Chinese Economy: Major Contributory Factors Research Paper

Introduction

China is one of the countries which have realized high economic achievements. The country boasts of a well developed infrastructure, international relations, good education system and a large population capacity. The economy of China currently is the fourth biggest globally when it is measured using nominal GDP, it is predicted that come 2008 the Chinese economy will surpass that of Germany to become the third largest. China economy output in 2006 was estimated to be roughly $2,000 and it has continued to rise rapidly. Loren, et al (2007) states that, China rapid economic performance is being attributed to the policies that were implemented by the government to liberalize the market. The effect was increased foreign trade and increased local competitiveness that has led to high economic growth that has been termed as monumental. (Loren, et al 2007)

This report is going to examine the Chinese rapid economy, and analyse the major contributory factors to the current high industrialization. The impact of this industrialization on the environment will also be analyzed in details especially pollution. Also we shall examine the Chinese stock market performance in relation to the rapid industrialization

The table below gives a summary of the economic statistics of China.

Table 1. The economic statistics of China.

Chinese economic growth from 2000 to present

Economic growth of China sped up to unrecorded highs in the current 21^st century, attaining 12.9% in 2000, 16.6% in 2004 and a high of 18.9% in 2005. This was to China’s leaders move to employ and accept United Nations and U.S backed expertise in reinventing and rejuvenating its economic framework and policies. Chinese leaders liberalized its markets in 2000 enhancing free foreign trade this move saw the volume of China foreign trade increase. In addition all legal blockades on private trade and also the on manufacturing sector were removed, and the government halted all subsidies on previous state owned companies, while at the same time permitting foreign importation to the market in so as to remove the monopolies enjoyed by state firms (John, 2006).

This move created competition among the industries and those firms which had competitive advantage survived and became more successful while those which could not compete collapsed. The public also had it winners and losses, among those who gained were the university educated entrepreneurs who got jobs to manage the increased inflow of foreign investments capital, become overseas agents among other opportunities. On the other hand the poor and the elderly suffered as they had depended on state incomes.

China’s economic reinvention resulted in high inflation of double–digit mark, however, the economy experts put into action macroeconomic machinery in the economic strategy which curbed and stabilized the inflation within a period of only three months. The government had to admit that even though the economic transformation resulted in a new economic class which mostly consisted of the rural poor, the economic structural adjustment was a significant aspect that it was willing to implement to as suggest by the global powerful economies. Thus, the government was forced to undertake the following macroeconomic measures to being down the inflation;

1. Letting prices of commodities to fluctuate;
2. The government raised interest rates to be very high
3. Increased/ introduced taxes
4. Highly reduced government subsidies given to many industries, and
5. Massively reduced welfare spending (John, 2006)

The aim of the above measures was to compress the in built inflation pressure out of the country’s economy in order for the manufactures to start making reasonable decisions concerning manufacturing, pricing and also investment, as an alternative of overusing resources. The manufactures were supposed to create a market instead of being central planners determining prices, the market was supposed to determine the price by itself. In the resulting product mix and output levels, the economic restructuring resulted to an inducement structure in the Chinese economy in which risk and efficiency were rewarded while punishing carelessness and wastage. The government thus set a mark for all other economic reforms which was controlling hyperinflation (John, 2006).

By 2005 China had grown to be the 6^th biggest economy overtaking Italy with a nominal GDP of 16.8% which was equivalent to US $281.9 billion. In 2006 China reported a purchasing power parity of U.S $10 trillion overtaking France and the UK to become the 4^th biggest economy in the world.

Economic policies that led to high economic growth

The unusual Chinese economic was been motivated by changes in economic policies which were undertaken by the government, that has continuously resulted in greater market force. Economic transformation was first witnessed in the agriculture sector, before it was extended to other industry and other sectors. The government abolished the controls placed on the market in 2000, while implementing competitive laws which were meant in unifying the market. The economic policies were meant to allow foreign direct investment in China. The economic environment policies that were formulated resulted to high savings rates as the government encouraged more savings and less borrowing through increasing the interest rates. This has resulted to rapid economic growth that is being witnessed in China presently. At the same time the capital stock also experienced rapid increase due to the large amount of money that was being invested in the capital market. High public investment and low borrowing has also assisted in creation of an urban society since many Chinese people continue to move from rural areas to the urban areas (Loren B, et al, 2007).

High investment in the economy has increased the assets which are available to every employee in the market sector thus acting as a boost for the labour productivity annual growth. This has also helped in improving the economy has the production on the urban workers is more than that of agriculture workers (Loren B, et al, 2007).

