Economic Policy And Global Government For Asian Nations

National economic policy in context of China

Discuss about the Economic Policy and Global Government for Asian Nations. 

Most of the Asian nations have witnessed rapid growth in the post-independence phase especially so in the last four decades or so. Amongst these nations, China leads the pack as it has completed transformed through a slew of economic reforms and at the present boasts its economy as the second largest economy in the world after only the USA (Yueh, 2010). The annual growth rate witnessed by the Chinese economy over the last three decades has been almost 10% which is phenomenal (IMF, 2012). While, a significant amount of praise for this stupendous growth goes to the opening up of the Chinese economy and related reforms, but it is imperative to analyse the role of macroeconomic policies in this regard. These macroeconomic policies assume an even more critical role in the wake of globalisation where the happenings in the economies of the other nations tend to have a significant impact on the Chinese economy (Bardhan, 2010). This impact needs to be understood in the wake of the export oriented nature of the economy and hence its dependence on the overall global demand besides the domestic demand. In view of the above background, the aim of the current paper is to present the economic policies of China along with the measures taken by the government and other responsible authorities to maintain the macroeconomic stability in the country. Besides, the role of this macroeconomic stability to growth has also been analysed through the medium of the given paper.

The national economic policy in context of China is under the control of the State Council which tends to set out the economic agenda over the long term and formulate the five year plan, which capture the goals in relation to the level of industrialisation, urbanisation and liberalisation of market that the country seeks to achieve in the medium term. This plan serves as a key tool for the fulfilment of the long term agenda of the government. The State Council frames the priorities and objectives of the plan along with the broad contours on how to achieve the same but the implementation of the same is left to the government agencies working at the central and local level (Qiang and Hu, 2014).  In this regards, it is noteworthy that State Council does not limit to only developmental goals in the various five year plan but also tend to include the macroeconomic goals. This particularly includes target related to inflation, money supply coupled with GDP growth.  The fact that these are fixed by the State Council ensures that synchronization is maintained between the objectives to be met and the likely economic indicators. Additionally, since certain economic indicators tend to be counter balancing like growth and inflation, hence a delicate balance needs to be maintained between the two so that the long term national objectives can be met in an efficient manner (Ballantyne, Garner & Wright, 2013).

Implementation of policy objectives

Therefore, annual assessments are carried out to rework the inflation and growth targets so that this delicate equilibrium could be maintained which becomes essential in the wake of a globalised economy which is more prone to global shocks. It is significant to note that China does not follow a monetary policy based on inflation targeting since inflation in China is not a fixed target and tends to be highly variable in accordance with the economic conditions and thus are periodically reviewed and determined by State Council (Ballantyne, Garner & Wright, 2013). Another key aspect that falls within the ambit of the State Council is the determination of the managed float regime in context of the exchange rate. This has become even more significant post 2005 when it was decided that China would migrate from a fixed exchange rate against the USD to a more market linked and determined exchange rate but the process was to be carried out only gradually so as to ensure that export sector and industrialisation was not adversely impacted (Hu, 2010).  Additionally, the State Council also exhibits control over certain key sectors so as to ensure that long term objectives are not only met but the underlying development is also sustainable and proceeds in a socially desirable manner. This is most clearly evident through the active interference in the property market which regulates the prices so as not to hamper the construction activity and simultaneously ensure that affordable housing demand is met so that the people could actively contribute to growth of the nation (RBA, 2012).

While, the State Council is the apex decision making body in term of laying down policy objectives, the implementation of the same is carried out by a host of government agencies. The PBC or People’s Bank of China along with SAFE (State Administration of Foreign Exchange) are collectively responsible for the implementation of the policy related to exchange rate.  In order to manage the exchange rate and also the supply of money in the economy, it is imperative that appropriate capital controls are erected on the flow of foreign capital (IMF, 2012). This has become significant in the last two decades when Chinese economy has opened up in a big way and has attracted significant chunk of investment in the form of FDI (Foreign Direct Investment). In order to manage the impact of this foreign money inflow and outflow, the PBC acting as the central bank uses various tools available in the monetary policy to achieve the objectives fixed by the State Council. It is noteworthy that without this stability lent by the PBC, the exchange rate movements would adversely impact the export competitiveness of China considering the huge inflow of foreign capital into China (Yueh, 2010).

Role of macroeconomic stability in promoting growth

Further the government both at the central and local level are responsible for making the expenditure in line with the government priorities that are defined by the State Council. While the majority of the revenue is collected by the Central government, the local government has a fair share in the expenditure. In the expenditure of the local government, a fair share goes into infrastructure spending besides social security and education. In terms of the various investment projects to be pursued a critical role is played by the NDRC or National Development and Reform Commission. The public investment forms a crucial component of the fiscal policy and includes the sizable investments that are made in the state owned enterprises which have a significant role to play in the Chinese economy. From the above discussion, it is apparent that the macroeconomic framework are highly interconnected and integrated under the aegis of the State Council which ensures that all the various levels move towards a common goal (Turner, Tan & Sadeghian, 2012).

