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Readers Question: China’s exports have decreased, and its growth as well, since the big economic crisis, but my question is How much does this affect its GDP because i heard they export to countries that are closer, like Japan for example instead of the states.

China has enjoyed near double digit growth for the past decade. However, this has largely been caused by exports. Last year, domestic consumption in China accounted for only 35% of GDP (this compares to 72% in the US). This accounts for the huge current account surplus that China has. This focus on export led growth is fine when the global economy is doing well, but now that the US economy is in a deep recession China is seeing a precipitous drop in exports. Economic growth in China is falling from 10% to 7%; this may still sound very impressive. But, the nature of the Chinese economy is that people argue, growth of less than 6% would lead to a sharp rise in unemployment.

Japan is also in recession, so exports to Japan will remain low.

In the short term, China will face difficulties. On the other hand, this does give some benefits to China

Help to reduce inflationary pressure. With growth at 10% there were worrying signs of overheating and inflation.

It may force China to boost its domestic consumption and rely less on export led growth. This would help to reduce the current account surplus and the global imbalance in savings and debt.

• China economy at crossroads

Readers Question: How about the case of cost push inflation like that of China? there’s high inflation and yet the economy is not operating at its full level of employment and due to the fact that its exchange rate is fixed, monetary policies would not be effective but fiscal policies would further increase unemployment. What policies can be implemented to reduce this cost push inflation in a fixed exchange rate system?

Comment on post: Economic Policies to reduce inflation 

It’s a good question. Inflation in China has recently reached an 11 year high of 7.1% (inflation China)

The Chinese blame rising food prices and rising oil prices. However, I would also blame the Chinese government for allowing demand to rise too quickly.

Loose Monetary Policy. The benchmark interest rate in China is currently 7.4%. Although it has been increased several times in the past 12 months, it still represents a very low real interest rate 0.3% (7.4-7.1%) Compare that to the UK, where real interest rates are closer to 3.0%. The low cost of borrowing is encouraging a boom in borrowing, but often the borrowing is badly directed and it could contribute towards a boom and bust in the Chinese property markets.

Undervalued Exchange Rate. Although the Yuan has appreciated in the past couple of years (although the exchange rate is supposed to be fixed it has been allowed to be gradually revalued) However, it is arguably still undervalued. The Chinese government is keen to keep it artificially low to stimulat export led growth. The weakness of the Yuan is indicated by the size of the Chinese Current account surplus.

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 Please can you tell me the sites where i can find graphs about the chinese economy. for example, graph about the level of employment, export sector, import sector GDP and so on.

• There is a pdf here on the Chinese Economy, it contains many diagrams and graphs, especially on regional inequality. Pdf link to Chinese economy
• More graphs on Chinese economy
• Recent history pdf
• Brief overview of Chinese economic history here (note no graphs)
• China Economy at BBC

Recent Blog Posts on China 

• Should We worry about a strong China?
  
• Chinese Economy 2008
• Chinese Yuan Dollar Forecast 2008

Readers Question: What is the most important reason why there is an improvement in the economic growth in the chinese out of the following policies. is it Government policy, education, investment from overseas, cheap labour or natural resources.

1. Cheap Labour

China has a large unskilled workforce willing to work for low wages. In the north many farmers struggle to make an income, therefore, they are willing to move south and work in manufacturing for low wages. Therefore, despite high growth, wages have remained low. This has meant Chinese exports have continued to be very competitive. Exports to the rest of the world are one of the main factors behind increased AD and China’s. Cheap labour has also helped avoid wage inflation, which could destablise economic growth.

2. Government Policy

The Chinese government have been keen to promote economic growth (they have been concerned about unemployment from privatised industries and agriculture). Therefore, they have kept the Yuan undervalued. This makes Chinese exports more competitive and has helped the exporting sector. The government have also kept interest rates relatively low. Although, it is sometimes difficult for small business to get loans. Low interest rates have also encouraged some irresponsible lending. Arguably the government have contributed to a boom and there is a danger that the government have allowed growth to be too high. This could lead to inflation and a downturn in the future.

3. Raw Materials.

China has good reserves of raw materials such as coal. However, for many raw materials they are net importers. This is true, particularly, for metals, oil and precious commodities. In fact demand from China is one of the main reasons behind the boom in commodity prices. Therefore, we could say China has experienced growth, despite having to import so many raw materials. The increasing price of oil and metals may be a constraint on future growth.

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China recently became the second largest economy in the world. According to the IMF, in 2010, the Chinese economy was $5,878,257 million – second only to the US economy. If we use GDP at purchasing power parity, the size of the Chinese economy is estimated to be even larger, at around $10,119,896 million. However, it also has an enviable growth rate of close to 10%; at this rate of economic growth, China is forecast to become the dominant world economy within 10 or 20 years.

The rise of the Chinese economy (and also other Asian economies such as India) pose some interesting questions. – Who will benefit? and what should we be concerned about it?

This is a simplified look at the impact China might have on the world economy.

Potential Threats From China

1. Demand for Commodities. Growth in the Chinese economy will lead to an increased demand placed on raw materials and commodities. This will push up prices and could lead to shortages of basic commodities.China accounted for 33% of the recent increase in demand for oil.
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