Macroeconomic Analysis Essay
China has always been defined as a ‘miracle’ of the global economy. The country has the most rapidly growing economy compare to all others in the world. Several years after entering the new millennium, the country is characterized as the most attractive business investment destination in the global economy. From then until today, the country received the largest Foreign Direct Investment (FDI) inflow from all over the globe, outperforming even United States and European countries (‘China Quick Facts’. 2007).
However, analysts are sometime puzzled with the rate of growth displayed by Chinese officially published economic statistics. Despite the logic that China has abundant and relatively cheap human resources and that China has been aggressively promoting its economy to foreign investors, analyst still believe that China’s growth might not be as ‘miracle’ as it has claimed to be (‘Are China FDI Figures Exaggerated’. 2005).
Within this paper I will perform an analytical review of China’s microeconomic condition through evaluation of GDP growth over a 20-year period. This paper contains arguments of what factors influencing growth and how has China managed them for the last 20 years. The conclusion would be a statement whether China’s economy is indeed experiencing sustainable and rapid
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II. Macroeconomic Factor Analyzed: GDP Growth
GDP Rmb Billion
Real Annual Growth Rate (%)
GDP Rmb Billion
Real Annual Growth Rate (%)
China GDP 1986-2005
Available at http://www.chinability.com/GDP.htm
The table indicated that China has a robust economic growth during the last 20 years with an average GDP growth of 9.4% annually. This is recorded as one of the highest GDP growth rates in the world. However, the table also displayed considerable ups and downs of the economy. The first three periods displayed a rather positive trend. However, the following two years displayed a rather shocking decrease of the national economic performance. The economy began to pick-up its paces in 1991, and the growth rate is double digit for the next 5 years (‘China GDP Stastistics’, 2005)
In 1996, there is a gradual decrease of the GDP growth rate until China enters the new millennium. In 2001, GDP accelerates again until the last quarter of 2005. This tremendous rate of growth is expected to maintain its course throughout the first decade of the millennium. This analysis gains supporters as the last five years did not display any signs of economic recession or slowdown. In any, the country has grown from having an annual GDP of 12 trillion Rmb in 2001 to 18 trillion Rmb in 2005.
China GDP 2001-2005
Available at http://www.chinability.com/GDP.htm
In the light of the data displayed above, we can assess the past and near-future trends of the economy. Nevertheless, in analyzing GDP growth, there is a strong need to take account of the various factors involved within the rate of GDP. Gross Domestic Product is the measure of productivity within a certain period of economy. In order to sustain productive. behaviors, communities require the support of various factors. Some of the most recognizable are sufficient economic infrastructure development, supportive foreign trade policies, sufficient technological infrastructure, high employment, considerable monetary savings, and stable foreign exchange rates behavior.
Infrastructure development are required because economic activities are built on availability of local resources like labor, raw materials, communication facilities, transportation, financial services, etc. It is very rare that a country with poor infrastructure could attract business investors and become highly productive. Supportive foreign trade policies are also crucial in creating and maintaining the growth of an economy. International trade theories have long stated that there is no nation who could survive by consuming only its own natural resources. Cooperation with foreign investors is the future of economics everywhere.
Technology is important because it is the catalyst of efficient business operations. Furthermore, technology has recently become an important ‘commodity’ for multinational businesses. India for example, received significant FDI inflow due to its capabilities in technology-related industries. Employment on the other hand, is considered as a determinant of economic stability. Investors prefer to invest in nations with high employment rate because it reflects a stable social and economic condition for business investments (‘China Applauds’, 2006).
Monetary savings on the other hand, is the measure of competitive value of a nation compare to others. Having considerable monetary savings mean the country has significant economic advantage compare to other nations. Exchange rate is also an indicator of stability. After the Asian economic crisis, western countries are reluctant to invest within the countries. This is because these countries displayed unstable economic conditions, which is an awful investment environment.
Prior to 1986, the country experience a double digit GDP growth rate which is a result of the cultural revolution and along with that foreign trade policy revolution undertaken by the government of China. The first wave of foreign investment into China and the development of non-state enterprises created double digit growth rate. The period of 1986 witness continuation of this effect, but a slight slowdown caused by overheating economy.