The stupendous growth shown by China was initiated through the reforms initiated in 1978 which during the initial phase of three years had an adjustment period during which centralised policies were introduced post which the economy had opened up gradually to foreign investments. Therefore, it found itself in a perfect position to cash in on the various outsourcing opportunities presented by the Western developed economies and gradually started strengthening the manufacturing industry. Besides, in order to fuel development of industries, infrastructure was the key focus which also attracted a plethora of FDI (Qiang & Yu, 2014). During the 1990’s, China witnessed export led growth which was highly concentrated towards the US. In this process, a strong enabling role was played by the macroeconomic stability led by a fixed currency exchange rate coupled with investments in the development of the enabling infrastructure. However, this increasing interaction with the outside world particularly the West had adverse implications for stability and growth which was apparent during the Asian currency crisis of 1997. China was not much impacted by this crisis as the contribution of foreign money in China was mostly in the form of FDI which was comparatively more stable than hot money or FII (Foreign Institutional Investors) money (Bardhan, 2010).

However, the growth in exports did slow down and also FDI inflows dropped. As a result, the Chinese authorities in order to sustain the growth focused on the weakness in the internal financial system which was reeling under the mounting debt of bad loans and an overdependence on US as a trade partner. Further, during the dot com bubble, in order to support the economy, there was a devaluation of the currency to enhance the export competitiveness even though China ran a huge capital and trade surplus. However, this was brought about by the stringent capital controls exhibited by the PBC  (Turner, Tan & Sadeghian, 2012). This coupled with increased focus on domestic demand enabled the Chinese economy to grow at the turn of the century. Arguably, the biggest challenge to Chinese economic growth came from the global economic crisis which plummeted global demand and led to reduced liquidity in the global market. However, through the government support led by the State Council, China was able to emerge from this crisis (Wen, 2013).

Impact of globalisation on macroeconomic policies

The management of the exchange rate to fuel economic growth during the last decade is apparent from the graph shown below.

It is apparent that at the turn of the century, there was no appreciation of the Chinese Renmindi so as to provide support to exports. However, fuelled by a bounce back from 2004 onwards, in late 2005, there was an appreciation of the economy which continued to the beginning of the crisis. Further, during the economic crisis, there was no appreciation of the Renmindi in a bid to provide support to the economy. However, the process of appreciation commenced from 2010, when there was a bounce back in the global economy backed by the government stimulus. Hence, it is evident that the exchange rate has played a key enabling role for economic growth as China becomes more exposed to global shocks (Ballantyne, Garner & Wright, 2013).

The contribution to the GDP during the last decade also highlights the support of the macroeconomic stability in the overall economic growth as shown below.

The above graph clearly indicates that from 2004 to 2007, the contribution of net exports to the GDP swelled. Further, during these years, the domestic consumption also boomed while the investment growth remained relatively constant. In 2008, there is a drop in GDP growth due to drop in net exports and consumption growth fuelled by the global financial crisis. As a result, in 2009, there was a spurt in investment primarily by the government so as to provide stimulus to the economy on the lines of Keynesian economics (Bardhan, 2010). This eventually tapered down as consumption and net exports showed signs of recovery. Therefore, it is apparent from the above graph that the government policy tends to be in line with the demands of the economy which has ensured that economic growth remains sustainable. This is also reflected in the inflation and unemployment figures which have remained stable as suitable measures have been undertaken in an integrated manner so as to provide a facilitating environment to the economic growth (Yueh, 2010).

Based on the above discussion, it is apparent that the underlying policy making framework that has been existing in China is exceptionally integrated in a hierarchical manner which ensures that the effort of all involved agencies and authorities is directed towards common goals. In this regards, while the State Council decides on the policy objectives and provides broad contours about the same, the implementing agencies like the PBC along with the state operated enterprises and also the government at various levels ensures that the same is implemented so as to achieve the targets offered by the State Council. While achieving the stated developmental goals, both economic and social, a key importance is offered to the macroeconomic stability which is apparent from the fact that decision in this regard is undertaken by the State Council and not left to the PBC to decide. Besides, with the opening up of the economy, it has become more susceptible to influence from external shocks and therefore prudent measures have been undertaken in the past so as to ensure that the economic growth remains sustainable. This has been demonstrated in the aftermath of the Asian currency crisis along with the global financial crisis. On the basis of the same, it may be fair to conclude, that indeed for China, the macroeconomic stability has proved to a significant contributory factor to economic growth.

References

Ballantyne A, Garner M & Wright M 2013, ‘Developments in Renminbi Internationalisation’, RBA Bulletin, June, pp 65–74. 

Bardhan, P 2010, Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India, 2^nd eds., Princeton University Press; USA

Hu X 2010, Exchange Rate Regime Reform and Monetary Policy Effectiveness, Available online from https://www.pbc.gov.cn/publish/english/956/2010/20100804100116452770088/20100804100116452770088.html (Accessed on November 29, 2016) 

IMF (International Monetary Fund) 2012, Country Chapter: People’s Republic of China, in Annual Report on Exchange Rate Arrangements 2012, Available online from https://www.imfareaer.org/Areaer/Pages/Reports.aspx  (Accessed on November 29, 2016). 

Qiang, G & Yu Y 2014, The Wealth of China: Untangling the Mystery of the World’s Second Largest Economy, 2^nd eds., CN Times Book, Shanghai 

RBA (Reserve Bank of Australia) 2012, ‘Box A: China’s Residential Property Market’, Statement on Monetary Policy, February, pp 14–16. 

Turner G, Tan N & Sadeghian D 2012, ‘The Chinese Banking System’, RBA Bulletin, September, pp 53–63 

Wen J 2013, ‘Report on the Work of the Government’, Address to the First Session of the Twelfth National People’s Congress, Available online from https://news.xinhuanet.com/english/china/2013-03/18/c_132242798.html  (Accessed on November 29, 2016). 

Yueh, L 2010, The Economy of China, 3^rd eds., Edward Elgar Publishers, London