The Economic Growth Of China

Published Date: 02 Nov 2017

Introduction

Economic growth of a country has long been regarded from the viewpoint of the increment of productive capacity. However, more importantly, a stronger economy will help to improve its people purchasing power which will in turn be a catalyst for overall social advancement. Since the early 80s, China has achieved tremendous economic success which is partly attributed to its population of 1.34 billion. China is no longer an underdeveloped country which was previously always associated with poverty due to its closed-door policy.

More than three decades since China initiated its economic reforms in 1978, China is now one of the fastest growing economies in the world as well as the largest economy in among the developing nations. According to CNN Money (2011), China has achieved as the second largest economy in the world with the Gross Domestic Product (GDP) in 7.8trillion of U.S dollar. This has lifted more than 400million people in China out of poverty with the poverty levels of one dollar a day (World Bank 2005). Thus, this paper will provide literature and statistics that explain on the factors that causes the tremendous growth rate of China, as well as the sources for the sustainability.

The Era of Reform

In the early 1950s, China launched a series of political movement to speed up industrialization and tried to carry out economic modernization, but the results were unsatisfactory. Subsequently, in the aftermath of Cultural Revolution, the Chinese leaders adopted an economic development strategy to transform into market-based from its centrally-planned in 1978. This has proven to be a key decision that has contributed to China’s rapid economic growth thereafter. For the whole process of economic reform, the first step was focused on agricultural sector and improved its resource allocation by introducing the household responsibility system (HRS) in rural areas.

The HRS had transformed into a household-based production system from the organised system of production where previously communally-owned farmland was divided into individual pieces for the household. It is noteworthy that this reform was started by the farmers in the rural areas based on their common sense; it’s not initiated by the government. Thanks to the far-sighted transformation, there had been a significant increase in the villagers’ output that was more than enough for them to provide sales to the market. During the period, there was an increase of China’s annual grain output to 407million tons in 1984 from less than 300 million tons before 1978 (Zhang 2011).

One of the key reasons for China’s consistently high growth rate was because of its high capital accumulation rate which was related to the advancement of technological structure. The high rate of capital accumulation provided a strong force for the rapid growth of the economy and also made up about 40% of China’s GDP (Lin, Cai & Li 2003). China initiated the open-door policy to attract foreign capital inflow and allow the Foreign Direct Investment (FDI) in order to accumulate capital and also increase employment. FDI spread from east to west across the country in the end of 1990s. Its investor-friendly policy helped to increase its FDI by leaps and bounds, attracting US$60.6billion of FDI in 2004, which was only surpassed by the US and UK, with nearly US$96billion and US78billionn of FDI each. From 1978 to end-2003, there are about US$500 billion invested in China from the foreign firms, which made up more than one quarter of China’s output manufactured goods (Lardy 2006). As a result, the Chinese economy has become more exposed to the world compared to previous economy.

In 1949, the People’s Republic of China was founded. This was when China rural population was accounting to 80%-90% of the total population and most of the rural population lived in poverty. Therefore, Chinese leaders had chosen a new economic development strategy, which was the heavy industry-oriented development strategy to eliminate poverty. This is because after the World War II, most of the developing countries have successfully accomplished political independence by having heavy-industries as the basic of development path. China tried to introduce similar strategy, in anticipation of emulating those countries’ success. Nevertheless, its results were unsatisfactory, largely because 70% of the total labour force was concentrating in the low-value-added agricultural sector.

In the 1978 economic reform, China improved their industrial structure by upgrading from low-value-added agricultural sector to high-value-added industries. By upgrading the industrial structure, it became more focused in the high-value added production sector by allocating its labour force in a more efficient manner. This has significantly contributed to the rapid growth of China economy, earning the aptly-coined status as the ‘factory of the world’, thanks to its low cost manufacturing base.

