Since the late 1970s, China has been experiencing a tremendous growth in its economy. In 1978, the Communist Party of China commenced an economic reformation program that aimed at enhancing the economic growth and performance of China (Hudis 112).
This program aimed at enhancing the management of state owned enterprises (SOEs) as well as encouraging the development of privately owned enterprises. Thus, in addition to attaining high rates of economic growth and attracting foreign direct investments, the main aim of this economic reform was to transform the Chinese economy to a socialist market economy (Kraus 361).
The aim of this ideology was to ensure that this economy is primarily controlled by state owned corporations. With this strategy in place, it was believed that every individual in China would benefit from the results of economic development as the profits earned by SOEs would be evenly distributed within the population.
At the present moment, China is one of the nations that exhibit high economic growth rates in terms of GDP. However, from a critical angle, it is evident that the Chinese market is based on the capitalist system. It is due to this fact that Hart-Landsburg and Burkett argue that perhaps China has failed to achieve its economic reform goals that were set over four decades ago.
Thus, the measures that were put in place after the implementation of the market reforms only led to the growth of capitalism. Despite the fact that SOEs were dominant during the 1970s and the 1980s, the growth of private entrepreneurship started to flourish during the late 1980s and in the 1990s.
Consequently, the Chinese government passed several legislations that not only encouraged the privatization of SOEs, but also played a significant role in attracting foreign direct investments which led to the growth of the private sector. In 1993 for instance, the labor law was passed in China. This law eliminated the control that the government had in the selection and recruitment processes and paved way for the free labor market.
This new concept used the demand and supply mechanism to determine the availability of jobs and the remuneration of employees. As a result, China has now been regarded as one of the main sources of cheap labor. Thus, many firms have moved their operations in this nation to enjoy the low costs of production.
From this analysis, it is clear that the reformation program that was initiated by the Chinese government to rejuvenate socialism within China has failed. The results of this program have led the Chinese economy into a totally different path. The Chinese market is now based on capitalism.
Consequently, most of the market industries and segments are dominated by foreign owned companies (Hart-Landsberg & Paul 13). Furthermore, Hart-Landsburg and Burkett argued that the results of this economic reformation process were not abrupt but came about in stages.
However, the measures that were put to overcome the upcoming challenges did not achieve the desired results since they led the economy further down the capitalist lane. As a result, the contemporary Chinese market is characterized by income polarization, high levels of poverty, and increased research and explorations. Hart-Landsburg and Burkett categorise these characteristic as the indicators of a capitalism market.
Four Major Imbalances in the Chinese Economy
The financial crisis of 2007/2008 was one of the most severe economic downfalls that the world has ever experienced since the great depression of the 1930s that almost crumbled the US economy (Feurberg 2). However, during the global financial crisis of 2007/2008, the Chinese economy was experiencing a positive growth. During the 2008/2009 financial year, China had a GDP of 9.2% (Lardy 3).
Nicholas Lardy, a financial analyst stated that China managed to overcome the financial crisis due to the fiscal monetary stimulus plan that it had put in place. However, Lardy further states that this economic stimulus plan will only be effective in the short run since it does not put into consideration the structural problems and imbalances that are currently present in the Chinese economy.
Over the last eight years, the Chinese economy has been operating on a pressed financial system. Prior to 2003, the interest rate on returns in China averaged 3% (Lardy 4). However, since 2004, this rate has greatly decreased hence forcing more households to save a higher proportion of their disposable income.
To support his argument, Lardy presented a chart that showed the household savings in China between 1998 and 2008. In this chart, it is evident that the rate of saving has increased from 29% to 36%. To explain why the Chinese people tend to save when the interest rates are low, Lardy came up with a hypothesis that described the Chinese population as precautionary savers who want to attain a specific target of financial assets (Lardy 5).
To support his argument, Lardy commented on the costly healthcare system in China that required upfront payments prior to offering services to its clients. To averse this problem, Lardy recommended that the Chinese government should develop effective social safety services that would reduce the level of household savings and encourage expenditure.
Another imbalance that Lardy identified is the outsized real estate investment that is present in China. Since the beginning of the 21st century, the rise in real estate investment and the sale of residential properties have been one of the leading drivers that have led to the high rate of economic growth that is being experienced in China. Between the year 2004 and 2010, the rate of residential properties in China has been growing at an average rate of 4.6%.
This rate is higher than the bank deposit rate that has been averaging at the rate of 0.7% during the same period (Lardy 6). Consequently, the residential property investments in China comprised of 9.1% of China’s GDP during the 2008/2009 financial year. This is higher than many nations in the world whose rate is below 5.2%. In an event of a bubble, Lardy warns that the Chinese market might suffer severe consequences than the USA during the 2007/2008 financial crisis.
The decline in interest rates charged on household savings and the consequent increase in savings by households has resulted in a repressive financial system in China (Feurberg 4). This is the third economic imbalance that Lardy identified.
To a higher extent, the commercial bank reserve levels are low hence increasing their level of borrowing and the amount of money circulating within the economy. This has greatly reduced the value of the Chinese currency. For instance, the exchange rate between 1995 and 2002 averaged 4.4%. However, this rate has stood at 0.5% since 2003. Thus, China needs to come up with policies that increase the reserve levels of commercial banks as a measure of curbing inflation.
The last imbalance that Lardy managed to identify is the subsidies that are present in the manufacturing sector, especially in the service industry. Given the repressive financial system that is present in China, households and commercial banks investors of the central bank. Thus, the government has access to low interest capital that it uses to fund state owned projects resulting in an imbalance in trade.
Works Cited
Feurberg, Garry 2012. Chinese Economic Growth Requires Restructuring Economy. Web.
Lardy, Nicholas 2012. Sustaining Economic Growth in China. Web.
Hart-Landsberg, Martin and Paul Burkett. China and Socialism: Market Reforms and Class Struggle. New York: Sage, 2005. Print.
Hudis, Peter. The Rosa Luxemburg Reader. New York: Sage, 2004. Print.
Kraus, Richard. Class Conflict in Chinese Socialism. New York: Columbia University Press, 2011. Print.