Strong and stable macroeconomic

The strong private sector growth has put an emphasis on maintaining of a stable macro-economy environment, most important being the stabilization of prices. Monetary policies of China currently are sound and have allowed the expansion of the economic growth in China. The government have been able to reduce its expenditure especially by cutting the amounts spend on the public welfare, while at the same time being able to increase the amount of revenue being collected. The inflation rate has been able to be brought down from 6% in the 1996 to a small devaluation in the year 2002. However, inflation rates have continued to fluctuate, which means that the country’s monetary policy has not been always successful controlling inflation. (Loren B, et al, 2007)

On the international scene the competitiveness of China still continues to and the volume of its exports is increasing. On the local scene, the macroeconomic prospects remain good. Credit and profits are high, thus the volume of investment in China is expected to continue while the consumption rate is anticipated to remain solid. Even though inflation is inhibiting consumption growth, the GDP is expected to reach 11.3% in 2007 to remain steady in 2000. Current data show that the economic activities remain buoyant and trade continues to grow (Loren B, et al, 2007).

Exchange rate

The dollar and the Chinese Yen have been exchanging at relatively fluctuating mode for the last five years but recent statistics indicate that the exchange rates are going up. This will to some extend affect the product pricing strategies. Analysts believe that, the lower the value Chinese currency the better, as it encourages more foreign investment which is important for the economic growth of the country. (Loren B, et al, 2007)

The graph above shows the exchange rate between Chinese RMB and the US Dollar during the month of February and June 2007, as it can be observed, the RMB continues to gain over the dollar.

It is thought that the presence of a virtually fixed exchange rate of the Chinese RMB and the US dollar is the cause of the inflation and deflation that comes from fluctuations in reaching an efficient exchange rate between the RMB and the US dollar. In the present high economic growth which is witnessing an increase in domestic investment and foreign capital investment, the need to buy the dollar has increased in order to make the exchange rate to be stable. The Chinese government has been able to stabilize this capital inflow by using the reserve ratios; by asking the banks to increase the interests on lending. In relation to this the government has started to formulate policies to redistribute the risks that come from fluctuations of the exchange rate. This is being undertaken through allowing flexibility in exchange rates (Loren B, et al, 2007).

Effects of rapid industrialization on the Environment

Jung (2006), states that no country in modern history has ever materialized as a major industrial powerhouse without damaging the environment. Thus, as China experiences high economic growth that has not been recorded in the previous past, so do its environmental degradation problem has become more severe. China rapid industrialization has had serious consequences on environment increasing the levels of pollution and natural resources dilapidation. Solid waste, water pollution, air pollution and increase in primary energy requirements are just some the environmental problems that China is facing at the present moment. (Jung, 2006)

Environmental problems that in other countries will be considered to be a catastrophic, in Chinese industrial cities such environmental problems are taken as normal. Such problems include children dying or being sick because of lead poisoning, high pollution of ocean and other environmental woes. China is being choked by its industrial success; the Chinese economy is on its high, posting a double digit GDP. However, the recent industrialization highly requires a continuous huge amount of energy which mostly comes from coal to continue driving the economy. As one of the environmental researcher points, China is in an awkward position, as its biggest achievement is also its biggest burden (Jung, 2006).

Land pollution

Around 30% of Chinese land is a desert, the rapid industrialization of China is thought to increase the desertification in this are. The Gobi desert which is in northern part of China is presently expanding by approximately 950 square miles each year. The large plains in the northern part of China previous used to be flooded by the Yellow river, however due to industrialization and building of dams and irrigation structures, the river course has been altered. This is endangering the whole river valley and it may lead to the river drying up. Latest droughts, global warming and deforestation serve as a reminder of the effects of industrialization (Jung, 2006).

Water pollution

Today in China, nearly all the rivers in the country are thought to be polluted at some level, more so half of the Chinese population is not able to access clean water for drinking. Reports indicate that due to a high number in industries, 90% of urban water bodies are highly polluted. The shortage of water is being witnessed in China especially in the northern part of China which is threatening the economic growth. Accidental industry spillages also have continued to be witnessed which highly pollutes the rivers. For example in 2005, a petrochemical plant explosion resulted in a huge discharge of nitrobenzene in to Songhua River leading to very high carcinogen levels which led to supply of water in Harbin city being cut (Ma, X and Ortalano, 2000).

