Role of Central Bank and Government in Chinas Economic Growth - Example

Student’s Name Professor’s Name Course Name Date Role of Central Bank and Government in China’s Economic Growth Introduction For a significant number of years, the Chinese economy has been experiencing a favorable level of growth in regards to foreign investments. This is despite the fact that other economies across the globe have continued to face slowdowns in their economies’ growth levels. This has been attributed to the efficient roles played by the Chinese government and its central bank. Currently, the economy enjoys a consumer base of about 1.3 billion people and also, it is perceived as being the haven of product manufacturing given its already existing cheap labor supply (International Monetary Fund 20-37). While the rest of the global economies are still struggling to post growth, Chinese economy continues to post tremendous growth rates that is approximated at about 10 per cent annually. The economy poses a great level of influence of the success of huge global projects including the hydroelectric projects and also, infrastructural based investments like the 5,000 meters above sea level railway to Tibet (International Monetary Fund 37). Since 1979, the Chinese communist government has been focusing its efforts on catapulting the level of Chinese economy from one that is centrally planned towards a new growth direction, which is merely based on a socialist-market economy. Significantly, the Chinese government helped to steer the country’s growth by way of establishing a four special economic zones as a model of opening up its economy (Lavoie & Wang 289-294). For instance, in an effort to propel the Chinese export activities, capital formation and technological advancements were some of the strategies implemented to aid with attracting foreign investments into the economy. The central government of China is steered to promote economy growth through investment projects aimed at alleviating the economy’s present sluggish trend. Recently, through the National Development and Reform Commission (NDRC), the government allowed iron and steel projects worth about $11.08 billion to be undertaken in Zhanjiang in Guangdong Province. However, the overall success of the economy has not been without significant challenges (Lavoie & Wang 296-299). For instance, within the last two economic years, the economy has not been posting the 8.1 per cent GDP growth rate; a condition that is likely to slow future growth in case it is not fairly alleviated. The government has continued to approve nationwide projects for purposes of stabilizing the economic growth. The Chinese economy also continues to grow amid the impeding challenges due to the fundamental roles that are played by its central bank formed in the late 1940’s under the name The People’s Bank of China (Lavoie & Wang 288). Its roles were significantly improved in the early 2000’s to steer the economy to higher heights. The bank’s role has widened in the last two years to include supervision and sustenance of normal economy operations in relation to both payment and settlement systems, regulation of the underlying financial markets in regards to foreign exchange markets, holding and managing foreign reserves as well as maintaining the external value for its currency at a formidable and proper level (Lavoie & Wang 288). The fundamental goal of the monetary policy, as formulated and implemented by the central bank, rests with the maintenance of a stable Renminbi and thus, allows tremendous economic growth. In consequence, it can be ascertained that the Chinese economy has experienced tremendous growth due to the fact that the central bank was able to maintain a significant fixed exchange rate (International Monetary Fund 38). In addition to the numerous approval of project investments allowed and sustained by the Chinese government, both central bank and the central government have adopted other ways of encouraging the growth of the economy by such ways as promoting consumption and relaxing monetary policies in order to stimulate current sluggish economic trend (Lan 10-13). In a joint decision that was made by the country’s ministry of finance, the NDRC and the ministry of industry and information technology granted a consumption subsidy to all households purchasing energy saving air conditioners, LED television sets and also, washing machines. The value of the subsidies, which was to be effective from June of 2012 to May 2013, ranged from about $28 and $63 per unit of item purchased. Notably, a newer form of auto subsidies is being formulated to allow potential Chinese purchasers of cars with engine capacities of 1.6 liters to enjoy a fixed subsidy of about $474.68 (Lan 12). This is being undertaken in conformity to the 2009 and 2010 government project that allowed a subsidy of about $788.89 million to rural dwellers in order to purchase vehicles and as a result it helped catapult the level of vehicle sales to higher heights. In 2012, the central bank announced that it was going to cut down the present interest rate benchmark by about 0.25 per cent points (Lan 12-13). The fundamental objective of the aforementioned cut being the increase of currency supply and also, the development of a perfect financing environment for future investments into the economy. It is important to note that although the Chinese economy has continued to experience support from both it government and central bank, there have been numerous challenges that have proven to be a significant barricade for its future success (Lan 10-13). For instance, for the past two years or so, the economy has continued to face impediments in such areas as real estate areas where investment rates are perceived as having dropped significantly due to stringent control policies as well as a relatively slowdown in regards to real estate sales due to limited sources of development borrowings. Subsequently, manufacturing investments within the economy are slowing down and there is completely nothing the government and central bank would do about it (Lan 10-13). The decline in this sector is attributed to the weakening of the international economies as well as a relatively lower corporate profitability level. Other notable impediments to economy growth are weakened exports due to slowed external demands from China’s external demand partners like Japan (Wen 233-267). Macroeconomic Policies Used by Chinese Government and Central Bank It is important to ascertain that the rapid Chinese economy growth in the decade has been brought about by the recent broadened economic reforms. While it is safe to postulate that significant reforms have been affected within the supply side of the economy, both the Chinese government and the central bank have adopted macro-policies in order to manage such impediments as inflation and financial risks (Sadeghian, White and D’Arcy 12-13). In China, macroeconomic policies are