Sources of China’s economic growth
In the recent past, China has experienced a dramatic economic growth which has led to the improvement in the improvement in the welfare of the citizens. This can be attributed to a number of factors. The rise in the per capita income is associated with capital accumulation and the improvement in the productivity of the non state sectors of the economy. It has also been contributed by the open economy policy which has been adopted by the government.This growth is associated with the resource intensive nature of China’s economy. Chinas government developed a policy that enabled the country towards industrialization. This is possible due to a number of factors such as the availability of alternative sources of energy such as coal, petroleum, hydroelectric and geothermal sources of energy. These sources has enabled in subsidization of the cost of production thus making it to be efficient.The low cost of electricity has enticed more investors into electricity intensive firms across various sectors of the economy thereby stimulating the dramatic economic growth experienced in the recent past.
State owned firms
There has been a decline in the size of enterprises that are controlled by the government. This has resulted in the increase in the industrial outputs due to the fact that by incorporating private and foreign direct investment in these enterprises their management has been improved ,(Wayne 11).The output from the industrial sector is boosted by outputs of private owned enterprises which are locally owned.
Capital has been sited as the greatest contributor towards China’s economic growth. There has been a high rate of capital accumulation which has resulted from the liberalization of the labor-supply market. This has made the investment sector to be profitable and to the fact that the surplus labor which has greatly reduced the chances of rising in the real wage.
Financial strength has also contributed to the economic growth. The financing of individual and corporate investors has been done in favorable terms considering the interest rate which are low. The low interest has enabled the investors to venture into capital intensive industries due to the accessibility of the finances. The amount of domestic savings has continuously kept the borrowing rates low. This has made the investment level to be high thus contributing to the GDP
The household savings have also been boosted by the government undertaking economic reformation that resulted in the decentralization of major state owned economic production sectors.
The agricultural sector has also contributed to the economic growth. This is especially after the abolishment of the communal system of agriculture in 1978.This led to the economic growth in the rural areas due to the legalization of market for agricultural products especially the grains. The liberalization of the agricultural sector led to the improvement in the production efficiency.Changes in the agricultural sector has resulted into the improvement in the income level of the residents.
China’s government has appreciated the contribution of international integration towards economic growth. This has enabled it to be integrated in the global economy thus reaping the benefits of integration. The integration has been possible from the formation of trade blocs.The blocs have enabled china to have access to international market for labor intensive manufactured goods.
Trade has greatly contributed to its economic growth. Statistics show that from the year 2004-2007, the value of China’s merchandise in trade nearly doubled. China’s exports in 2007 (at $1218 billion) exceeded that of the US (at $1162 billion).The size of China’s imports are low leading to a trade surplus. (Wayne 7).
Trade and foreign direct investment has also resulted in the countries size of foreign reserves being favourable.This is due to the combination of the large trade surplus and the increased size of foreign direct inflows.
In 2001 China ascended to the World Trade Organization resulted in the improvement of its level of exports and foreign direct investment which increased its growth prospects. The growth in the level of exports has made China to have economic strength resulting from improved net exports.
The Chinese government has developed incentives that attract corporate and individuals to invest in their economy.
Industrialization has resulted into increase in the productivity level of the surplus labour.This is due to shift in the labor supply from being agricultural sector which is less productive due to its dependence on natural factors ,such as rain, to more productive sectors
The level of productivity has also contributed to economic growth.Productivity refers to the efficiency with which resources are utilized as inputs.
The changes in China’s employment structure resulting from labor mobility has also contributed to industrialization due to the availability of cheap Labour as people migrate from the rural economy to urban sector leading to increase in the level of productivity,(Kraay 23).
The education sector
The improvement of the education system has resulted in the improvement of the quality of labor force within the economy. Through education, the marginal product of the labor force has been improved and a significant reduction in the level of illiteracy witnessed. China has appreciated the contribution of education towards economic growth and it has highly invested in the education sector.This has made China to be an economy based on knowledge. According to studies the accumulation of Chinas economic growth is associated with the accumulation of human capital which contributed to growth and welfare of China’s citizens, (Wang Yan & Dong Yun 12).
