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The Economy of China Chapter I Introduction China’s economy is huge and expanding rapidly. In the last 30 years the rate of Chinese economic growth has been almost miraculous, averaging 8% growth in Gross Domestic Product (GDP) per annum. The economy has grown more than 10 times during that period, with Chinese GDP reaching 3.42 trillion US dollars by 2007. In Purchasing Power Parity GDP, China already has the biggest economy after the United States. Most analysts project China to become the largest economy in the world this century using all measures of GDP. This paper analyses the Chinese economy in recent years from a perspective view. Chapter II takes a closer look at the Chinese economic policies and targets that set by Chinese government, including the fiscal, monetary, trading and economic growth policies adopted by China government in the past 10 years. Chapter Ⅲ identifies the overview of Chinese economy, that is, Chinese performance in the economy in the past years. Chapter Ⅳ makes out some suggestions about how to soundly develop the economy in the future. Chapter Ⅴ concludes our general ideas that our economic aim is to build a harmonious and moderately prosperous society. To achieve the goal, the Government will address its development challenges through a balanced strategy that aims to build a harmonious society and a socialist market economy that is energy-efficient and environmentally friendly. Chapter II The Chinese Economic Polices and targetsThe Essay is provided by UK Assignment http://www.ukassignment.org 2.1 The monetary policies The Chinese government’s monetary policy instruments applied by the PBC(People's Bank of China ) include reserve requirement ratio, central bank base interest rate, rediscounting, central bank lending, open market operation and other policy instruments specified by the State Council. The objective of the monetary policy is to maintain the stability of the value of the currency and thereby promote economic growth.In 1998, the national bank credit quota was scrapped and the PBC in theory has had to rely on adjusting its own balance sheet to manage the monetary base. Since then, the PBC has tried to develop the influence of the interest rate. The tools for influencing money creation in China are now mostly present. However, they are not yet as effective as they need to be to enable the PBC to run an effective monetary policy. Consider the three main ones: OMO, discount rate and reserve requirements. Open market operations in China began in October 1998, when the PBC started cash trading of bonds. In comparison to repos, bills can be traded, which improves liquidity, and regular bill auctions allow an interest rate benchmark to be formed. The PBC has developed the primary bill market to include 52 dealers, including banks securities companies, insurers, rural credit co-operatives etc. PBC bill auctions use both volume- and rate-based bidding. The PBC is reported to have a dedicated OMO trading room managed by the PBC’s Monetary Policy Division.Box 1 below. At first the PBC only engaged in one OMO a week. In the early days, cash bond trading was the most common means of adjusting the monetary base. After a short period, this was replaced by bond-based repo transactions since these had the advantage vis-à-vis bonds of affecting money market rates (and not impacting on the bond market). On June 25th 2002 the central bank started using reverse MoF- bond-based repos to cope with new FX inflows. However, by September 2002, the PBC had run out of bonds upon which to make repo transactions. To resolve this, the central bank determined that all outstanding repo contracts issued between June 26th and September 24th would not be honoured as such, but would be converted into a new instrument, PBC bills. The conversion resulted in bills worth CNY193.8bn (USD23.3bn), which appears on the central bank’s balance sheet in September 2002. The first auction of ‘new’ central bank bills took place in May 2003 and since then the market has grown substantially. From February 25th 2003, the central bank has engaged in two (or more) OMOs a week.It has also developed a liquidity management system, which now provides a daily update on banks’ liquidity positions.Table 1 summarises the PBC’s OMOs since 1998 (China Financial Stability Analysis Group,2005). Table 1: Open market operations Second, the discount rate, the rate at which the PBC lends into the money market. On March 25th 2004, the PBC introduced ‘floating rate’ central bank rediscount lending. In other words, the PBC now has right to set the discount rate without having to seek State Council permission each time. At the same time, the PBC added 63 bps to the benchmark discount rate for financial institutions, and 27 bps to the standard rate to take the central bank’s core rediscount rate to 3.24%. Floating rate rediscount lending will be phased in over three years for the rural credit co-operatives （Financial Stability Analysis Group, 2007). Third, the reserve requirement. The PBC reduced this ratio in the late 1990s as table 2 shows, in an attempt to stimulate credit growth and to give the banks more flexibility in how they managed their funds. At the same time, the central bank has steadily reduced the rates it pays on reserves, both required and excess, as table 3 shows, in an attempt to encourage banks to lend into the money markets rather than place their excess funds on deposit with the central bank. On April 25th 2004, the PBC adopted a differentiated reserve ratio system, meaning