Factors Impeding Chinas Economic Performance and the Wider Impacts on Global Economy - Case Study Example

Factors Impeding China’s Economic Performance and the Wider Impacts on Global Economy Name Institution Course Date Factors Impeding China’s Economic Performance and the Wider Impacts on Global Economy In 1978, Chinese Communist Party leader, Deng Xiaoping inducted the open door policy as a free-market reform (Smyth, 2008). This reform revived China from being a poor and undeveloped country to being a growing open market economy (Naughton, 2006). A free-market reform meant that China could accept foreign direct investments, privatize state-owned businesses, remove price control and allow entrepreneurs to start their own business. The open door policy was the beginning of a dramatic economic growth for China. Between 1978, the start of the open market policy and 2012, the economy of the country has grown by approximately 9.4 percent annually since China is the largest developing economy which has led to more than 500 million people being lifted from poverty (Naughton, 2006). In addition, the reform brought about other transitions that are currently in progress such as the replacement of the rural productivity by urban productivity and the country also is shifting from being a developing to a developed economy. However, China stills lags behind when it comes to the GDP per capita and the regional inequality is very high (Rawski, 2001). China is still considered a poor country despite the positive results brought about by the open market reform. China’s economic slowdown that is associated with the decrease of the country’s annual gain of 10 per cent in 2007 to the value below 8 percent has powered prevalent speculation concerning the economy’s growth potential (Naughton, 2006). For a fundamental country, China accounts for more than 35 per cent of the global growth of GDP. For this reason, the hindrances to the economic growth of China have affected the global economy as a whole. This paper will explore the factors impeding the economic growth and performance of China. It will also detail out how such factors can have an effect on the global economy. The wider explanation is that China’s economic growth and performance is slowing down and there are many concerns that this transition of the economy will bring about disruptive results (Guariglia, Liu and Song, 2008). The immediate sparks in relation to the instability in the China’s economy is a warning sign about the global economy. The fall of the China’s economy began as an innocent incident with a fall in markets. This fall has continued to gather momentum and it is now looking very worrying. China’s economy is considered the second largest in the world by nominal GDP and the largest economy by purchasing power equivalence (Rawski, 2001). China is the world’s largest hub for manufacturing and the largest exporter of goods. In addition, the country is the largest trading economy globally and takes a vital part in the international market. As of 2015, China has been considered to having a slowing economy. This slowing economy has been caused by a number of factors. One factor hindering the economic performance and growth in China is the demographic shift (Naughton, 2006). China is expected to experience a serious demographic shift in the years to come. The one-child policy over the years has reduced the number of people and especially of adults of working age. This has led to the decrease in the population that has resulted to the decrease in labour and in the number of working group. In order to reduce the shortage of labour in China, the government announced the relaxation of the one child policy. This recent relaxation of the policy coupled with the big decrease in the infant mortality has increased the number of children. In addition, older people are living longer as a result of the improved healthcare as well as reduced poverty in China (Ravallion and Chen, 2007). Therefore, the approximate number of older people and children supported by working class people has increased dramatically. This has dramatically affected the GDP per capita thereby hindering the economic performance of the country (Guariglia, Liu and Song, 2008). China makes-up one-fifth of the global population and is geographical huge which has cheap labour that has attracted foreign companies leading to the growth of the economy. However, according to Naughton (2006), China is undergoing a noticeable demographic change which is predicted to advance by 2030. China is also faced with state and political restraints. China’s Communist Party was established in 1949 which has over the years dominated the state and has maintained the permanent monopoly when it comes to power. Since 1978, the Communist Party has worked hard to offer systems of law that stimulates economic growth like the financial repression (Smyth, 2008). However, these systems of laws have not solved problems presented in the country’s political restraints. Although financial repression led to the enhancement of investment in China, it has restrained and hindered societal processes as well as the resource allocation. This has caused the household and the private sector to live under many restrains. And as a result, the consumer financing has risen from a low point. There are about 11 per cent of Chinese citizens who still live in adverse poverty, while more than third of the country’s wealth is held by one per cent of the Chinese population (Smyth, 2008). Although China is the second largest economy, it is the 83th country in terms of per capita income (Smyth, 2008). Countries with low capita income are less likely to handle massive increases in investment. In addition, the framework of the China’s political structure is considered “stove-piping” as ministries and hierarchies share information verticality through the chain of command and not horizontally among each other. As a result, corruption in China is very high. This has resulted to a decrease in the economic performance of the country. Additionally, China is said to have a weak civil society. Civil society can be described as a citizenship institutionalized in the social structure. Civil society regulates fundamental sections of exchange-processes associated with the economic and political system. Civil society is very vital and is controlled by public awareness and not the political power (Smyth, 2008). The Chinese current model and the political system have hindered essential societal allocated processes (Smyth, 2008). One of the major distorting factors in the Chinese political model is the role of state. The political control tends to restrain the development of social community. For a full grown economy in any country, societal, cognitive