Direct overseas investment
Its growth is also associated with the strategy to venture into direct overseas investment. In this strategy the government encourages local state owned firms to invest in other countries globally. This is due to the increased foreign reserves and hence the need for the government to seek diversity of investment opportunities. This has enabled a shift in government’s investment from traditional investment destinations which yield low returns in the long run to profitable investment sectors. Through this the government is able to effectively manage its foreign exchange reserves, (Rajan 5)
Meaning of China’s economic growth to its neighbors and other countries
Chinas rapid economic growth presents greater potential for economic growth for its neighbors and other countries. This is due to the fact that by adopting an open economy policy, there are investment opportunities through the foreign direct iinvestment.According to statistics, by 2002; China was the most desirable destination for foreign direct investment (Rajan 4).
It also enhances international trade through the trading blocs of whom China is a member.Individual countries will be in a position to gain new strategies that they may adopt to their economies in order to strengthen it.
China’s economic growth has an impact on South East Asia’s exports. This is due to the fact that China’s imports a lot from Southeast Asia countries making the receipts of these countries from their exports enormous. This means that the future for bilateral trade between China and its neighbors is bright. For instance in the year 2000, China was Southeast’s largest export destination accounting for 3.1 percent of Southeast Asia total global exports, (Rajan 7).
To the united state of America, Chinas economy has proved to be a challenge to US policymakers. This due to the increase in the amount of Chinas exports into the American economy resulting into increase in the competitive pressure into various industries within the US economy. The American economy ‘feels’ threatened to an extent that the US government alleges that China does not fully implement the World Trade Organization policies and that its economic policies need to be amended.(Wayne CRS 4)
China also offers a source of tourist for its neighbors and other countries around the world. According to (Rajan 6), the total number of tourists who visited Southeast Asia in 1995 amounted to 0.8 million but they almost tripled in 2000 to 2.3 million tourists. This translates into an increment in the size of foreign exchange receipts enabling these countries to efficiently conduct international trade.
There is an increase in China’s demand for raw materials and energy to supply its industries. This is a concern to other world countries due to the impact on the prices of these commodities. The increased demand results into upsurge of the prices affecting the trading capacity of countries with low foreign exchange reserves.
The impact of increased industrialization of which China is one of them is being felt by countries globally. This is due to the increased environmental pollution and the depletion of the O zone layer which has resulted into global warming. This poses a health threat to the entire world due to increased risk of diseases related with the Ultra-violet rays such as cancer. In the 21st century, global warming has emerged to be a major hazard in environmental conservation.
The US is also concerned by China’s investment policy related to energy and raw materials which is being conducted globally especially in Iran, North Korea and Sudan. These countries have enormous energy resources and other raw materials that attract China to invest in. The desires to control these resources by various parties have sparked political violence in these countries leading to political instability and compromise of human rights in the event of war. This results into conflict between China and other interested parties with the U.S which has political and human right concern. (Wayne CRS-5).
According to Wayne, China’s economic growth has resulted to improvement in the US-China economic relationship.
The African countries also benefit from China since it imports a lot of commodities from their various economic sectors such as the mineral fuels to cater for its increased need for energy. These African countries in turn are an export destination for China’s products such as machinery and other electrical appliance.
North Korea is a major beneficiary of China’s foreign aid for example in the form of food and fuel.Iran is currently proving to be a reliable Chinese trading partner.According to Wayne, Iran was China’s largest source of mineral fuel in the year 2007.China has also signed major trade deals with Iran that involve China’s state owned enterprises obtaining gas for their operation from Iran, (Wayne 8)
China’s future growth (potential and challenges)
From its accession to the World Trade Organization the economic growth of other countries is guaranteed. This is due to the fact that China will require more services from other countries.This is due to its increased demand to improve its infrastructure and other distributional networks.
As China continues with its industrialization, most of the Southeast Asian countries will be involved with the infrastructural development by being a source of the required resources which may not be available in China. This is due to the fact that a particular country cannot have total comparative advantage in all goods and services.This shows that these countries will benefit from China’s development policy.
With regard to foreign direct investment prospects, China’s neighbors and other countries are losing. This is due to the fact that has become to be more preferable investment destination. From research it is evident that in the early 1990’s ,three-fifth of FDI were channeled to Southeast Asia countries and less than one fifth to China.This trend was reversed by 1999-2000 where over two thirds of FDI went to China,(Rajaan 9).
China’s economic growth also pose a threat globally due to the increased competition in the global market.This is due to the fact that China has a better competitive edge in various economic sectors in comparison to its competitors.
