Influence of Globalisation on China’s Economy

CHINA CASE STUDY

“Undertake a case study of the influence of globalisation on China’s economy, including an evaluation of the strategies used to promote economic growth and development in this economy.”

Introduction

China is in Southeast Asia, along the coastline of the Pacific Ocean. It’s the third largest country in the world, after Russia and Canada. It has an area of 9,706,961 km² and belongs to the Asian region; and Eastern Asian subregion.

In 1949, China became a communist country under the rigid, totalitarian, socialism leadership of Mao Zedong. The state took control of many resources on behalf of the people – no private ownership was allowed. The Communist Party of China (CPC) were in power and the people worked on behalf of the common good. After Zedong’s passing, China moved away from his version of communism and China reformed its economy along partly capitalist lines to make it one of the world’s fastest-growing, as well its leading exporter.

Although, the political influence of the CPC within China remains to this day. The country’s senior decision-making body is the standing committee of the politburo. They control three other important bodies and ensures the party line is upheld. These are: The Military Affairs Commission, which controls the armed forces; the National People’s Congress, or parliament; and the State Council, the government’s administrative arm.

China has 35 top cities (shown on map); 20 make up one percent or more of China’s huge GDP. Chinas top 5 cities are:

Shanghai (3.80 percent)

Beijing (3.43 percent) – Capital City

Guangzhou (2.71 percent)

Shenzhen (2.55 percent)

Tianjin (2.53 percent)

China has the largest population in the world, of 1.42B people. Its current growth rate is 0.39%. A one-child policy was introduced, this slowed down the very rapid population growth. This resulted in some negative aspects, including rapid increase in the number of older people, and an imbalance of the genders – more males than females, 107.56 males per 100 females in 1953 but this has dropped to about 105 males per 100 females in 2015. In 2016, the law was changed to a two-child policy. 

There has been a dramatic move to urbanised areas, with nearly 60% of China’s population living in towns and cities in 2017, and the majority of these in the eastern provinces. Globalisation, which is the integration between different countries and economies, has greatly impacted China in all aspects of economic activity and life.  According to the World Bank, China is classified as a middle-class economy its rapid growth has pulled hundreds of millions of people out of poverty. Only 10% of its population lives on $1USD a day, as opposed to 64% 35 years ago.

GDP comparisons using PPP consider the relative cost of local goods, services and inflation rates of the country, rather than using international market exchange rates, and so are more useful when considering the domestic market.  China tops the list from International Monetary Fund, World Bank and CIA World Factbook.

As shown in Figure 2a, China’s GDP based on PPP, exceeded the US’s in 2014; China accounted for 18.2% compared to USA’s 15.3%. Hence, making it the world’s largest economy based on PPP.

Figure 2b shows the largest economies based on GDP, PPP in 2018, according to International Monetary Fund estimates. This clearly shows its huge growth in GDP, based on PPP relative to other economies in recent decades.

 

 

 

 

 

 

 Globalisation Strategies Undertaken (PRE GFC) and;

Their IMPACTS on Economic Growth

Economic reforms were implemented after 1978 in order to improve China’s economic performance. These were implemented by Deng Xiao Ping; He became Chairman of the Chinese Communist Party in 1978. He wanted to raise and sustain living standards for China’s economy, basing his reforms on rapid industrialisation and modernisation. As China’s population was rapidly growing (as shown in Figure 3), Deng established a ‘one child policy’, to cap the rapid economic growth.

The following strategies were used to promote globalisation and improve economic growth and development between 1978 and 2008, and the impact they had on the Chinese Economic Growth:

Agricultural Reforms – Economic reforms began with agriculture because at that time it was “the foundation of the national economy”. The commune system of agriculture was replaced with the Household Responsibility System, allowing households to make their own production decisions and to sell their own surplus output.

Impact: After twenty years, China’s agriculture witnessed considerable progress. From 1978 to 1999, grain output increased from 305 million tons to 508 million tons. Also, the output of oil, meat, aquatic products and fruits increased several times, and the structure of agricultural production had undergone profound changes to increase its output.

Changes to Trade and Foreign Investment – China’s ‘Open Door Policy’ has encouraged it to adopt foreign trade and investment, allowing it to become one of the largest trading countries globally. Special Economic Zones were established throughout China, which encouraged foreign investment by Multi-National Corporations through a variety of incentives: low rates of tax, import duties being exempted, cheaper labour and power, and loosening government regulations.

Impact: Total value of foreign trade grew from US$21 billion in 1978 (GNP of 10%) to US$237 billion in 1994 (GNP of 36% in 1996), overall allowing China to become firmly integrated into the world economy.

Cuts to Protection – The ‘open door policy’, therefore led to tariffs and other barriers being cut, allowing efficiency to increase as imports could travel more freely than previously.