that second-tier banks, with capital adequacy ratios or asset quality etc. below certain standards would have to hold 8% reserves (compared to the standard level of 7.5%). Rural and urban credit co-operative were exempted from this rule for the time being. Ma and McCauley (2004) note that by mid-2004, 38 second-tier banks were subject to the new higher level, affecting about 10% of deposits in the system (Financial Market Department of the PBC,2006). Table 2. China’s banks’ required reserve ratio, % Table 3. Interest rates paid on required reserves, % 2.2 The fiscal policy A fiscal policy is when the government changes taxation and increases government spending. Through an expansionary fiscal policy it aims at increasing the amount of disposable income people will have. This income will, depending on the marginal propensity to consume, be spent in the economy. The result of this will be that aggregate demand will increase thus eliminating the deflationary gap which is caused by either growth or unemployment. Moreover fiscal policy aims at increasing government spending. If government spending increases the investment in the economy which will be translated as an increase of investment in the economy and which will in turn close the deflationary gap. Through a contractionary demand side policy the government aims at decreasing the amount of disposable income and thus reducing consumption within the economy which will in turn lead in a reduction of aggregate demand. In terms of government spending the government will reduce government spending so as to reduce investment and t hus close the inflationary gap. discretionary fiscalpolicy should focus on long run issues, such as tax reform and social security reform (Ji and Lin, 2008). From the following figures you can see China's economy performed well in the first half according to the economic indicators. Take 2007 for example, According to the numbers, China's GDP grew 11.4%, retail sales grew 16.8%, fixed asset investments grew 24.8% and foreign trade exports grew 23.5%. Economists point out that the turnaround in China's economy shows that China's active fiscal policy is working. The fiscal policy has undoubtedly expanded domestic demand. China's fiscal expenditures continued to increase in the first half along with the growing economy. Fiscal earnings totaled 624 billion yuan, up 94.6 billion from the same period last year or 17.9%. Fiscal expenditures totaled 583.8 billion yuan, up 119 billion yuan from the same period last year or 25.6% (The World Bank Group, 2008). China's active fiscal policy spured economic growth by using greater fiscal spending. In recent years, faced with problems such as lagging domestic demand, increased unemployment, an irrational economic structure and a slow increase in farmers' income, the CCP and State Council decided to adopt this policy to spur investments and increase consumer spending and exports. In the second half of 1998, due to the Asian financial crisis and lack of domestic demand, the Chinese authorities issued 100 billion yuan worth of Treasury bonds to fund infrastructure construction. In addition to the 50 billion yuan in bonds set aside in the 1999 preliminary budget, another 60 billion yuan long-term debt was issued to increase investments. At the same time, the tax policy to increase investments and expand exports increased the income of the lower class urban residents. In the past two years, the state has used treasury bonds to increase infrastructure construction, support technological renovations in enterprises and spur econThe Essay is provided by UK Assignment http://www.ukassignment.org Increasing investments in infrastructure not only caused the production and prices of resources such as concrete, steel, nonferrous metals, it has pushed up the prices of consumer industrial goods. The elimination of taxes on fixed asset investments, such as business tax on real estate, contract tax, value-added tax on land, has stimulated the growth of China's real estate industry. Many of the government's tax policy has tried to encourage the development of high tech startups. Billions of bonds were used to provide interest rate subsidies on loans so large- and mid-size enterprises could upgrade their technology (Angus，2008) . 2.3 The trading policy Trade volume is measured in relation to the size of the domestic economy, and is shown as three values: the value of exports as a percentage of GDP, the value of imports as a percentage of GDP, and the combined value of both imports and exports as a percentage of GDP. Trade volume shows how much the economy depends on foreign trade. A nation turns abroad for anything it needs that it cannot generate domestically. Exports reflect dependence on foreign markets, while imports reflect dependence on foreign-made goods and services. High levels of trade volume reflect vigorous engagement with the global economy.The Current Account Balance [CAB] is a record of money flowing into a national economy through foreign trade, minus money flowing out through foreign trade. It is shown as a percentage of GDP. For more detail, see the Glossary. Source: International Monetary Fund.When a nation's CAB is positive, foreign trade is pouring money into its economy, making more available for investment, consumption and taxation. When the CAB is negative, foreign trade is draining money out of its economy, diminishing the stock of wealth available for these activities (Shi and Li , 2008).The world is rapidly changing. Goods, technology, investments and jobs are moving across borders faster than ever before. Globalisation is fundamentally changing the nature of commerce for countries, companies and citizens the world over, and presents major challenges.In response to this change, Chinese government has adopted appropriate trading policies to keep the current account balance.These are the different trade policies adopted according to the different situations: 1990-1997: Foreign investment grows tenfold between 1990 and 1997. Despite unwieldy contractual and legal framework, China's billion-plus customers lure many investors, especially from ethnic Chinese in areas near Hong Kong and Taiwan (Mnkiw, N. Goregory, 1997). 