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China's Economy - Background

Economic growth in the 1980's was largely based in rural China. As the communist command system in the agricultural sector was dismantled and rural communes were abandoned, the productivity of farms shot up and many farmers and villagers also established light industries and other entrepreneurial ventures. Agriculture and rural industry accounted for about three-fifths of China's gross domestic product, and so progress in these areas was bound to be reflected in the country's overall performance.

By the end of the 1980's, however, the rural economy was stumbling: the immediate gains from freeing agriculture could not be continued and extortion, overtaxation, and embezzlement by local officials were taking their toll. Moreover, the effects of decades of environmental devastation and neglect began to be felt. China had lost one-third of its topsoil and arable land in the past 40 years. When floods come, rural areas bear the brunt because the government deliberately blows up small dams and dikes, inundating farmlands, so as to spare the cities.

China's economic growth in the 1990's was essentially an urban phenomenon, with many city-dwellers registering visible gains in personal income. Urban free enterprise employs only three percent of the Chinese people but accounts for about one-tenth of China's gross domestic product. Predictably, enterprises that employ cheap labor to make consumer products for export have proved to be the most profitable.

But the real story of Deng Xiaoping's post-1989 reforms was a "marketization of power" -- a process in which power-holders and their hangers-on plundered public wealth. The primary target of their plunder was state property that had been accumulated from forty years of the people's sweat, and their primary means of plunder was political power.

Party and government officials manipulated the state-controlled sector of the Chinese economy, which represented about one-third of gross domestic product and includes all of the important industries, commodities, and essential services. A two-track pricing system was put in place by which unscrupulous officials bought raw materials and industrial products at a government-controlled price and then turned around and sold them on the open market for a much higher market-dictated price.

The huge illicit profits that resulted from this maneuver were plowed into speculation in securities and real estate; they also provided the grease whereby officials allow foreign investors to evade having to deal with market costs when they set up joint ventures and other enterprises in China.

All banks in China were state-controlled, and they served as veritable cash cows for state-controlled industries. By 1998 somet $240 billion -- nearly half of all personal savings that have accumulated in China since the 1950's -- had been transferred, as emergency loans, from banks to state-controlled industries. There is little or not hope of recovering these "loans." China's banking sector verged on bankruptcy by any objective measures, with a huge burden of nonperforming loans overwhelming a shrinking capital base.

The fall in global demand brought China's growth to a halt in the fourth quarter of 2008, but a timely and aggressive fiscal and monetary policy stimulus has resulted in a strong domestic economic recovery and a decline in its current account surplus, and as a result contributed significantly to the recovery in global demand. Real GDP rose by 7.1 percent on a year-over-year basis in the first half of 2009, as fixed investment and consumption contributed 6.2 percentage points and 3.8 percentage points to growth, respectively.

As global demand dried up in the fourth quarter of 2008, China's exports plummeted. Exports fell by 31 percent between the third quarter of 2008 and the first quarter of 2009, while imports fell 30 percent. In the second quarter of 2009, imports recovered strongly on the back of China's economic stimulus; however, exports increased only slightly. As a result, China's trade surplus narrowed to a three-year low of $35 billion (3.2 percent of GDP) in the second quarter. China's current account surplus, though still large, narrowed to 6.7 percent of GDP in the first half of 2009, from an 11 percent high in 2007. China's trade surplus with the United States fell to $103 billion in the first half of 2009, down from 13 percent from the first half of 2008.

The nation’s economy grew 7.8 percent in 2012 - its slowest pace in 13 years - and registered a weak 7.7 percent expansion in the first three months of 2013. The GDP real growth rate in 2009 was 8.7%. In April 2011 Three Morgan Stanley analysts - Qing Wang, Steven Zhang and Ernest Ho - addressed the question of how much longer can China continue to grow at a 10% a year. Not much longer, say the three, but the deceleration will be slight, to an 8% annual growth rate through 2020. In March 2011 Barry Eichengreen of the University of California at Berkeley, Donghyun Park of the Asian Development Bank and Kwanho Shin of Korea University, calculated that growth was likely to slow to around 8% by the year 2015. Other economists estimate that China's growth could slow to between 5% and 6% annually between 2010 and 2030.

On 11 July 2013 China's Finance Minister Lou Jiwei said that his country's economy will not take a hard landing and a slower economic growth rate is a necessary phenomenon from economic restructuring. "Despite the slowdown of China's economic growth rate, the structural reform is paying off," Lou told the press after a session on reform and sustainable development on the second day of the two-day China-U.S. Strategic and Economic Dialogue (S&ED). He said China's growth performance and quality had been enhanced and the country has the confidence to deal with the current challenges and promote the economic sustainable growth.

"The contribution of consumption to GDP (Gross Domestic Product) growth has increased, the proportion of service sector to GDP has also enhanced, the ratio of current account surplus of GDP has dropped, employment situation is good, and CPI (Consumer Price Index) is not high," said Lou. In the first quarter the growth rate was 7.7 percent, and the rate in the first half of this year will be slightly lower than 7.7 percent, he added. There is no doubt that China can achieve this year's growth target of 7.5 percent.

In 2013 Boeing adjusted its forecast for China's annual GDP growth over the 20 years 2013-2033. In 2011, it put the figure at 7 percent; in 2013, the forecast was for 6.4 percent - still double the global rate. By 2013 the world's second-largest economy was losing steam. Wang Jian, a senior researcher with the China Society of Macroeconomics, a research body affiliated with the National Development and Reform Commission (NDRC), wrote on 24 July 2013 "China's economic growth rate will probably fall below seven percent in the fourth quarter this year and may fall under six percent in some quarter next year." By the end of July 2013 the HSBC/Markit Purchasing Managers' Index showed output, employment and new orders all declining at a faster pace in July. The overall index of business conditions fell to 47.7 from June's final reading of 48.2, a third straight month below the watershed 50 line which divides expansion from contraction and the weakest level since August 2012.

The employment sub-index slid to 47.3 in July 2013, the weakest since the depths of the global financial crisis in early 2009. On July 10, 2013 China released unexpectedly poor trade data for June 2013, in a further sign of weakness in the world's second largest economy. Government figures showed exports fell 3.1 percent from a year earlier. That is well below market expectations of around four percent growth. Imports also dropped 0.7 percent, a figure much weaker than forecast. China's trade surplus fell to just over $27 billion. China's government had expected slower economic growth as it attempts to transition from a reliance on exports and toward greater domestic consumer demand. Evidence of China's slowing economy is seen in the many moribund construction projects spread across the country. There are blocks of residential compounds where there is cloth up around the sides of the buildings to prevent dust from going in. There's no work going on, and this is seen in all Chinese cities.

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Page last modified: 25-11-2016 12:01:57 ZULU