A Study of the Causes and the Effects of China’s Economy possibly

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China is the country with the largest population in the world, at 1. 2 billion people it accounts for more than a sixth of the human race. In an economic sense however China has always been somewhat of an underachiever. Its command economy structure has led to inefficiency and an incorrect mix of consumer and capital goods. Where in recent times the “Asian Tigers” have boomed, China it seems has lagged, with communism, poverty and an abysmal human rights record stunting economic growth. Until now, China has weathered the storm of the Asian financial crisis without much damage accrued.

In 1979 it was decided by the Chinese government that there would have to be a radical overhaul of their economic system, progress has been very gradual but the results are plain to see. Statistics show that real GDP has risen at an average annual rate of 9. 7% post-reform, with 1992 having the highest in China’s history at 14. 2% (Table 1). This is obviously very encouraging for the Chinese Government, due to the success of these measures they have taken further steps towards becoming a more free market economy. It is very difficult to measure the size of China’s economy accurately.

A BBC Online report I examined stated that China’s economy had, due to its economic output in 2001 overtaken Italy as the sixth largest economy in the world, and is now challenging France as fifth. A Bloomberg spokeswoman said that “At current exchange levels, China could overtake France next year, and the UK in 2005 or 2006. ” China’s per capita GDP is only $790 and it is reckoned by the World Bank that nearly 30% of the population lives beneath the poverty line of $1 a day. This would indicate that the economy and its people’s living standards were far below that of the most powerful countries like the US, Japan or Germany.

China’s 1999 GDP would only be 2. 3% of the United State’s $33,835. However comparisons like these are rash and underestimate the Chinese wealth. This is because prices in China for the majority of goods and services are significantly lower than those in the United States and other developed countries. This of course means the Chinese have more purchasing power with the same number of dollars. These price differentials make it very difficult to measure and compare the countries’ figures, especially due to the high propensity for Chinese goods to be bought using barter or trade.

Economists have however made an attempt to factor in these differences and came up with the “purchasing power parity” measurement (PPP). This converts actual purchasing power of currency into US Dollars based on the prices of goods or services, not unlike the RPI in Britain. When China’s figures are used this way its Per Capita GDP in PPP is raised to $4,228. This is now 12. 4% of the United State’s Per Capita GDP, a far more realistic figure. However the PPP is possibly unreliable due to the nature of China’s developing economy, prices of many goods are distorted due to trade barriers, price controls and subsidies.

Unfortunately it is the most accurate means available for comparison. These figures and more comparing China to Germany and Japan can be seen in Table 2. China’s economy is confident, bankers and entrepreneurs feel that their country is booming. They think that by moving towards deregulation China’s economy is showing leadership for a new era of powerful Asian world beating producers. This confidence is based around facts and figures that when the restructuring began the governments could only have dreamt about. Balance of Trade statistics are in huge surpluses, in 1998 as high as $43. 6 billion.

When compared with the late 1970’s and the 80’s the figures are even more impressive. The full table of figures can be seen as Table 3. A report published by the State Statistical Bureau (SSB) has commented that China’s economy is bucking the trend in the year 2001. It is the world’s fastest growing economy at 7. 3%, however when put in to the perspective of the global and local economic conditions this is more impressive. September 11th slowed the final quarter of 2001 greatly, impacting projected exports and growth.

All Asian countries bar China are struggling, the SSB report a Japanese recession, Singapore has a GDP shrunk by 2. % on 2000. Hong Kong and Taiwan are both on the brink of reporting economic contraction and while Vietnam announced growth of 6. 8%, almost as high as China, it was well beneath the forecasted levels. China is changing from an export-oriented economy to a new era that satisfies both export and domestic needs. Both exports and imports from China are growing at extremely fast rates. In 2001 exports grew by 27. 8% to $249. 2 billion, imports however increased by 35. 8% to $225. 1 billion. This shows how the domestic consumer good market is growing in China, the population is becoming wealthier and more market oriented.

Within the current political and business structure in China there are some glaring problems. Embezzlement and corruption in Government and the private sector are two frequently publicized examples. According to China’s 2001 fiscal report the judicial institutions were clogged with 36, 447 cases involving bribery, insider dealing or embezzlement. The cost to China of these crimes is very big, it is estimated that the loss in taxes and custom duties from the corruption erodes 8% of the GNP. That works out at roughly $80 billion. The costs of the court, lawyers and security for all these crimes is estimated at another $2 billion.

The most worrying fact of all is that despite efforts to curb “executive crime” the number of embezzlement cases is accelerating at 9% per annum, exceeding the national growth rate. There is also the problem of tampering with the economic data China presents. As I have said, China reported economic growth of 7. 3% in 2001 but Hong Kong’s rate was close to zero. This, argues Professor Lester Thurow from Michigan Institute of Technology, makes no sense. China claim Hong Kong as a “major engine for the economic development in South China.

This of course contradicts and Thurow states “They can’t both be right. ” He backs up his claim with comments on China’s foreign trade, ” China’s foreign trade in the previous five years surged up and down violently but the economy maintained steady growth, which is suspicious. ” China’s most recent official report forecasts that fiscal deficits in 2002 will be a record of about $37 billion. These huge deficits show us that despite the hype of a booming China the continuous economic growth is highly dependent on deficits to boost domestic demand and presents an image of false prosperity.

As I move on to study China in more detail several questions must be asked. With the world economy now in trouble is there anyway for China to expand her exports so that she may grow strong enough to pay back the debts that may cripple the financial system? Will China do as The World Trade Organization’s next director-general Supachai Panitchpakdi predicted by “speeding up reforms in economic, legal, administrative and other sectors. ” And does “The WTO entry signaled China’s willingness to play by international trade rules and bring its economy into harmony with the world. “

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