The economic growth of a country is strongly related to the technological innovation, there is a strong relationship between the economy and technology. With the rapid growth in technology, one can enjoy the rapid growth in the economy. According to BusinessWeek Economist, Michael Mandel says: ‘Economic growth is driven by new technologies and its applications, always and in all places.’(2004). Thus, technological innovation is vital for the economic growth rate and there are two ways to realize: 1. Self-investment by conducting research and development (R&D); 2. By imitating or purchasing advanced technologies from develop countries (Lin, Cai & Li 2003). Nevertheless, history has proven that chances to success for R&D in new technologies are small and also required substantial investment.

Similar to path undertaken by Japan and the four Asian Little Dragons (Taiwan, South Korea, Hong Kong and Singapore) in the early 1960s, China utilised the ‘advantage of backwardness’ in its technological innovation by importing advanced technologies form developed countries to boost its economic growth rate. The wise move helped to give the best outcome with its limited resources back then to achieve higher economic growth. Studies have also shown that the cost of independent research is triple of the cost of buying patents. Moreover, there are also commercial values in the purchase of patented technologies.

In addition, one of its greatest tools deployed to achieve strong economic success stemmed from the devaluation of its own currency, Renminbi (RMB). The value of RMB to dollar dropped from 1.7:1 in 1978 to 8.28:1 in 2000 after a series of moves by the Chinese central government to devalue its currency. This resulted in a surge of its export demand due to the pricing advantage from the RMB devaluation, providing strong boost to China’s already rapid growth in GDP. Coupled with its low cost base, China becomes the next frontier of growth for multi-national companies given the vast opportunity provided in the most populous country in the world.

Becoming a member of World Trade Organization (WTO) on 11th December 2001 after 15 years of effort has proven to be a game-changer for its economic growth. The membership of WTO brought to an end its long isolationist approach and grew its economic linkages with the rest of the world. This is because by joining as a member of WTO, China enjoys better integration with the global economy under a rules-based, transparent and predictable system (Sharma 2009). The aims of WTO are to lower the tax rate that is paid on goods coming into or going out of a country, which is the tariff rate and also according to principle of comparable advantage, production could be allocate globally by allowing market entries.

With all the efforts that China had made as I mentioned above, the impressive economic growth trajectory is as following:

In 1978, it shows an increment of China GDP which is from US$214.2 billion to US$4327 billion in 2008;

there is also increased in GDP per capital from US$228 to US$3292 (United Nation Statistics Division 2011).

During 1978-2008, China has achieved the high annual growth rate of GDP, 9.9% that surpassed the world average growth rate of 3.3% (Zhang 2011).

During 1978 to 2009, there is also an increment in sum of exports and imports from US$9.8billion to US$ 1202billion and US$10.9billion to US$1006billion respectively (World Trade Organization 2010).

With these results, China is now the second-largest economy in the world. An economic survey done by the Organisation for Economic Co-operation and Development in 2005 shows that by 2025 or maybe earlier, China will become the world largest economy if China continues its economic growth path.

Sustainability of Chinese Economic Growth

Over the past three decades, China has achieved a constant period of rapid economic growth. This has set an extraordinary record in the world economic history. However, the sustainability of the China economic growth has long been met with scepticism by various quarters. According to Garnaut (2005), high rates of saving and investment, strong state system, and demographic structure are 3 factors than will sustain the economic growth of China. The existence of an effective strong China state system enables a stable condition for market exchange which is critical in sustaining economic growth. In addition, the high investment levels in China have been supported by the high ratio of national saving, which is the most fundamental source of investment funding. Favourable changes in the China demographic structure have also provided a high ratio of skilful members of the labour force to population. As a result, this will increase integration into international markets and maintain the rapid growth of Chinese economy.

Conclusion

China has achieved rapid economic growth since 1978 economic reform which was introduced by the late Chinese leader Teng Xiao Ping. Various economic measures implemented throughout the rich history of China including the implementation of market-based economy, ‘open-door’ policy, currency devaluation, utilisation of the ‘ advantage of backwardness’ and successful application to join the WTO have all contributed to the Chinese economy that the world heaped praises on. Few factors that may sustain the economic growth include maintaining high rates of savings and investment, strengthening the state system and improving demographic structure. China would accomplish as the largest economies in the world that surpass the US economy if China continues with its effort.