1999: China's global trade totals $353 billion; its trade surplus is $36 billion. China's primary trading partners are Japan, Taiwan, the United States, South Korea, Hong Kong, Germany, Singapore, Russia, and the Netherlands. In November, the United States and China arrive at a bilateral market-access agreement that paves the way for China's accession to the World Trade Organization. 2000: China reaches a bilateral WTO agreement with the European Union and other trade partners and begins work on a multilateral WTO accession package. To increase exports, China encourages the formatioThe Essay is provided by UK Assignment http://www.ukassignment.org 2001-2003: In 2001 China serves as the Asia Pacific Economic Group's (APEC) chair; Shanghai hosts the annual APEC leaders meeting. After the 2001 World Trade Organization summit in Qatar, China becomes a full member of the WTO. Many tariffs and regulations are streamlined or ended, but foreign investors still face procedural obstacles. Trading partners complain that the Chinese currency is undervalued. 2004-2005：According to the report (Financial Market Department of the PBC ,2006), China’s foreign trade maintained the rapid growth since the second half of 2002, and climbed from the fifth largest country in foreign trade in 2002 to the fourth, which further consolidated its position as a large trading country, and made more contribution to the development of China’s national economy. Moreover, there was still a large space left for China’s exports to grow rapidly in 2005. However, the complicated and constant-changing international situations pose a potential threat to the world economy, and the keep rising prices of the domestic upstream products would obstruct exports growth. Encouraged by the domestic investment demands, China’s imports would continue to go high, but the growth rate will mainly rest with the development trends of domestic investment and the force and effect of macro-economic control. 2006-2007: In 2006, China's foreign trade stood at 1.76 trillion U.S. dollars, up 23.6 percent year-on-year, ranking third in the world. China's imports and exports of goods likely amounted to 2.1 trillion U.S. dollars for the whole year, a growth of 20 percent over the year-earlier level in 2007.External trade has continued to grow rapidly since the beginning of the year, the report says. Foreign sales of machinery, electronics, textiles and clothing and footwear posted sustained growth. Trade with major partners, including the European Union, the United States and Japan, has increased continuously (Chinese Academy of Social Sciences Department of Economics,2008). 2.4 The economic growth policy The economic Growth is measured as the annual per cent change in the value of the gross domestic product after taking account of inflation. A positive economic growth rate means more of everything than before: more production, more demand for labor, and more wealth available for consumption, taxation and investment. A negative growth rate means the economy is shrinking. Jobs are more scarce and do not pay as well as in boom times. These are the economic growth in China from 1998 to 2003: 1998-2000: By 1999, with 1.25 billion people and a GDP of $3,800 per capita, China's is the fastest growing economy in the world, and also the second largest after the U.S. But the country remains poor, lacking the monetary and fiscal controls to manage its vast economy. The government turns to banks to provide failing SOEs loans, but they are not repaid. The banking system is threatened. 2001-2003: After China joins the WTO, foreign investment surges to a record high. Strong growth masks internal disparities between cities and rural areas, coastal and interior regions. Cuts in tariffs and rules streamline business, but the huge state-owned sector remains deeply troubled and extremely hard to reform. In 2003 the spread of the deadly SARS virus has a severe impact on China's economy. (Ji and Lin, 2008) 2004-2007: The following years continued to witness the rapid economic rise of China, with an emphasis on both quality and speed. In the first half of the 21st century, rural areas remained to be the "strategic citadel" of expanding domestic demand and economic growth. In the face of energy and resource challenges, China plans to lay the groundwork of a resource-efficient society in 30 years. Other priorities include: building a favourable environment for international exchange, persisting in the path of "bringing-in, going global" and advancing international competition and cooperation based on mutual benefit and win-win situations. Moreover, to pursue independent innovation, develop private-run businesses, and engage the initiative of both local government and enterprises to enhance China's economic vibrancy and sustainable growth（http://www.pbc.gov.cn/english/）. 