Impact: In 1996, the Tariff cut reduced from 32% to 19%, then in 2000, 15%. This overall opened China’s economy to foreign competition, allowing their economy to grow.

Taxation Reforms – were introduced by the Chinese government in 1994 and are still the foundations of China’s local fiscal system. Prior to the reforms, Beijing negotiated with local governments over the share of locally collected taxes that were paid into the central budget. The reform consolidated government control over the economy.

Impact: Taxation reforms allow the central government in China to direct the flow of government spending, which is generated by tax revenue, to the development and improvement of economic infrastructure (roads, railways, ports etc), which greatly support China’s economic growth. In 1994, the central government’s revenue more than doubled from the previous year, and Beijing’s share of total fiscal revenue soared to 56% from 22%.

Membership of Economic Forums – Reforms were driven by various multilateral trade negotiations. After the late 1980s, unilateral liberalisation in the Western Pacific region kicked off from regional cooperation arrangements such as the Asia-Pacific Economic Cooperation (APEC) forum.

Impact: APEC created regional initiatives which had objectives globally, increasing China’s liberalisation. Joining these economic forums also facilitated the negotiation of Trade Agreements between China and the rest of the world; this effectively increased trade opportunities and gains from trade.

 

Adjustments to the Exchange Rate – China’s previous exchange rate resulted in excess demand for foreign exchange, turning terms of trade against China’s export producers. In 1979, the country began to implement its reform and ‘opening’ policies, it loosened foreign exchange controls and allowed exporters to retain a share of their foreign exchange earnings; this was called the ‘foreign exchange retention system’. Also, for a long time, China has undervalued its currency (the Renminbi) in order to make its exports more competitive on global markets.

 

Impact: On July 21st, 2005, China slightly revalued the yuan and modified their exchange rate system; this was to unpeg their currency from the US dollar. This ultimately allowed them to reform the exchange rate regime by moving into a managed, floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Figure 4 shows the drastic changes of their exchange rate once globalisation policies were put in place.

Investment in Fixed Assets – Post China’s ‘opening up’ policies, their fixed asset investments have achieved and sustained rapid growth and has significant force behind China’s economic growth. A large sum of investment in China since the early 1990s has been used in increasing the amount and improving the quality of infrastructure. This was primarily driven by urbanisation in China, as cities require substantial infrastructure development to support a growing population. Chinese Fixed Asset Investment measures the change in the total spending on non-rural capital investments such as factories, roads, power grids, and property.

Impact: In the city, it resulted in increased infrastructure: this includes water supply, gas, heating, roads and bridges, waste water treatment, flood prevention, parks and greenery, sanitation, and public transit systems.  It has expanded to include infrastructure investment in transport systems, energy production and distribution, telecom, as well as social facilities such as hospitals, stadiums, and schools. This has grown to include sectors which support the infrastructures – such as steel production, iron ore mining, coal mining. Fixed Asset Investment in China averaged 20.05% from 1996, but has dropped to about 5% currently.

Prior to the implementation of economic growth reforms and globalization strategies, from 1953 to 1978, China’s annual average GDP growth rate was 6%. In 1978, China’s economy underwent new reforms and strategies, changing it from a planned, agricultural based, domestically-focused economy into a market economy that was highly industrialized and trade-oriented, integrating with the global economy to engage in globalization. As a result, China’s GDP grew rapidly across recent years, with an average annual growth rate in GDP of 9.5% from 1978 until 2009, with growth rate peaking at 14.2% in 2007.

 

Positive Impacts of Globalisation Strategies on China’s Economic Development

China’s economic growth has been averaging around 8% in average real terms over recent decades; allowing them to experience a significant reduction in poverty. According to The World Bank, extreme poverty has been reduced by approximately 400 million people in China, over the last 25 years. Between the years 1990-2001, where China’s policies were most productive, income poverty reduction was most rapid: citizens living below the international poverty line (US$1) fell by 130 million people.

These improvements have been sourced by direct foreign investment, which provides finance for exported oriented strategy. During the 1980s and 1990s, China’s economy doubled in size; their real incomes rose and there were significant improvements in material and non-material indicators. These include, but are not limited to: GNI per capita, life expectancy and literary/education rates; as shown in Figure 5.

The numerical trends are shown in Figure 6, where there is a clear increase in all quality of life indicators. The Human Development Index ranks countries based on the GDP per capita, literacy, educational attainment and life expectancy. China’s HDI value rose from 0.502 in 1990 to 0.752 in 2017, displaying the improvements in both economic and human development.

