China - Economic Growth and Development | tutor2u Economics
Study notes

China - Economic Growth and Development

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB

This study note looks at aspects of economic growth and development in China

China's global economic influence and power is unmistakeable. That said the economy is now in a slowdown phase and in the process of moving towards a different model of growth and development.

China - Economic Growth

Key Macroeconomic Indicators for China

  • China has achieved an average growth rate of over 9% pa since 1978 – the year that effectively was the start of the market based reforms in the Chinese economy
  • Rapid, sustained growth in China has lifted over 700 million people (or one-tenth of the world's population) out of extreme poverty
  • All of the Millennium Development Goals have been reached or are within reach
  • Growth in China is now slowing down and a lower target rate of growth of 7% has been set
  • Capital investment (I) and exports (X) have been the foundations for Chinese growth and development but the Chinese economy has now reached an important turning point.
  • For growth to be sustained China needs to achieve a re-balancing of her economy
    • Relying less on exports of low to medium value manufactured products and moving up value chains to produce and sell products with a high-knowledge and high-technology component
    • Driving more growth from household spending (consumption) on goods and services
    • Sustainability has become an essential part of China's development strategy
    • Addressing the pressures that come from rising inequalities of income and wealth.
  • Success in improving sustainability through low carbon innovation and other technological breakthroughs can provide China with new sources of external demand as Chinese businesses export products and licence technology in green industries
  • China remains a Communist state dominated by the Chinese Communist Party but it is also an increasingly open economy where trade accounts for over seventy per cent of GDP

In 2000, China's accounted for 7.1% of the world's total GDP (in PPP terms)

  • By 2015 China will have a 19% share of global GDP - higher than any of the other BRIC nations
  • Per capita incomes are rising though still low by advanced-nation levels
  • The share of GDP (by valued-added) from Chinese industry has been close to 50% for more than 30 years, but since 1980 the share contributed by service industries grown from 30% to 43%. This is below the norm in advanced countries where services account for more than 70% of GDP.
  • Agriculture's share of Chinese GDP has fallen from 30% of GDP in 1980 to less than 10% in 2009. There has also been a mass movement of millions of people away from rural areas into urban centres of population but agriculture still accounts for around 40% of total employment
  • The latest Economic Plan is centred on developing the services sector, increasing urbanization and improving incomes – there are big opportunities here for UK service multinationals
Progressing towards 2030

China should complete its transition to a market economy -- through enterprise, land, labor, and financial sector reforms -- strengthen its private sector, open its markets to greater competition and innovation, and ensure equality of opportunity to help achieve its goal of a new structure for economic growth.

These are some of the key findings of a joint research report by a team from the World Bank and the Development Research Center of China's State Council, which lays out the case for a new development strategy for China to rebalance the role of government and market, private sector and society, to reach the goal of a high income country by 2030

Source: World Bank Report 2012

Chinese Development Strategies

  • China is a unique blend of market and command economy, but the market is gaining importance
  • For many years China has practiced export-led growth with exports exceeding 40% of GDP
  • Investment has been a huge growth driver – it was 46% of GDP in 2010. By comparison, Japan in its 1970s boom topped out at 36%, while Korea's share peaked at 39% in the 1990s.
  • The surplus on the balance of payments current account has fallen from over 10% of GDP in 2007 to less than 6% in 2011
  • Korea, Japan, Germany and Switzerland run trade surpluses with China because they are able to export the high-value manufactured items, particularly investment goods, China needs
  • The emphasis of China's growth policy is changing. A quote from Premier Wen Jiabao is central to this - 'China's economy needs to be put on the path of endogenous growth driven by innovation'

Foreign Direct Investment and Chinese Growth

Outward FDI from China

  • Partly because of trade surpluses, China has accumulated foreign-exchange reserves in excess of $3 trillion. These surpluses allow for outward overseas direct investment – much of the current focus is on China's investments in many African and Latin American countries.
  • China is estimated to earn around $1bn per day interest income from their FX reserves
  • In recent years China has given more loans to poor countries than the World Bank. In African countries such as Nigeria and Zambia, amounts from China of over US$100 million per year have been common. In Zambia, for instance, this has represented 1–1½ percent of GDP
  • Chinese companies are preparing for investments in Western and Eastern Europe in engineering and technology as part of an effort to find new markets and gain greater control of global supply chains. In 2010 Geely (a Chinese car maker) purchased Volvo (Sweden). Lenovo (the world's largest manufacturer of personal computers) bought IBM's PC business
  • Large scale investments by China in mining capacity is helping propel Peru into the world's second largest copper mining nation

FDI into China

  • China continues to attract high levels of inward foreign direct investment
  • China aims to lure more FDI in advanced manufacturing, as well as services including logistics, research and development, higher education and vocational training. This part of her aim to boost the service-side of the economy and to lift per capita incomes.

