Country Analysis China

Economic Analysis of China

Index Table

Strategy 2

Fiscal Policy 2

Monetary Policy 2

Context and performance 3

GDP 3

Political situation 5

Opportunities and threats 6

Conclusion 7

Company Analysis 9

Sources 10

Economic Analysis of China

Strategy

It is commonly known that economy in China has been booming for the last two decades. The question that remains to most people is how China went from a closed, communistic country, to a country that is thought to be of the highest economic importance in the 21st century. Open-door policies and encouraging foreign investment were not in China's dictionary until the 80s. Only then, the government felt the need for change.

The radical change in China was directed by an important metamorphose of government policies in all sectors. The government did not only alter its fiscal and exchange rate policies but also made important progresses in the field of trade and investment policies. They did this to obtain higher growth rates and ensure the country's autonomy.

Fiscal Policy

Two important factors in a country's economy are the fiscal and monetary policy. In China the Nation's People Congress, the NPC, manages the fiscal policy, which is the country's parliament. The People's Bank of China, the PBC, is in charge of the monetary policy.

The NPC started to restructure China's economy over 25 years ago. They created a fiscal policy that gave more freedom to the market forces. They first applied this restructuring in the agriculture, later in the industry and finally to large parts of the service sector. By 2000 they completely dismantled all price regulations. The NPC also introduced new laws that allowed private individuals to own limited liability corporations. Competition laws were used to unify the internal market. In addition to this, they sharpened the business environment by allowing foreign direct investment, reducing tariffs, abolishing the state export trading monopoly and ending multiple exchange rates. China also became member of the WTO. Hereby many laws and regulations were standardised. In 2004 the government made fundamental changes to the constitution. They stressed the role of the non-state sector in supporting the economic activity and the importance of protecting private property from arbitrary seizure. In 2005 they deregulated infrastructure, public utilities and financial services, among others.

All these interventions allowed the emergence of a powerful private sector in the Chinese economy. The growth in private ownerships did not only have a positive impact on macro economic activity, boosting the level of productivity, it also had a very favourable impact on real incomes. The expanding private sector and increasing incomes resulted in very high savings rates. On the other hand, this expansionary fiscal policy also has its negative sides. Although the expansionary policy reduced the negative effects of the Asian financial crisis in 1998, it also led to overheating sectors. The sectors include real estate, automobile, steel and aluminium. The investment boom also caused energy shortages, clogged transportation and a rise in prices of raw materials.

Monetary Policy

The Chinese economy is also influenced by the monetary policy, which has been considerable volatility of inflation. The past has shown that China's monetary policy has not been successful in maintaining low and stable inflation.

A major issue in China's monetary policy has been its expansionistic character in 2003. The government was afraid of the possible negative effects of the SARS epidemic on economic growth and decided to raise the targets for broad money growth and credit expansion. The NPC was ready to accept the risk of higher inflation because of these measurements. The PBC, on the contrary, has never been in favour of this and has repeatedly tried to inform and persuade the government of the risks and dangers of their actions. Fearing the results of the expansionism of the monetary policy, the PBC announced new policy guidelines to restrict lending to the overheating sectors, like the property sector. Unfortunately, they found little support with the NPC and domestic currency lending grew at an alarming rate.

As a result of the alarming rates, the PBC tried to convince the government to either revalue the currency, in order to reduce aggregate demand, or to raise interest rates to restrict the rapid growth of credit that was feeding an unseen boom in fixed asset investment. Yet, China did not revalue its currency. The unwillingness of the authorities is partly surprising, given the frequency with which they adjusted the exchange rate in the 1980s. The authorities defend the fixed exchange rate because the need of stability. This stability is questionable because China matches its currency against the dollar. Seen the volatility of the dollar against other major currencies, like the Japanese Yen and the Euro, the Chinese fixed exchange rate guarantees that the Chinese currency, the Yuan, is also quite volatile on a trade-weighted basis.

Even though the government is not helping the PBC, the PBC does try to change things by for example soaking up excess liquidity. They also threat to raise China's benchmark lending rate if the consumer price index growth surpasses the one year lending rate, which would happen if the government doesn't take action.

These changes in fiscal, monetary and exchange rate policies are China's strategy to create a better basis for world trade and economy. They have also made improvements in other sectors, for example education. The government has imposed all children a nine-year education trajectory. Significant efforts were also made to raise the number of higher-educated people. Although China is making important steps into the right direction, they still have much work ahead.

Context and performance

A strategy alone cannot change a country's economy. A strategy should be used in symbiosis with a country's context. A country's context is a mixture of the country's resources, the firms, national and international organizations and the formal and