and entrepreneurial issues need to be aligned but this is impossible in China. Although the state has become more lenient to the civil society, the political systems still creates limitations. Some China scholars argue that the existing relation between the state and the civil society is still good (Naughton, 2006).This means that the Chinese civilization is characterized by the coupling of political and cultural processes which has caused the restraining of structural differentiation of society. In China, some decades ago, there lacked natural law and personal freedom and rights. Culturally, the ancient Chinese system was low in structural differentiation. Generally, the civil society in China is still weak and the system of free institution past the state is close. Another factor that has contributed to the hindrances of the China’s economic performance is social inequality. Since the development of the reform in the 1970s, China has experienced extraordinary economic growth. However, this growth has resulted to the decrease in income poverty and has resulted to the increase in social inequality (Ravallion and Chen, 2007). Growing disparities in different dimensions like rural-urban and first and second-tier cities are considered as reasons for social unrest. In the country, the growing amount in household income is not uniformly distributed as the growth of GDP (Rawski, 2001). The country’s income inequality rose from the former leader, Deng Xiaoping when he launched the market-oriented reforms in 1978. The income level of the poor is seen growing but it is noticeable that the rich are growing richer faster. Before, 2012, the China’s income ratio of the poor to the rich increased to 22:1 (Guariglia, Liu and Song, 2008). This has resulted from the implementation of policies that favour special economic zones. Between 2013 and 2014, the people living in the urban areas earned 2.5 times more compared to the people living in the rural area and the income of people living in rural residents in the coastal regions tripled. From the 1980s, the income inequality has risen at a faster rate compared to countries such as the United State. Income inequality in China over the decades has grown at an alarming rate. This has contributed to the decline in the economic performance of the country. China is also characterized by the increasing number of middle class individuals which has led the country to the middle income trap where it is almost impossible to move into higher income bracket (Naughton, 2006). China started as a poor country which generated a GDP and income growth pouring out resources into the modern economic system. Affordable cost associated with labour has appealed many foreign investments that have created jobs. These changes led to economic growth. Nevertheless, due to saturation of investment, companies became less competitive leading to lowering of their productivity. As a result, China has surplus the middle income level by 2007 with a large range to reaching the upper income level. Also, the GDP of China is way below that of developed countries. In 2014, the China’s GDP per capita was approximately 24 per cent compared to that of the United States (Holz, 2006). Few countries have managed to grow their GDP per capita to up to 60 per cent of United States GDP. They include Japan, Singapore, and South Korea to name a few. China has a long way to go. This has crippled its economic performance. Due to the factors that hinder the economic performance of China, it has resulted to various consequences in the global economy. Issues raised concerning the slowdown of China’s economy will have a negative effect on the overall global economy and markets which are closely associated with it (Naughton, 2006). For example, the United States will experience a decrement in level of customer spending which will in turn influence the exports negatively. This places the United States in a dilemma in locating other potential markets. In the short run, the effects of decreasing exports affected by these negative developments may result to a shortage in the balance of trade between the United States and China which will eventually widen (Naughton, 2006). These factors have also affected the value of commodities worldwide. Commodities such as gold and crude oil have suffered quite some effects due to these factors. Plentiful supplies have been a very important factor which has added an additional downward pressure on the worth of crude oil. For example, the value of Brent crude oil plummeted by almost half the price since the beginning of the fall of the Chinese stock market. In addition, these factors resulted to undermined prices of copper and aluminium since China is a major buyer of industrial commodities (Naughton, 2006). This has been due to the lower- than-expected sales of the commodity to the country. Also, the price of gold in the global market gained momentum from the poor economic performance of China since most people realized that it is a very safe investment and therefore can be protected against misfortune such as inflation and general financial instabilities. The global economy suffered consequences such as depression in the demand for iron ore, oil as well as other commodities (Holz, 2006). This came about due to the decline in operation rates of heavy industries and construction. The poor economic performance of China oversaw an excess supply of cotton over the demand. This forced the country to import cotton in an amount corresponding to these excess hence affecting the supporting world prices. It also led to the slowdown of the domestic demand forcing China to unload some of its stockpile back into the global market at a reduced price leading to substantial downward pressure on the dominating world price. In terms of “credit connection”, the slowdown that was experienced in China disabled the credit profiles of very many companies all over the world specifically those that dealt with commodities such as gas, steel and mining to mention a few (Holz, 2006). Shipping companies, on the hand also suffered a lot since the commodities affected accounted for a very substantial percentage of freight volume. The slowdown of China’s economy also affected global technology, manufacturing and automotive divisions for they felt the rise of credit pressure created by the reduced demand of the Chinese market. This increase in credit pressure also was due to the falling prices of commodities. Due to the economic slowdown experienced by China, the global economy also suffered in terms of exports (Holz, 2006). Countries such as Australia, Japan, South Korea as well as African nations such as Gambia and Mali to name a few are likely to suffer from the continued slowdown of the Chinese