The Changing Pattern of Chinese Exports

  • For much of the last twenty years China's export industries have been dominated by manufacturing and selling consumer goods to rich advanced countries
  • But now China is shifting the emphasis of exports towards selling heavy industry products to developed and developing countries – for example overseas sales of giant earth movers, telecoms network gear and construction materials. Many of these are high-value and higher profit products which will make it easier for Chinese companies to pay higher wages to their employees.
  • Much low-valued added production such as cheap textiles and household goods is shifting to countries such as Vietnam and Bangladesh.
  • The other big change in the pattern of Chinese exports is a shift away from selling to rich, advanced, developed country markets towards fast-growing developing nations including Africa
China trade and investment - revision video

Sovereign Wealth Funds:

  • China has a sovereign wealth fund known as the China Investment Corp (CIC) charged with making portfolio investment overseas
  • In 2011, Cheung Kong Infrastructure Holdings Ltd bought Northumbrian Water Group and the CIC acquired an 8.68% stake in Thames Water Utilities
  • China has encouraged many businesses to make big capital investments in other emerging countries many on an African continent rich in natural resources.

Domestic investment and rural development and green technologies

  • The Chinese government has used some of the currency reserves to fund increased investment in rural areas of China to support living standards and development in some of the poorest parts of this vast country. Chinese farm subsidies have grown, as a share of total farm incomes, subsidies in China have jumped from 6% in 1995 to 17% in 2010
  • The 12th Five Year Plan allocates more resources to green investments in traditional sectors, for example infrastructure spending and innovation to improve water and energy efficiency in farming in a bid to lift agricultural productivity and profits.

Key Growth and Development Challenges for China

  • Enormous attention is paid to economic, social and political developments in China
  • Sustained growth and development is not inevitable even if the key macro indicators suggest that China is on a firm path towards becoming the world's biggest economy.
  • There are numerous challenges to overcome in the near and medium term.
  • The key point is that China is switching to a less capital-intensive development model.

Key challenges include the following:

  • Environmental challenges
  • Growing inequality of income & wealth
  • Threat from high inflation
  • Global trade tensions
  • Demographic challenges
  • Lowering reliance on exports and trade surpluses
  • Re-balancing away from huge investment towards consumption

Wage Inflation in the Chinese Economy

Wages are rising fast in China – many economists believe that China has hit a stage in its development at which demand for labour starts to grow faster than supply, creating labour shortages and pushing up salaries. This is known as a Lewis Turning Point.

Why are wages rising so quickly?

The main reason for the acceleration in wages is that China is ceasing to be a labour surplus country – here are some explanations for the pick-up in wages. Keep in mind however that wages in China remain low compared to richer advanced countries and many other emerging nations. Recent data suggests they are typically around $300 a month in the manufacturing heartlands, lower in rural areas.

  • 1.Demographics:
  • a.The median age in China's 35.2 years and it is rising
  • b.To some commentators, China is getting older before she has got rich. Life expectancy has soared, while fertility has plummeted due to strict birth control policies.
  • c.In 2009 there were 167 million over-60s in China, about an eighth of the population. By 2050 there will be 480 million, while the number of young people will have fallen. In 2000 there were six workers for every over-60. By 2030, there will be barely two.
  • d.Under the "one child policy" the fertility rate dropped to between 1.5 and 1.8, well below the 2.1 figure required to keep the population stable. This policy has now been changed
  • e.The old age dependency ratio will double in the next two decades, and the size of China's labour force is projected to start shrinking as soon as 2015.
  • 2.Social pressures:
  • a.Wages are rising because of growing concerns among the Chinese authorities about the consequences for income inequality of rapid growth. Tens of millions of workers have migrated to the Chinese cities where average wages are higher but creating a deeper imbalance in rural areas which already suffer low incomes and low quality public services.
  • b.Labour shortages and worker unrest have prompted sizeable increases in the minimum wage in many Chinese regions
  • c.The government's latest five year plan states that firms must increase wages by at least 13% every year but in certain areas the local authorities mandate much higher rises.
  • 3.Multinationals under the microscope:
  • a.There has been international pressure on foreign multinationals operating in China to lift wages for their workers. Many media reports have highlighted factories with miserably low wages and appalling working conditions.
  • b.Organisations such as the Fair Labour Organisation have been active in raising concerns about low wages and possible exploitation by monopsony employers.
  • c.Foxconn Technology Group (official name: Hon Hai Precision Industry) is a Taiwan-based company and also China's largest private-sector employer and was heavily criticised after fourteen worker suicides at one of its main land Chinese plants over a 10-month period in 2010, prompting local protests.
China's share of global output

What might be some of the consequences of a lengthy period of rapid wage inflation in China?