administered in a distinctive and different manner in comparison to the developed economies. These policies are formulated and implemented in a more cohesive approach given that these two bodies utilize a significant level of monetary, fiscal and regulatory policies instruments to attain economic growth. The Chinese national economic policies are established and executed by the state council that formulates a five-year operational plan that involves the government’s wide range economic agendas (Sadeghian, White and D’Arcy 13). Notably, the state council also, within the aforementioned five-year plan, is accredited with the formulation of macroeconomic outcomes. National targets that relate to inflation and growth in the money supply and in the GDP are ascertained within the National People’s Congress; the targets being 3.5,13 and 7.5 per cents respectively. It is important to realize that in China, there are numerous institutions that are accredited with the implementation of macroeconomic policies (Sadeghian, White and D’Arcy 13-20). For instance, the exchange rate policy is formulated and implemented by the People’s Bank of China as well as the State Administration of Foreign Exchange. In relation to employment growth, the Chinese economy has perceived a significant decrease of about 3.25 per cent in the years beginning 2012 to present (Sadeghian, White and D’Arcy 19). Both the government and the People’s Bank of China have increased their commitment levels within the last two years to meet the growth and inflation targets that were set by the state councils. This has been achieved by way of adopting a robust control of the exchange rate as well as influences affected over the domestic money supplies as well as credit growth within the economy. The movement from a fixed to a flexible and sustained float exchange rate within the regime ending 2005, the PBC has currently allowed the RMB to relatively appreciate in value significantly except for the 2008 mid period. The mid period resulted to a pause in the growth of the currency due to the global financial crises that affected the entire global economies that resulted to a decrease in Chinese based exports (Sadeghian, White and D’Arcy 18-19). Within the last two years, the PBC in conjunction with the central government have encouraged the utilization of tight capital controls as a way of sterilizing the effect of balance of payment flows in relation to the domestic money supply. With the immediate economic growth recovery in the years following the 2008 and 2009 global financial crisis, the Chinese budget deficit was contracted to a number of 1.1 per cent within 2011(Sadeghian, White and D’Arcy 18-19). Within the last two years or so, the economic growth has been slowed while the economy’s fiscal policies have expanded significantly in 2012 while the central government approximations of a further expansion in 2013 being realized. It is evidently clear that the moderate expansionary of the fiscal policies of the economy have been portrayed by the immediate pick-up of the numerous developments made in regards to infrastructure development and promotion of agricultural based sector (Sadeghian, White and D’Arcy 19). The monetary policies were, in the course of these period, eased substantially depicting the People’s Bank of China’s evaluation that the policies needed to be maintained at a prudent level in order to offset the lingering effects of the global financial crisis in relation to asset quality within the banking sector (Sadeghian, White and D’Arcy 19). Notwithstanding, within the global financial crisis period, the level of borrowings increased substantially putting pressure on the quality of assets within the banking sector. However, immediately after the crisis, the National Audit Office highlighted the immediate size of government debt as the PBC assumed the task of monitoring and implementing necessary controls on lending to numerous commercialized banking institutions. Consequently, the property market is perceived as the most notable driver of the Chinese economy given that property investment cycles contribute largely to numerous fluctuations in demand (Reserve Bank of Australia 14-16). This sector is significant for purposes of allowing household savings since China’s financial markets are underdeveloped to offer a wide range of options in investment opportunities; an aspect that is significantly availed within developed global economies. The inflation of housing prices within the crisis period resulted to the overheating within the property markets and also, affecting the general economy as a whole. However; with the introduction of controls by the central government and PBC resulted to curbing of speculative and investor demands. This led to easement of the sector in 2010 as whole as price inflation declined retrospectively till mid 2012 period (Reserve Bank of Australia 14-16). On the contrary, despite the fact that property controls were set in place, the level of price inflation started to increase again in the period between mid 2012 to present. This has resulted to the announcement of additional property markets by the PBC and central government, as well as renewed commitments to ensure past controls are implemented (Reserve Bank of Australia 14-16). In conclusion, it can be seen that the Chinese government and PBC have continued to adopt both macro and micro-economic policies to bring about success in the last two years. Despite the challenges attributed to a slower economic growth and significant price inflations, the Chinese agencies have opted to put in measures to curtail any possible impediments like decreased external demands leading poor exports. Both of these institutions have been greatly involved in matters related to monetary and fiscal policies in order to ensure that the economic growth of the country continues to grow in comparison to the developed ones. Works Cited IMF (International Monetary Fund), Country Chapter: People’s Republic of China, in Annual Report on Exchange Rate Arrangements 2012, International Monetary Fund, Washington DC, (2012). Available at http://www.imfareaer.org/Areaer/Pages/Reports.aspx Lavoie, Marc & Wang Peng. The compensation thesis as exemplified by the case of the Chinese central bank, International Review of Applied Economics, 26.3(2012): 287-301. Lan, Xinzhen. “To ensure growth, Beijing Review, (2012):10-13 RBA (Reserve Bank of Australia), ‘Box A: China’s Residential Property Market’, Statement on Monetary Policy, (2012), pp 14–16 Sadeghian, Dena, White, Graham and D’Arcy, Patrick. Macroeconomic management in China, Bulletin: June Quarter, (2013): 11-20. Accessed from http://www.rba.gov.au/publications/bulletin/2013/jun/pdf/bu-0613-2.pdf Wen J. Report on the Work of the Government: Address to the First Session of the Twelfth National People’s Congress, Beijing, (2013). Available at http://news. xinhuanet.com/english/china/2013-03/18/c_132242798.htm Read More