Air pollution

Rapid industrialization of China has led to pollution problems that are s severe, the rate of environmental degradation is currently very high with harsh domestic and global repercussions; the current pollution is posing a prolonged burden to the Chinese people. Public health is suffering, and air pollution as lead to cancer becoming the leading cause of death in China according to the ministry of health. The high number of industries in China has made many Chinese cities to be wrapped in Gray toxic shroud, it is estimated that only one percentage of the China 560 million city population breathe safe air. This problem can be reflected by the efforts that Beijing is trying to undertake to clean its skies for the upcoming 2008 Olympics (Jung, 2006).

Pollution from coal

China’s high demand of energy has increased the demand for cheap coal power, it is estimated that each week 2GW of coal-fired power is added on the available energy. Though other sources of energy are available, the local available coal is cheaper and it is used to power more than 80% of China’s industries. However, coal plants have highly contributed to air pollution and creation of acid rain which in turn affects the soils negatively. Coal also produces high carbon dioxide emission which is produced from power generations. It is estimated that in 2005 more than 25 million tons of sulphur dioxide were realized to the air by these power generators (Jung, 2006).

Pollution brought by rapid Chinese industrialization is posing a lot of threat; healthcare expenses are increasing due to increase pollution caused illness. The authorities are realizing that in order to balance rapid industrialization with the environmental, sustainable environmental policies have to be implemented. Thus, economic policy makers are promising to change the policy of growth-first to use a more environmental conscious model. The Chinese government is closing illegal coal mines and some heavy polluting factories to try and improve the environment. The impact of pollution is immense in China the World Bank for example estimates that China undergoes a loss of around $170 billion each year as a result of reduction in productivity and health care expenses caused by pollution (Jung, 2006).

Green house effect

China today, is though to be the greatest producer of greenhouse gaseous that are emitted in the world. The negative effect is brought about by the high use of coal energy by the Chinese industries which are ever increasing. The need of energy has continued to increase due to the rapid industrialization. Greenhouse gases are resulting into acidic rain which is thought to impact the agricultural sector in a negative way. More so, the number of people suffering from respiratory ailment complication is gradually increasing which is thought to be due to increases in the amount of greenhouse gases. China large industries continue to emit a number of greenhouse gases. (Jung, 2006)

China environmental problems have become a global problem, huge amounts of nitrogen and sulphur oxides that result from coal- fires from China’s plants, are causing acidic rains in South Korea, Tokyo and Seoul. According to research carried out by journal of geographical research a lot of particulate pollution found in Los Angeles originates form China (Jung, 2006).

Environmental experts previous estimated that it some time for China to overtake the united states as the global leader in greenhouse effect, it was earlier thought that this will probably be by 2010. However, current estimates reveal that China probably could lead in global emissions by the end of this year; this is according to International Energy Agency. But, according to other studies done by Netherlands Environmental Assessment Agency, it suggest that China currently could be leading in global green house emission.

The table below shows the increase in different greenhouse gases for time in China

Table 2. Fossil Fuel-related CO2 Emissions in China, 2000-2005 (in millions of metric tons of carbon dioxide) (Jung, 2006)

Rapid industrialization effect on the Stock market

China stock market is currently booming, with high enthusiasm for share equity booming, coupled by high amounts of financial capital that is flowing in the market, the index share has continued to rise. The capital market remains stable, with high foreign investments and the high growth of the Chinese economy the stock market has continued to experience high increase, this is attributed the high confidence the investors have in the economy. Though, the Chinese economy has experienced brief interruptions, the stock market has continued to report increased growth. (SSE, 2007)

The Chinese stock market recorded an increase of 130% in 2006, and has continued to increase it growth in 2007 by growing by 12% during the first quarter of the year. Though the increase is causing some jesters and experts warn that “there is a bubble going on” the stock performance continue to experience a positive increase. The stock markets of Shanghai and Shenzhen have continued to recorded increased trading and have recorded the highest levels never reached before; the bull ran is expected to continue as the economy is continues to grow. Chinese economic growth is a big stimulator to stock market growth because high economic growth results to more money available to the public thus being able to invest in the stock market (SSE, 2007).

The graph below shows the performance of the stocks market of SSEC in comparison to NASDAQ between 2005 and 2007, as it can be seen from the graph, the stock performance of SSEC and continued to rise over the three years (SSE, 2007).