  1. Costs and profits: A short-term squeeze on profits for manufacturers such as FoxConn and Nike
  2. FDI shift: There might be a shift of FDI away from China to lower-cost countries such as Vietnam and Bangladesh. But many experts argue that the relocation of manufacturing and FDI will be small because of factors unique to China – for example, high manufacturing reliability, close access to growing Chinese domestic markets, excellent supply chains built up over twenty years, the existence of external economies of scale in China and commitments to raising productivity and product quality – which makes the wage rate less important. Relocation of manufacturing is more likely to happen within China to lower cost interior regions with excellent transport and communication links.
  3. Income and consumption: China is a middle-income country but it is well positioned to join the ranks of the world's high-income countries if growth can be sustained. Rising wages will help to boost demand for consumer durables, leisure activities and housing - providing a new source of demand as China looks to wean itself off resource heavy investment and export-led growth
  4. Trade balances: Higher wages and incomes may lead to a rise in demand for imports into China – providing an opportunity for advanced countries – and might stimulate FDI for consumer-facing businesses such as retailers and financial services companies
  5. Productivity and innovation: A decade or more of high wage growth will fast-forward the drive by Chinese producers to raise total factor productivity by investing in human capital and technology to lift output per worker. Annual labour productivity growth in China from 2010-2015 is forecast to be 8,3% which means that 10% annual growth in real wages will have little effect on unit labour costs

Demographic challenges: China's declining labour force

This is an important longer-term trend for the Chinese economy

  • The size of the Chinese population is forecast to peak around 2025-2030 and then start to decline
  • The labour force may contract by around 20% in the next forty years
  • During the years 2001-10, China's population rose at just 0.57% annually — half the level of the previous decade
  • China's working-age population declined by almost 3.5 million people in 2012
  • Although per capita income is only around 1/5th of incomes in rich nations, the fertility rate in China is on par with those of Russia, South Korea, Japan, Germany and Italy
  • As China grows old, dependency ratios will rise – this will put upward pressure on government spending and an aging workforce will be less mobile and probably demand higher wages
  • By 2010, nearly 14% of Chinese citizens were over 60, and nearly one in 10 were over 65 – this will continued to rise in the years ahead
China's Foreign Exchange Reserves

Urbanization

Roughly 1 of 10 people in the world is a resident of a Chinese city

Cities with more than a million people in 2011
USA (9) European Union (18) China (93)
New York: 8.2 Los Angeles: 2.8 Chicago: 2.7

Houston: 2.1

Philadelphia: 1.5

Phoenix: 1.4

San Antonio: 1.3

San Diego: 1.3

Dallas: 1.2

London: 7.8 Berlin: 3.5 Madrid: 3.3

Rome: 2.5

Paris: 2.2

Hamburg: 1.8

Budapest: 1.7

Vienna: 1.7

Warsaw: 1.7

Bucharest: 1.7 Barcelona: 1.6 Munich: 1.3

Milan: 1.3

Prague: 1.2

Sofia: 1.2

Brussels: 1.0

Birmingham: 1.0

Cologne: 1.0

Shanghai: 19.5 Beijing: 15.0 Guangzhou: 10.4

Shenzhen: 10.2

Chongqing: 9.7

Wuhan: 8.9

Tianjin: 8.5

Dongguan: 7.1

Chengdu: 6.3

Foshan: 6.2 Nanjing: 5.6 Haerbin: 5.4

Shenyang: 5.4

Hangzhou: 5.1

Xi'an: 4.8

Shantou: 4.0

Zhengzhou: 3.7

Qingdao: 3.6

Rising Income and Wealth Inequality in China

  • Inequality is a major social and political issue for China
  • The country has income inequality higher than most other Asian economies and their relative poverty level is similar to that persisting in many Latin American nations.
  • In 2011, although the average wealth per Chinese citizen was $17,126 - nearly double that of other high growth economies such as India, median wealth was just $6,327.
  • The gap between urban and rural incomes is widening. In 2010, rural residents had an average per capita disposable income of $898, less than a third of the average of urban residents $2,900
  • Only Brazil of the BRIC countries has managed to reduce inequality in recent years, in part due to its successful Bolsa Familia (family allowance) policy offering conditional cash transfers for poorer families paid directly to the female head of the family
  • Many economists including some influential ones in China such as Justin Lin believe that their system favours large corporations and a small rich elite, at the expense of the majority
Chinese and UK economic growth compared

Revision Videos you may find useful on the Chinese Economy

Chinese economy (part 1) key successes - revision video
Chinese economy (part 2) key challenges - revision video
Chinese economy (part 3) economic reforms - revision video
China relative living standards - revision video

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