 

Negative Impacts of Globalisation Strategies on China’s Economic Development

Distribution of Income

Over the past couple decades, China’s real household incomes have averaged annual growth of 10%, though there is an obvious rise in income inequality. In the 1980s, China’s Gini coefficient, which is a measure of income inequality, was at a low 0.3. This number grew, reflecting increasing inequality, to 0.5 in 2015. (Evident in Figure 7) This is due to the urban-rural income gap and large geographical variations amongst Chinese provinces.

The increasing Gini coefficient is due to the differences in regional income levels throughout China; they vary considerably. Per capita incomes are higher in urban areas, such as large urban cities and towns, as opposed to rural areas in the central and western provinces.  The Household Responsibility system reinforced this income inequality by restricting the movement of the rural population to urban centres in the SEZ’s. Figure 8 shows where the highest income is dispersed, particularly Beijing and Shanghai, which experience the fastest economic and employment growth. The higher income areas are affected as such, due to their close proximity to the Special Economic Zones, which encourage foreign investment by MNCs.

 

Environmental Stability

China’s rapidly increasing economic growth has resulted in various negative externalities as high levels of resources are being used; a large one is environmental degradation. Due to resource depletion and the degradation of the environment, China is experiencing many environment implications, which increasingly are growing more severe. A study was taken in 2007 on China’s environment. It estimated that if pollution is not contained by 2020, 600,000 premature deaths will happen, along with 20 million cases of respiratory illness per year.

China heavily relies on 70% its electricity is produced from coal-fired power stations; ultimately resulting in significant amounts of Carbon Dioxide emission as pollution. In 2015, China accounted for 28% of global emission of Carbon Dioxide. (Figure 9) Hence, this made China’s rate of chronic respiratory disease the highest.

Apart from these emissions, other significant environmental problems China experiences include:

Drinking contaminated water – Up to 300M people, estimated that the cost of healthcare from cancers and diarrhea associated with water pollution reached approximately US$8 billion in 2003 in rural areas of China.

Loss of natural grassland/forests – due to growing agriculture and industry

Loss of lakes/wetlands – Lakes shrinking 15%, and wetlands 26% since the 1950s

Inefficient waste disposal – Estimated 20% solid waste was properly disposed, and 10% of sewage was treated; pollution from heavy metals such as lead, mercury, chromium, cadmium, and arsenic has become increasingly prominent, seriously endangering the health of local citizens

Severe air pollution levels – Emitting 17 million metric tonnes of Sulphur Dioxide a year; Beijing – In December 2015: the government issued a red alert, its most severe warning in its four-tier system. Schools were closed. Flights were cancelled. Road traffic was limited. Outdoor Construction projects were stopped.

China’s New Growth and Development Strategy (POST GFC)

In having the world’s largest GDP based on PPP, China is a significant contributor to world economic growth. China’s excessive growth rates created many implications which they ultimately plan to resolve many policies allow them to transition into a more balanced growth model.

Once the Global Financial Crisis hit in 2007, it unleashed a series of severe effects – from the stock market collapsing, financial institutions failing, and economies pushed in recession.

The old model of economic development was built on high and rapidly increasing levels of investment, especially in industrial activity and urban infrastructure. The GFC crumbled this, so China’s response was to maintain a fixed exchange rate against the US dollar, despite large currency depreciation in other Western Pacific economies. They also used massive monetary and fiscal expansion to maintain growth in output and employment. Fiscal and monetary expansions were applied a large scale between 2008–09.

China also rebalanced its economy away from investment and export-led growth in order to increase its sustainability and non-inflationary growth. The Chinese government have pursued policies to maintain economic growth of 6.5%-7%. These policies support China’s global SOEs, allowing them to secure resource supplies and directly invest in the overseas market.

Chinese leaders have also taken steps to boost domestic demand from its 1.37 billion people. A strong consumer market allows China to rely less on exports. This is because the people have become wealthier and can afford to buy products.

To boost growth, China needs more innovative companies. These only come from entrepreneurship. China is diversifying into a more market-based economy, meaning it relies less on state-owned, and more on privately-owned, companies to reap the rewards of a competitive environment. 

China’s leaders also realise they must reform the economy. To that end, President Xi Jinping authorized the “Made in China 2025” plan in 2015. It recommends advances in technology, specifically big data, aircraft engines, and clean cars. China has become a world leader in solar technology. It is cutting back on exports, including steel and coal production.

China’s ‘One Belt, One Road’ strategy was announced in May 2017 with the aim to increase economic development by building trade infrastructure; like roads, railways and ports to create trade linkages from Asia to Europe to Oceania (as shown in Figure 10). President Xi Jinping, during a Beijing summit, announced he would invest US$117b to further support this project; 68 countries have agreed and signed with the intention to mainly obtain Chinese loans and aid.

 

 

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