The Chinese Economy

China has become the second-largest economy in the word as measured by the nominal value of GDP in US dollars, and on a purchasing power parity basis, it is the largest. In 2015, China’s share of global GDP was estimated at 17.1%, its share of word exports of goods and services was 11.4%, and its share of word population was 19%. With a rate of growth that averaged 9.9% between 1998 and 2007 and the world’s largest population at 1.3b, China’s control and influence in international trade circles and global production have seen it increasingly coined as the de-facto economic superpower.

China’s “socialist-market economy”, results in the government’s allowance of the use of free market forces in specific areas of the economy, and harsher state operated controls in other areas such as monetary policy and industrial regulation.  Economic policy between 1978 and 1997 initiated the transition from a communist society to more socialist tendencies, with cuts to trade protection, major banking and taxation reform, agricultural reform, and the establishment of the ‘open door policy’ in 1980 and consequent Special Economic Zones. The open door policy refers to the policy announced by Deng Xiaping in December 1978 to open the door to foreign businesses that wanted to set up in China. The four SEZ’s set up in the 1980’s were Shenzhen, Zhugai, and Shantou and Xiament, strategically located near Hong Kong, Macau and Taiwan, but with a favourable tax regime and low wages in order to attract capital and business from these oversease Chinese communities. Shenzhen averaged at a growth rate of 40% per annum between 1981-1993, compared to the average GDP growth of 9.8% for the country as  a whole. While in 1978 China ranked 32nd in world export volume, by 1989 it had doubled its world trade and had become the 13th largest exporter.

The current economic model insinuated within China has resulted in an over-reliance on fixed investment and exporting for its economic growth, extensive inefficiencies that exist in many sectors (due largely to government industrial policies), widespread pollution, and growing income inequality. China faces long-term challenges of rebalancing economy away from this pattern of investment and export-led growth, to a more sustainable and non-inflationary growth generated by expanding household consumption and the services sector. These challenges stem in part from an incomplete transition to a free market economy and from imbalances that have resulted from the government’s goal of economic growth at all costs.

China’s is aiming for a lower growth rate of 6.5% in 2017, in part influenced by slower growth in advanced economies, and in part due to China’s needed transition to domestic sources of growth. However, a larger than expected slowdown, further instability in its financial markets, or greater geopolitical tensions in the South China Sea could have significant impacts not only on China’s domestic markets, but on global confidence, output, trade, and investment.