2.5 The economic targets China adopts the "five-year-plan" strategy for economic development. The 9th Five-Year Plan (1996-2000) was outstandingly successful, and the 10th Five-Year Plan (2001-2005) mapped out the first plan for the new century, setting these main targets: -- Sustaining fairly rapid growth, strategic restructuring, improving the quality and benefits of economic growth so as to lay firm foundations for doubling the 2000 GDP by 2010; substantial perfection of the socialist market economy and putting state-owned enterprises on a modern enterprise footing, thus allowing greater participation in international cooperation and competition (Liu and Zhang ,2008). -- GDP to reach some 12,500 billion yuan, and per capita GDP 9,400 yuan by 2005 (at 2000 prices assuming annual economic growth of around 7 percent). -- Optimizing and upgrading the industrial structure to sharpen China's competitive edge. By 2005, the added value of the primary, secondary and tertiary industries will account for 13 percent, 51 percent and 36 percent, respectively, of GDP; employing 44 percent, 23 percent and 33 percent, respectively, of the labor force. Further improvement to infrastructure; increaThe Essay is provided by UK Assignment http://www.ukassignment.org Most of these targets have already been achieved ahead of schedule. At present, the government is implementing the 11th Five-Year Plan (2006-2010). Following the Chinese Communist Party's Third Plenum, held in October 2003, Chinese legislators unveiled several proposed amendments to the state constitution. One of the most significant was a proposal to provide protection for private property rights. Legislators also indicated there would be a new emphasis on certain aspects of overall government economic policy, including efforts to reduce unemployment (now in the 8-10% range in urban areas), to rebalance income distribution between urban and rural regions, and to maintain economic growth while protecting the environment and improving social equity. The National People's Congress approved the amendments when it met in March 2004 (Financial Stability Analysis Group,2007). The Fifth Plenum in October 2005 approved the 11th Five-Year Economic Program (2006-2010) aimed at building a "harmonious society" through more balanced wealth distribution and improved education, medical care, and social security. On March 2006, the National People's Congress approved the 11th Five-Year Program. The plan called for a relatively conservative 45% increase in GDP and a 20% reduction in energy intensity (energy consumption per unit of GDP) by 2010.China's economy grew at an average rate of 10% per year during the period 1990-2004, the highest growth rate in the world. China's GDP grew 10.0% in 2003, 10.1%, in 2004, and even faster 10.4% in 2005 despite attempts by the government to cool the economy. China's total trade in 2006 surpassed $1.76 trillion, making China the world's third-largest trading nation after the U.S. and Germany. Such high growth is necessary if China is to generate the 15 million jobs needed annually — roughly the size of Ecuador or Cambodia — to employ new entrants into the job market. (Zhou，2008) 4.1 Inflation Inflation is measured as the annual percent change in the prices of goods deemed necessary for life in that country. The specific goods included in this "market basket" change only rarely, so this measure reflects fluctuation in purchasing power of the national currency. Source: International Monetary Fund. Producers in turn may raise their selling prices to cover these increases, scale back production to check their costs (resulting in lay-offs), or fail to invest in future production. During the winter of 2007-2008, inflation ran about 7% on an annual basis, rising to 8.7% in statistics for February 2008, released in March, 2008. The food and fuel sectors were major problem areas, with meat and fuel posing special difficulties. Shortages of gasoline and diesel fuel developed in the fall of 2007 due to reluctance of refineries to produce fuel at low prices set by the state. These prices were slightly increased in November, 2007 with fuel selling for $2.65 a gallon, still slightly below world prices. Price controls were in effect on numerous basic products and services, but were ineffective with food, prices of which were rising at an annual rate of 18.2% in November, 2007 (Beijing University of Chinese National Accounts and Economic Growth Research Center,2008).The problem of inflation has caused concern at the highest levels of the Chinese government. On January 9, 2008 the government of China issued the following statement on its official website: "The Chinese government decided on Wednesday to take further measures to stabilize market prices and increase the severity of punishments for those guilty of driving up prices through hoarding or cheating." Pork is an important part of the Chinese economy with a per capita consumption of a fifth of a pound per day. The worldwide rise in the price of animal feed associated with increased production of ethanol from corn resulted in steep rises in pork prices in China in 2007. Increased cost of production interacted badly with increased demand resulting from rapidly rising wages. The state responded by subsidizing pork prices for students and the urban poor and called for increased production. Release of pork from the nation's strategic pork reserve was considered. 