The integration also opened China’s opportunity to access modern technology. Due to the open nature of the trading bloc economy, it has become possible for china to involve itself with foreign direct investment. This has contributed towards the advancement of China’s capital stock. The foreign direct investment policy has contributed to increase in the degree of competition to the domestic firms compelling them to adopt more efficient management strategies. The competition resulting from globalization has also contributed to China’s domestic enterprises across various sectors be more inventive and innovative.
The low inflation rate within China’s economy has also led to its drastic economic growth. The inflation rate has been stable over time. This is partly due to the high level of household savings. The savings have stabilized the economy since the central bank does not have to frequently undertake a monetary policy involving the printing of more money to cater for the rising money demand. This helps to keep the level of money supply average and the inflationary pressure to be low.This has led to the improvement in the gross domestic product.
China’s economic growth sustainability faces a challenge due to the increased inequality between the rural and the urban income divide. There is also an increased demand for natural resources such as energy, water
Of concern to China’s economic growth is the declining rate of human capital that threatens the current growth and improvement in the economy in decades to come. This decline in the accumulation of human capital is due to the inequality in the funding of the education sector.The funding is not evenly distributed amongst the various regions of China.
The economy is also facing a challenge resulting from the widespread corruption in the various economic sectors.Coruption has hampered the growth rate that has been experienced over the recent past
The growth rate is currently threatened by the increasing lack of trust by the entire population especially those in low economic status.This public unrest is attributed to the opinion that they are not benefiting from the economic growth and that those who are is due to being connected with the current government.This has resulted in social instability resulting from the widened income gap between the urban and the rural residents according to a United Nation report in 2005, (Loui&Wang 23).
Despite china having a high education base in the primary and secondary level, the size of those in higher education and tertiary levels is limited in comparison to other Asian economies. This means that China will experience a stiff competition from other countries which might result in the decline in the rate of economic growth.
Due to the dramatic expansion of the capital base within Chinas economy, the need for the accumulation of human capital will decline in the future due to capital contribution to the economy.This is in line with the law of diminishing returns.
The potential for growth is also at risk due to the sharp decline in the natural resources as a result of the increase in the size of the population.The population is also rapidly aging posing a threat to availability of labor force in the future.
The recent world financial crisis is proving to be disadvantageous to the financing capacities of Chinas financial sectors. This has lead to the banking sector being inefficient.The financial crisis is also a source of increase in the inflation rate thus slowing the growth rate.This has also contributed to the level of disparity between citizens of different economic status.
This is also due to the fact that China’s banking system is controlled by the central government instead of the market forces. It is the government that sets the interest rate and in the process favors some of the Chinese firms. Loans are usually made on the basis of political connection which adds to the banks inefficiency.
It has also adopted an economic system that greatly relies on exports and fixed investment as the main drivers of the economy. (Wayne 10).
For sustainability of economic growth, the government needs to address investment in the educational sector.This is due to the fact that the private sources of financing the education sector are not sufficient.
There is the need for china to reform its electricity industry if the country is to sustain its economic growth.This will ensure that it increases its capacity to supply power to the large size of the industrial sector at a cost effective way will leads to the efficiency of the end users. This will also contribute to the decline in the environmental degradation that is affecting the world economies. The formulation of strategies aimed at restructuring the electricity sector will lead to the improvement in its competitive edge.
According to recent development, the Chinese government has reported a rise in the consumer price index by 7.1% in January 2008 over the same month in 2007 raising a major concern in the effect on the inflation rate and the future economic growth, (Wayne 10)
The increased amount of foreign exchange reserves presents a potential to China’s economic growth. This is due to the fact that these reserves will be used by the government in the acquisition of foreign firms which are in economic sectors with high potential growth capacity.
The future of the domestic firms is also bright due to their capacity to improve their management skills. These firms will gain from the foreign firms that are located in China through the Foreign Direct Investment Policy.
To cope with the increased need for energy, China has a strategy that addresses this need through investing in foreign countries that deal with energy and other raw materials that are paramount to its economic growth.
For instance, the government has formed the China National Offshore Oil Corporation that is mainly concerned with oil exploration and the acquisition of foreign companies in the energy sector (Wayne 13).
The Chinese government is putting more effort in promoting its locally produced products. This will enhance its involvement in the international trade since most of the Chinese products will be internationally recognized as being Chinese brands.
It has also developed a strategy that entails the purchase of other companies together with their products which are internationally recognized.
In conclusion China’s economic growth is bright if the strategies that the government has devised to sustain its economic growth are effectively implemented. There is a need for the Chinese government to urgently address the challenges that may slow down the rate of economic growth.
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