economy. Australia exports that are consumed by the Chinese market constitute about 30 per cent. They include; iron ore, coal, copper and meat to mention a few. Therefore, Australia would suffer due to the slowdown of the Chinese economy since they would find it very difficult to discover new markets to accommodate its increasing exports (Holz, 2006). Some of their export commodities have been greatly affected by the slowdown. This has prompted Australia to sign trade agreements with countries such as Japan and South Korea in order to curb this impact imposed by China’s economic slowdown. Additionally, countries such as Japan and South Korea export electronics, machinery, and medical electronic equipment to China (Riedel, Jin and Gao, 2007). This amounts to about 8 per cent of products of China’s imports and 20 per cent of Japan’s exports. Due to the continuous slowdown of China’s economy, the demand for such exports diminish which in turn slows down the rate of exports from Japan. On the other hand, South Korea also depends massively on China which amounts to nearly 29 per cent of its export trade. The country exports electronics, surgical equipment and chemicals. Therefore, due to the economic slowdown China is experiencing, it may lead to crippling of the South Korea’s economy in terms of their exports (Riedel, Jin and Gao, 2007). Furthermore, the economic distress experienced by China may also slow down the potential economies of the Sub-Saharan nations (Hao, 2006). These nations show a great potential of growth and development but with the continuous poor economic performance portrayed by China, it may also cripple these nations’ economies since they depend on their export of minerals and natural resources to China. Commodities which include copper and iron ore are under strain but also, the prices of tea and coffee will remain constant because there is a continuous demand for these products within the Chinese market. The countries which are benefiting from continuous demand for tea and coffee in China are Ghana, Uganda and Rwanda. Other countries worldwide which are likely to suffer the consequences of the Chinese poor economic performance include; the United States, Canada and the UK. These nations export aircrafts, machinery and vehicles to China (Riedel, Jin and Gao, 2007). For example, the US exports to China constitutes a substantial 9 per cent of their total export trade as well as about 8 per cent of Chinese imports (Hao, 2006). In addition, Germany exports about 6.5 per cent of their engines, machinery, automobiles and pharmaceuticals to China. Therefore, due to the China’s economic slowdown, these countries will be heavily affected with regard to the revenue they generate from exporting their products to the Chinese market. Some of the nations, for example, the UK and Western Europe, are very optimistic with regard to their own economic recoveries (Hao, 2006). The unavoidable slowdown portrayed by the economic performance of China is a negative influence for most nations globally and therefore, those that can adapt a faster pace of recovery will play a steadying role. To sum up, China is considered the second largest economy globally. The 1978 open forum policy initiated by Deng Xiaoping enabled China to be an open free market economy. This open door policy characterized the beginning of the country’s economic growth. However, in the last decades, China has been faced with a number of challenges that have threatened to cripple its economy. The major factor that limits China’s economic performance is low GDP per capita. A high GDP per capita growth results to a higher standard of living. China is still lagging in terms of GDP and thus the living standard of people has decreased. Due to its low capita income, China is less likely to handle massive increases in investment. In addition, the country is faced with social inequality in terms of income distribution. Although there has been a decrease in poverty in China over the decades, there are still people in the country who live in poverty. China has also an increasing number of middle class individuals which has led the country to the middle income trap where they cannot move into higher income bracket. As a result, China has surplus the middle income level and has a less likelihood of reaching the upper income level. Although there are a number of scholars who argue that the existing relationship between the state and the civil society is still good, the civil society in China is still weak which has affected the economic performance. Since it is the second largest economy and one of the largest importer and exporter of commodities, China is considered a huge enabler to the global economy that would unescapably affect the entire world. The global economy has been affected as a result of the economic slowdown of China. For instance, the prices of commodities have reduced such as crude oil and cotton. The fall of China’s economic performance in the recent years has led to the dramatic drop in trade across the world. Exports from countries like Australia and Japan have significantly reduced which has affected the global economy at large. The Chinese economic slowdown has also affected Africa in terms of trade. However, some countries such as Uganda which export tea and coffee are not affected by the economic turmoil due to the increasing demand of the commodities. Also, the United States’ stock market have been affected by the China’s problems since over 40 per cent of revenue generated by country’s multinational companies come from overseas. Generally, China is faced with economic slowdown that has been triggered by many factors which have brought about consequences to the global economy. References Guariglia, A., Liu, X. and L. Song 2008, Is the Growth of Chinese Firms Constrained by Internal Finance? Mimeograph, University of Nottingham . Hao, C 2006, Development of Financial Intermediation and Economic Growth: The Chinese Experience. China Economic Review , 17, 347-62. Holz, C. A 2006, China's Reform Period Economic Growth: How Reliable are Augus Maddison's Estimates? Review of Income and Wealth, 52 (1), 85-119. Naughton, B 2006, The Chinese Economy: Transitions and Growth, Cambridge, MA: The MIT Press. Ravallion, M. and S. H. Chen 2007, China’s (Uneven) Progress Against Poverty, Journal of Development Economics, 82, 1-42. Rawski, T 2001, What is Happening to China's GDP Statistics? China Economic Review, 12, 347-354. Riedel, J., Jin, J. and J. Gao 2007, How China Grows: Investment, Finance and Reform, Princeton, Princeton University Press. Smyth, R 2008, Property Rights in China's Economic Reforms. Communist and Post-Communist Studies, 31 (3), 235-248. Appendices China GDP Annual Growth Rate Change in China GDP Read More