4.2 Unemployment Unemployment is measured annually as the percent of the labor force that cannot find a job. The labor force comprises adults who want to work. Uncounted are those who do not seek employment, or who have become discouraged enough to stop looking. Source: International Monetary Fund. Economies are powered by consumer spending and savings investment. Unemployed workers earn no wages; they spend little and save less. Economies with high levels of unemployment are stalled economies. China’s economy is likely to experience stagflation. Department of Labor and Social Security show that in the past five years, China's urban new jobs each year are more than 9,000,000 people in 2007 to reach 12,040,000 people, creating an active employment policy since the implementation of the best level; a total of 25,000,000 state-owned and collective enterprises laid-off workers Were re-employed; the registered urban unemployment rate from the 4.3 percent decline year by year, by the end of 2007 to 4.0 percent. In reality, the Chinese government has been inclined to strengthen structural policy while weakening total quantity policy. This round of tightening can be said to be selective “spot kill” by treating different things differently. For instance, different industries and enterprises are treated differently on a selective basis. Such control is structural control but the government does not say whether to contract or expand the total demand (Zhou, 2008). Such control means may sharpen the focus of macro-control but it also contains administrative means that may hurt the normal functioning of the market economy. 4.3 Government expenditure Government spending is the annual value of all government spending on goods and services, expressed as a percentage of the gross domestic product.Government spends in such large amounts that it has the power to stabilize commodity markets and otherwise shore up unsteady parts of the economy. By the same token, government is not very nimble; it responds slowly to market signals. As a result, its remedies may be untimely, even unhelpful. Economies that show high dependence on government spending may be less able to capitalize on emerging opportunities. Well, the table below well describing our increasing expenditures. As far as I know, comparing to old days, our living standard had improved much. To satisfy people’ need, our government makes great endeavors like strengthening the infrastructure experiment. As technology and education plays a big role on country-development, government put part of money on science and technology. Under this condition, the revenue is affected more or less. Obviously, it contributes to increase the revenue. The increasing expenditures Chapter Ⅳ Suggestions Currently with the global financial crisis rippling through the United States and Europe, China's once supercharged economic growth has slowed sharply, dropping from 12.6 percent in the second quarter of 20The Essay is provided by UK Assignment http://www.ukassignment.org In addition, when we take a careful look at the fiscal policy, we still find many disadvantages. In addition, the government has invested large amounts of capital and passed favored treatment policies so the state owned enterprises can pull themselves out of the red. In the second half of last year, SOE profits rose 4.4-fold compared with the same period two years ago. While government spending on major projects increased, its expenditures on social welfare rose 1.95-fold during the first half. Government expenditures on public security, technology, education and agricultural technology has also increased. As we all can see these investments will undoubtedly create favorable conditions for SOE reforms, economic structure adjustments and improving the market system. China continued down the path it set out in 2000. It maintained its active fiscal policy in the second half. It followed the direction set by the State Council and issue Treasury bonds at the appropriate time to raise funds for construction projects. It increased supervision and management over the use of funds raised from selling bonds the government has invested large amounts of capital and passed favored treatment policies so the state owned enterprises can pull themselves out of the red. In the second half of last year, SOE profits rose 4.4-fold compared with the same period two years ago. While government spending on major projects increased, its expenditures on social welfare rose 1.95-fold during the first half. In my view, government expenditures on public security, technology, education and agricultural technology should be increased. These investments will undoubtedly create favorable conditions for SOE reforms, economic structure adjustments and improving the market system. China continued down the path it set out in 2000. I think it should maintain its active fiscal policy in the second half and still follow the direction set by the State Council and issue Treasury bonds at the appropriate time to raise funds for construction projects. As a result, our supervision and management over the use of funds raised from selling bonds. Chapter Ⅴ Conclusion These are the specific situation of Chinese economy. From this paper you can grasp a general idea of the Chinese economy. Nevertheless, the PRC is still a lower-middle-income country, with many millions of people living on less than $1 a day. Reducing poverty remains a daunting challenge, as does raising the welfare Appendices economic indicators 2003 2004 2005 2006 2007 References Angus Maidisen. (2008). Chinese economic performance in the long run.Shanghai: Shanghai People's Publishing House. Beijing University of Chinese National Accounts and Economic Growth Research Center.(2008). China economic growth report. Beijing: China's economy Press. 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