China’s Economic Imbalance as a Development Threat

Introduction

This paper focuses on China with the view of detailing the major issue that may present a challenge to the country’s future economic development. In the coming ten years, the Chinese political, financial, and international relations will be among the various issues that the economy will need to address. Of concern is that such issues will be felt not only in China and the entire Asia-Pacific zone, but also in the rest of the world. However, it is imperative to point out that such factors will influence China’s future economic atmosphere in different capacities. This paper singles out the prevailing financial imbalance as the issue that poses the greatest challenge to the country’s future economic progress. Specifically, the paper will examine the cause, its significance, and the possible strategies that can be put in place to address the imbalance.

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Causes of China’s Financial Imbalance

According to Rudd (2014), “China already represents 16 percent of global gross domestic product (GDP), rising to 28 percent by 2030” (para. 1). Its trade balance reached a peak of approximately 630 USD HML in 2016 after having recorded the worst figure of roughly 320 USD HML in 2012. President Xi Jinxing took over the leadership mantle of the country with the main agenda of overturning the country’s economic system in terms of increasing its revenue to match that of the average economies before advancing it to be on par with that of its industrialized counterparts. However, this endeavor will prove a nightmare if the President does not address the cause of its imbalanced economy.

Firstly, China depends excessively on exports to the extent that its national consumption amounts to an insignificant share of its Gross Domestic Product relative to other upcoming countries. The country assumes a 16% share of the international GDP. This overdependence on exports has led to what Kuo (2011) terms as “Chronic overcapacity” (para. 7), which according to him, has worsened the country’s trade disparity with particular leading trading associates. Such a situation is viewed as a permanent cause for worry in the country’s diplomatic affairs, especially with America.

Secondly, it is crucial to point out three key elements that determine the expenditure rate on a country’s Gross Domestic Product, including China: the level of spending, savings, and net exports. China had a spending capacity of 50.3%, investment level of 40.1%, and net exports of 8.6% according to the 2004-9 World Bank report of World Development Indicators (Knight & Wang, 2011).

In addition, the 2007-2008 global financial crisis led to a decline in China’s GDP to net exports ratio, which hit the 6% mark in 2009. The crisis resulted in a drop in exports and an increase in the level of investment and hence the reported macroeconomic imbalance (Knight & Wang, 2011) that is threatening the future of the country’s economic development. From another perspective, Johansson (2012) regards China’s exploitive monetary guidelines as the root behind the country’s prevailing economic disparity. According to Johansson (2012), “Financial repression has a significant and negative effect on economic growth, and repressive financial policies often lead to both domestic and external economic imbalances” (para. 1).

In the last two decades, China has been operating under strict trade policies that are currently threatening the country’s economic sustainability in the future. In fact, China is currently experiencing global criticisms concerning its contentious trade policies, including its failure to uphold reputable domination and human rights. Currently, according to Alessi and Xu (2015), it is trying to establish trade partnership with most African countries such as Sudan, Kenya, and Zimbabwe among others. For instance, its trade rule of non-interference has given it the leeway to distribute arsenal to challenged countries such as Sudan and hence the reason why other countries, for instance, the US, are concerned about the future of China’s business affairs, not only in Africa, but also around the globe (Alessi & Xu, 2015). One may wish to know the significance of this financial imbalance to China and other countries in the international arena (Sturn, 2014).

Significance of China’s Financial Imbalance

The impact of China’s financial disparity is not only felt within the country, but also outside its borders (Zhang, 2014). Any country that is a trade partner of China must be negatively affected whenever it (China) experiences any trouble in its financial systems. Regardless of the substantial efforts by the People’s Bank of China to stabilize the financial imbalances of the reserve accumulation, it is evident that the level of inflation in the country is rising to the extent of putting excessive burden on the common Chinese. Surplus liquidity is now spreading out into the global economy.

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The imbalance has converted China from a deflationary agent on the US and European price rank into an inflationary instrument. Following the foreign exchange disparity, floating the Renminbi may be viewed as a move that is not practicable or advantageous. In fact, a floated Renminbi may not cut down the country’s trade excess. As an alternative, financial management and the customary private-sector investment for the trade excess call for a return to a realistically predetermined nominal yuan/dollar charge that is comparable to the one that prevailed between 1995 and 2004. However, for any recently retuned yuan/dollar charge to be realistic as a financial security, McKinnon and Schnabl (2009) claim, “foreign “China bashing” to get the RMB up must end” (para. 2). However, China still stands a better chance of overturning the situation to secure the future of its economy.

Restoring Balance in China’s Economy

The country has had to maintain the surplus of the summation of the balance of trade (the difference between commodities and services exported and what is obtained from overseas), net proceeds from foreign countries, and net current transfers. As a result, it has also found itself in a situation where it has to manage a huge asset account surplus principally in the form of foreign direct investment for years. According to Yongdig (2013), “China’s ‘twin surpluses’ are a reflection of market distortion, which has caused large welfare losses for the country” (p. 551).

To restore balance in its economy, China needs to establish in-house factors that can restore internal stability while not ignoring forces that are responsible bringing external disparities (Yao & Zhou, 2011). It is advisable for the country to merge spending-controlling strategies and outlay-shifting standards to attain a recommendable non-inflationary development capacity while at the same time maintaining the current-account-balance-to-Gross Domestic Product proportion at a sound level.

Conclusion

The political, financial, and even environmental atmosphere of any country is crucial in determining its future. Unless countries around the globe embark on maintaining fair levels of the above elements, they may risk encountering far-reaching disasters that may prove impossible to address. From the above expositions, China has been experiencing current account excesses, and hence imbalance, for more than twenty years now. Current account is a vital indicator of a nation’s economic status. However, it is imperative to confirm that the witnessed current account spillover is not a matter of the country’s saving disparities. On the contrary, the prevailing surplus and the investment disparity arise from convoluted and dynamic interaction among many aspects. The paper has proposed various strategies that China can implement to restore sanity (balance) to its economic system whose future is currently under threat.

Reference List

Alessi, C., & Xu, B. (2015). China in Africa. Web.

Johansson, A. (2012, August 25). Financial repression and China’s economic imbalances. Web.

Knight, J., & Wang, W. (2011). China’s macroeconomic imbalance: Causes and consequences. Web.

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Kuo, K. (2011). What are the biggest problems facing China? Web.

McKinnon, R., & Schnabl, G. (2009). China’s financial conundrum and global imbalances. Web.

Rudd, K. (2014). Challenges China faces for its future: Kevin Rudd. Web.

Sturn, S. (2014). From internal imbalances to global imbalances: a survey on the causes of China’s export-led growth. China Economic Journal, 7(3), 320-342.

Yao, X., & Zhou, M. (2011). China’s economic and trade development: Imbalance to equilibrium. World Economy, 34(12), 2081-2096.

Yongdig, Y. (2013). Rebalancing the Chinese economy. Oxford Review of Economic Policy, 28(3), 551-568.

Zhang, D. (2014). China’s economic development: Institutions, growth and imbalances. Asian-Pacific Economic Literature, 28(1), 206-207.

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