In 1989, the government enacted policies which were intended to brake the overheating economy. The policy was taken because in 1988, there was an aborted effort at the wholesale price reform. The incident resulted panic buying and wildly increased inflation. This explains the sudden raise of GDP growth. However, the government managed to create price stability by canceling large investment projects and decreasing domestic demands of products and services. The following economic turmoil was caused by the Beijing Massacre 1989. AS displayed within the table, the incident causes slowdown of national businesses, especially those involved with foreign investments.
In 1991, the economy started to rise again, however, still with limping steps due to the worsened national image. In 1992, Deng Xiaoping decided to perform a tour through the Southern region of the country and attempt to revive international trust to the national economy. The tour achieved a significant portion of its intentions. Soon after the our, international interest in the rapidly growing economy was revived and FDI inflow to the coastal regions of the country was significantly boosted. Particularly in Shanghai, the new economic tendency brought significant governmental investment into the region, to build further infrastructure for international investment. The governmental initiatives brought increasing trade activities within the region, which encourage growth and also inflation (‘Poverty’, 2006).
Afterwards, the economy was overheated again. Zhu Rongji, the new leader of the country designed policies that will slightly slow down the economy but maintaining sufficient economic growth to attract foreign investors. As a result, the GDP displayed a gradual slowdown of economic growth, but with a level of growth that still allows increasing living standards of Chinese citizens. During the 1990, living standards of the Chinese society continued to rise, especially among urban residents. By the late 1990, China’s powerful FDI inflow has brought the country to have one of the most respected foreign exchange reserves in the world.
The period following the phenomenal growth, analysts have begun to seriously doubt the validity of China’s GDP growth figures. This is followed by questions regarding China’s entire national accounts. Several analyses indicated that China has been manipulating the data and overstated growth in the early 1990’s and understating growth in late 1990’s. This is performed to gain a stable and respectable look of the economy. However, others stated that the problem was because the statistical systems tends to overestimate output at the beginning of China’s accelerated growth cycle and underestimate output at the end of the cycle (‘100m Chinese’, 2006).
In 2005, there are indications that the 2005 GDP has been significantly underestimated. Analysts suspected that this occurred because of the failure to properly account the growth of the service sector which has displayed surprising performance (‘Are China’s FDI Figures Fudged?’ 2005). The last recorded GDP growth rates are in average of 10% annually.
The latest condition of the economy displayed signs of overheating economy marked by the lack of workers available for new job openings. This is not a sign that China has used-up all of its human resources, but the available workers are unwilling to sell themselves cheap because of the enhanced standard of living and economic condition. Many considered that China will experience another slowdown of economy due to the increasing labor prices and decreasing labor ‘availability’ (‘Bull’, 2005).
On the other hand, Chinese economy displayed enhanced household saving which is a sign of a strong economy. Nevertheless, there are also those who believed that the policy of low interest rates and high household savings will encourage too much investment (‘Bull’, 2005).
China has displayed a robust economic growth starting from 1985 to 2005. Despite the occasional fluctuation, the country displayed an average of 9% GDP growth during the 20 years period. The country has been underestimating its own growth which resulted an understatement of GDP growth recently, just as it was suspected that the country was overstating the GDP figures which resulted an overstatement of GDP growth in the early 1990’s.
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Bull, Pierre. 2005. ‘A Short Run Macroeconomic Policy’. Retrieved February 12, 2007 from www.chinabalancesheet.org/Documents/Data_Economic.PDF
‘China GDP Statistic’. 2005. Econbrowser. Retrieved February 12, 2007 from http://www.econbrowser.com/archives/2005/10/china_gdp_stati.html
‘China Applauds Technology Transfer to Alleviate Poverty’. 2006. People’s Daily Online. Retrieved February 12, 2007 from http://english.people.com.cn/200608/25/eng20060825_296866.html
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‘China Quick Facts’. 2007. The World Bank Group. Retrieved February 12, 2007 from http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/CHINAEXTN/0,,c
‘Poverty Reduction Remains Tough Job for Asia-Pacific Countries’. 2006. People’ Daily Online. Retrieved February 12, 2007 from http://english.people.com.cn/200609/19/eng20060919_303966.html
‘100m Chinese lifted Out of Poverty in 20 years’ 2006. China. Retrieved February 12, 2007 from http://www.chinadaily.com.cn/china/2006-08/23/content_671484.htm