let us try to find out some of the causes of unemployment in china. The main cause of unemployment in China is pretty obvious to everybody. The ever increasing population is the first and most important causes behind the unemployment in china. This country has largest population in the world. The work force available is too large. Every year new generation is added to the already available work force. This is a battle of numbers. It is really very difficult for any government to find jobs for millions of young people entering in the job market. In 2004 the estimation was that fifteen million young people will enter the job market and only about eight million jobs were expected to be created in that year. It was assumed that the growth rate will be around seven percent at that time. It was obvious that eight million people were going to remain unemployed in spite of impressive growth rate of the economy. There is another major reason behind the unemployment. The types of the jobs offered. There is lack of jobs for the graduates and literate young people. In India for example the IT industry was a major driving force for the faster growth and providing lots many employment opportunities. The IT, BPO industry created history of providing lot many jobs for the young generation. There was trickling effect of the growth of these industries. The new middle class was created by these IT and BPO industries. There was an unprecedented demand for the goods and services by this new middle class. This created a fast growing economy and market. All this created lot many more income opportunities. All this could have happened in China also. But it did not happen in China at all. Why' The reason is very simple. The Indians had a large pool of young people proficient in English language. The Chinese never had any English peaking work force. This was the major cause of their set back in these industries. If the Chinese had good English speaking work force their unemployment rate would have gone down dramatically. I feel that the ever increasing population and lack of the English speaking work force are the two major causes of unemployment in china. In conjunction with its huge population, China's soaring economy, with the energy and resources it consumes and the pollution it produces, is causing unprecedented environmental strain. Because Chinese industry is relatively energy-inefficient and high-polluting, the stress is all the greater. In many ways, the Chinese experiment in free market economics has been an enormous success, compressing into a few decades growth comparable to what many countries took centuries to achieve. As Flavin and Gardner explain, "since embarking on economic reforms two decades ago, China's economy has averaged a remarkable 9.5 percent growth rate, doubling in the last decade alone" (3). | | DC coreless motor production in China | | Such rapid growth, however, generates a ravenous demand for new energy and materials, particularly when not connected to more efficient resource use: "As China becomes wealthier and more populous, demand for energy-using products and services, including appliances, space heating and cooling, personal and freight transportation, and all the intermediate industrial products needed to produce them, will continue to grow. This presents a fundamental challenge, since, without changes in energy efficiency and energy supply structure, economic growth will drive up energy demand and consequently pollution" (Zhu, 28). Indeed, China has followed a traditional path of resource-intensive growth, dependent on heavy industry and negligent regarding social and environmental aspects. With its huge population and rapid growth, this has led to tremendous environmental disruption, so that, "over the past 20 years China's economic explosion has created an ecological implosion. Environmental degradation is costing the country nearly 9 percent of its annual gross domestic product (GDP)" (Turner & Zhi 153). Environmental costs, that is, turn into economic costs, as an unhealthy society cannot work as efficiently as a healthy one, a problem which China has just begun to face seriously. Income Distribution •The income of top 20% people is eighteen times of that of the lowest 20% people. (Chinese Academy of Social Science) Health Care A decade ago, Chinese macro-health policy shifted its health care financing and delivery toward a free market system. It encouraged all levels of health facilities to rely on user fees to support their operations. However, China continued its administered prices and hospitals continued to be operated by the government. These financing, pricing and organizational policies were not coordinated. The author found these uncoordinated policies created serious dissonance in the system. Irrational prices distorted medical practices which resulted in overuse of drugs and high technology tests. Market-based financing created more unequal access to health care between the rich and poor. Public control of hospitals and poor management caused inefficiency, waste and poor quality of care. The disarray of the Chinese health system, however, had not caused a measurable decline in health status of the Chinese people. One explanation was that the government had maintained its level of funding (per capita) for public health and prevention. Another possible explanation was that rapid rising income in China had improved nutrition, clean water and education which offset any adverse impacts of poorer medical services to the low-income populations. Nonetheless, the Chinese experience showed that its increasing expenditure per person for health care through user fees and insurance had not produced commensurate improvement in health status. China'a experience holds several lessons for less developed nations. First, there is a close linkage between financing, price and organization of health care. China is undertaking a reform on its health care system. The New Rural Co-operative Medical Care System (NRCMCS) is a new 2005 initiative to overhaul the healthcare system, particularly intended to make it more affordable for the rural poor. Under the NRCMCS, the annual cost of medical cover is 50 yuan (US$7) per person. Of that, 20 yuan is paid in by the central government, 20 yuan by the provincial government and a contribution of 10 yuan is made by the patient. As of September 2007, around 80% of the whole rural population of China had signed up (about 685 million people). The system is tiered, depending on the location. If patients go to a small hospital or clinic in their local town, the scheme will cover from 70-80% of their bill. If they go to a county one, the percentage of the cost being covered falls to about 60%. And if they need specialist help in a large modern city hospital, they have to bear most of the cost themselves, the scheme would cover about 30% of the bill.[2] Education Is a state-run system of public education run by the Ministry of Education. All citizens must attend school for at least nine years. The government provides primary education for six years, starting at age six or seven, followed by six years of secondary education for ages 12 to 18. Some provinces may have five years of primary school but four years for middle school. There are three years of middle school and three years of high school. The Ministry of Education reported a 99 percent attendance rate for primary school and an 80 percent rate for both primary and middle schools.[citation needed] In 1985, the government abolished tax-funded higher education, requiring university applicants to compete for scholarships based on academic ability. In the early 1980s the government allowed the establishment of the first private schools. The population has had on average only 6.2 years of schooling, but in 1986 the government set the goal of nine years of compulsory education for students by the year 2000.