China Economy Examining the Current Case Study

  • Length: 10 pages
  • Sources: 20
  • Subject: Economics
  • Type: Case Study
  • Paper: #66547964
  • Related Topic: Economy, China, Real Estate

Excerpt from Case Study :

China's Economy During and After the Economic Crisis

All of these factors created major growth for China for the three decades following the beginnings of its economic reforms, and then the financial crisis hit. China began the twenty-first century with a growth rate of 8.4% in 2000, peaking in 2007 with a 13% growth rate (IMF 2010). In 2008, this rate fell to 9.6% -- a significant drop, but still a significant growth rate as well (IMF 2010). The estimated growth rate in 2009 showed a slower drop to 8.7%, and forecasted growth in 2010 showed the rate climbing back up to 10%, with an average rate for the decade still at 9.9% despite the hiccup caused by the global downturn (IMF 2010).

A large reason hat China was so insulated form the economic shock that was so devastating in other parts of the world was because of the swift and sure action that the Chinese government was able to take in response to the crisis, something that earned them high praise form the International Monetary Fund (Mingxin 2010). A four-trillion-yuan (approximately $590 billion) stimulus package was enacted in late 2008, creating many jobs and other economic opportunities and pumping much needed cash into the system, signaling a clear shift from a "prudent" to a "proactive" fiscal policy (Mingxin 2010). The Chinese government also quickly lifted credit growth restrictions and lowered interest rates, increasing the amount of bank lending in the country enormously and further stimulating the economy with its now "moderately loose" monetary policy (Mingxin 2010). These actions largely offset the drop in demand for Chinese-manufactured products in other countries.

The sudden change in the global economic structure also created a sharp increase in the demand for imports by the Chinese populous, as well as driving up demand for the consumption of resources found within China, and thus domestic spending increased while the country's trade surplus was significantly diminished (Mingxin 2010). The overall macroeconomic policy that was enacted by the Chinese government in response to the financial crisis was similar to that of other nations in its attempts to both free and increase the flow of cash into and through the domestic economic system. This country was far more successful than others in this endeavor due to the ability for the government to act almost immediately even on such large issues.

The macroeconomic policies that were enacted by the Chinese government as a means of avoiding and/or mitigating the effects of the economic crisis also worked in microeconomic ways to stimulate domestic consumption and spending. Many public works projects created jobs at the local level, increasing the profitability of businesses in many traditionally impoverished areas as these projects created greater numbers and greater degrees of discretionary income; as more cash existed in the system on a large scale, more individuals and individual businesses were able to reap the financial awards and sustain higher standards of living (MacLeod 2008). Thus, it was the specificity with which the Chinese government determined to spend the stimulus package as much as if not more than the existence of the stimulus money itself that helped ensure the continued growth of the Chinese economy during this period of near-global recession (MacLeod 2008).

Risks and Their Significance

There are several risks currently facing the Chinese economy that should give both domestic and foreign investors some cause for concern and wariness. The continued careful control of the yuan's exchange rate has the effect of taxing domestic private consumption, as it is a better long-term strategy to save the slowly appreciating currency until it has reached a higher exchange value (Goldstein & Lardy 2007). Uncertainty also looms large in the global economy, and China's still-large dependence on international consumption of its goods leaves it especially vulnerable to the possibility of another downturn (Shasha 2010).

Other risks stem even more directly from the country's response to the financial crisis. Specifically, the large increase in bank loans made by Chinese banking institutions to Chinese businesses and individuals in the wake of cheaper credit and lifted restrictions are bound to have a greater rate of defaults than is standard in the country, leaving some question as to the future reliability of these banks (Shasha 2010). Increased building during this period due to both direct stimulus spending and simple optimism about the growing economy has led to a real estate development excess in the country, and it could take many years before this surplus is actually utilized and begins to make true economic sense in balancing out expenditure and profitability (Sinocism 2010). Wage inflation brought about by currency control and the increasing frustration and condemnation by the international community of the large trade surpluses China is already returning to also make the future success and growth of the Chinese economy more uncertain than it would otherwise be (Sinocism 2010).

These problems are joined by the simple lack of sustainability inherent to the country's current economic stimulus policies; government spending and significantly relaxed credit rules have enabled the Chinese economy to continue to grow despite significantly reduced foreign demand and a still-low domestic demand, but this cannot be kept up forever. When the lack of demand catches up to the country's production enterprises, the excess capacity could create a sharp spike in unemployment, increasing defaults on capital loans, and other signature features of a recession that would form something of a correction on China's growth.

Finally, China is also plaged with a host of social problems, and the country's leadership has demonstrated either a lack of interest in truly addressing these problems or a lack of ability to effectively tackle these issues, or possibly both. Massive corruption at all levels of government with direct implications on business proceedings in the country, a lack of infrastructure in many of the rural areas of the geographically vast nation that leaves a large portion of its population at significant disadvantage, lack of adequate healthcare and basic necessities for many individuals, and a host of other human rights issues including religious and political persecution as well as worker exploitation all threaten to boil over into internal turmoil and external restrictions and sanctions (BBC 2010). Though these problems have been ongoing for many years, they continue to erode confidence in the Chinese economy for some investors on both ethical and practical grounds, and with good reason.

Conclusion: The Way Forward

China cannot simply un-peg the yuan from other world currencies and allow it to float free; the results could be internally as well as externally disastrous. A more carefully controlled yet aggressive move to a free floating currency is advisable, however, as is increased spending on infrastructure and social issues as a means not only of stimulating the economy but also laying the groundwork for truly sustainable growth and security. Bringing trade more in balance and accomplishing these other goals would make China a better integrated part of the world economy, poised for greater future success.


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