Stock

The current boom for the Chinese stock market is though to be because of a slum that was witnessed in 2001. As a result of the strong performance, many companies are expected to make a profit of up to 20%; this is according to the chairman of China equities. Nevertheless some other reports indicate that the present boom of the stock market is not as a result of high profits that companies are enjoying but because of other economic factors, which includes the increased demand by the mainland Chinese to own equities. This is supported by high number of individual brokerage accounts which have been opened in the recent past, it is estimated that as at January 2007 the individual accounts were 80 million posting a 10% increase over the pat year. The number of retail investors who control approximately 60% of the share on the stock market is also increasing (SSE, 2007).

The reasons of increase in stock investment by the Chinese may be complex, but the fundamental components are clear; Chinese middle class is increasing rapidly due to industrialization. The Chinese are investing more in stocks to increase their savings and security since the government continues to reduce the welfare given to the public in the health sector. In addition, there is a limit on foreign investments in China, limiting the Chinese investors on how much they can invest in the foreign stock markets. Thus as the China’s economy grow many Chinese people are putting their savings in the stock market which is also contributing to the present boom (Brooks and Tao, 2005).

Though the government is concerned about the sustainability of the current stock market boom, the stock market continues to expand. The main concern of the government is that if a sharp deflation happens it could lead to slump in the stock market that which happened in 2001. The major difficulty comes down in balancing between the volume of share supply and the demand available for those shares from the retail investors. The government is trying to tackle the problem from both ends. On the side of the demand, it is trying to discourage investor euphoria through using announcements such as Cheng’s.

In addition the government has requested the banks to stiffen their lending requirements, prohibiting retail investors from being lend money by the banks to invest in the stock market. In relation to the supply of shares, the government has started to encourage more companies to be listed through loosening bylaw on Initial Public Offer (I P O) and also structures of the share. This is anticipated to increase the amount of IPO, for example Price Waterhouse coopers estimates that Shanghai stock exchange could end up seeing 200 billion Yuan in terms of new IPO this year (2007) (Brooks and Tao, 2005).

Though, the government has tried to control the stock market by formulating the above mentioned policies, so far the stock market boom still continues. As a result the government may consider enforcing more restrictions on lending. However, many market experts predict that the stock market boom will still continue. As the stock market bull ran continues the government has little powers in limiting it, the only thing the government is expected to do is to restrict the lending further. The government is also expected to restrict the bank lending practices by increasing the minimum reserves ratios. Despite all the measures that the government has undertaken in trying to put in check the high growth of the stock market, the stock market has continued to perform well and the stock index has continued to go up. Market analysts are view this aspect as a result of high economic growth which has increased the cash flow in the country promoting the public to have enough many to save (Brooks and Tao, 2005).

The graph below shows the continued growth of shanghai stock exchange. Source shanghai stock exchange (SSE (2007): www.sse.com.cn/ssereport

The stock market index of shanghai for example has recorded a high of 4,000 mark which is the highest ever. Many ordinary people and even students are buying shares instead of keeping the money in the bank reports indicate that up to 300,000 people at times open brokerage accounts in a week. (SSE, 2007)

Conclusion

China has become one of the countries of the world that has had its economy grow considerably fast for the last two decades. This has been attributed to the way the Chinese government has been allowing market forces to independently operate. Foreign investment policies are also part of the contributors of the increase in investment sector of the country. The reforms cover issues such as exchange rates, entry barriers, foreign investments, internal markets and price controls. This high industrialization has led to environmental degradation, which high air, water and land pollution being reported. Greenhouse gasses emission has also increased and China is being thought to be the leading global greenhouse gasses producer. However, the rapid industrialization has highly contributed to the improved stock exchange performance as the public as more money to save. As China continue to experience a high economic growth rate and a high GDP the biggest challenge it will continue to face is how to protect and improve the environment to be sustainable and to ensure that the stock market do not explode and slump.

References

1. Brooks and Tao (2005): China’s Labour Market Performance and Challenges, IMF working paper 03/210, International Monetary Fund, Washington DC.
2. John B. S. J. (2006): Understanding China: A Guide to China’s Economy, History and Political Structure.
3. Jung W. K (2006): The environmental impact of industrialization in East Asia and strategies toward sustainable development; Journal Sustainability Science; Publisher Springer Japan
4. Loren B, et al (2007): Growth and Structural Transformation in China, in China’s Great Economic Transformation, Cambridge University Press, New York,
5. Ma, X and Ortalano, L (2000): Environmental Regulation in China: institutions, enforcement and compliance. Rowman & Littlefield
6. Shanghai stock exchange (SSE, 2007): China stock market; Web.
7. Sinkule, B, J. and Ortolana, L (2000): Implementing Environmental Policy in China. Praeger Publishers