Problems of Chinese Economic Growth?

 Since 1978 the Chinese economy has maintained economic growth at an average of nearly 8%. By western standards this is remarkable. The UK, by contrast, has grown at an average rate of 2.5%. However, despite the impressive figures there are many serious economic problems resulting from economic growth.

In particular, the growth rate combined with a population of over 1 billion has caused serious environmental problems. These are a good example of negative externalities of growth. A negative externality is a cost imposed on the rest of society as a result of receiving the benefits from growth.

Problems of Chinese Economic Growth.

  1. Pollution.

Pollution is a major problem in many industrialised cities. Increased car ownership has led to problems of smog and worsening air quality. Pollution also occurs from China’s vast industrial sector. Often regulation of pollution is very limited with untreated sewage often been poured directly into rivers.

2. Shortage of Power.

The growing demand of the Chinese economy has placed great demands on China’s creaking power infrastructure. This has led to the creation of projects like the Three Gorges Dam. This has been criticised for creating environmental and social problems. Environmentalists fear that the dam will severely impact on the natural habitats of many species.

3. Growing Income Inequality

China’s economic growth has benefited the south and eastern regions more than anywhere else. This has created a growing disparity between north and south. The agricultural north has, by contrast, been left behind. Many farmers struggle to make a living. Therefore, this has encouraged a migration of workers from north to south. China has struggled to deal with this regional inequality.

4. Property Boom

There are fears that China has been caught up in its own speculative property bubble. Especially in Beijing and the south East, houseprices have increased significantly. There are concerns that this property bubble could burst, creating negative equity.

5. Inefficient Banking Sector.

In particular the Chinese banking sector has a bad reputation for making bad loans. Many loans are not repaid back. This is a legacy of the Communist intervention in industry. Banks often made loans to large government business’ with little regard for free market principles. As a consequence it is difficult for genuine new starts to get sufficient capital funding. But, much investment is squandered.

6. Unemployment

It sounds a paradox that the Chinese economy can grow at 8% and yet unemployment is still a problem. The reason is that there are still many state owned enterprises which are grossly inefficient. Therefore, in the process of privatisation and modernisation many surplus workers are being made redundant. There is also a lot of unemployment (and disguised unemployment) in the agricultural sector.

7. Undervaluation of Yuan.

The Chinese Yuan has been tied to the dollar. As the dollar had devalued the Yuan has also devalued. However, it is argued by many (especially in the US) that the Yuan is undervalued against the US dollar by up to 40%. The impact of an undervaluation of the Yuan is that:

  • Increase inflationary pressure in the Chinese economy.
  • Make it expensive for Chinese to buy foreign goods.
  • Give an artificial advantage to Chinese manufacturers.

8. Overheating Economy.

Because the Chinese economy is growing so quickly there are concerns that this could easily lead to inflationary pressures. This is particularly a problem because of:

  • relatively loose monetary policy
  • undervalued exchange rate
  • Property Boom.
  • Inflation is currently 3.8%, but, there are upward pressures.

9. Huge Balance of Payments Surplus.

Maybe not such a serious problem for China. But, the US sees it as creating a great disequilibrium. The US, if not anyone else, would like to see the China use its balance of payments surplus elsewhere.

Citation : Pettinger, Tejvan. “Problems of Chinese Economy“, Oxford, www.economicshelp.org, 25th Sep 2009

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