China's Changing Economy

Trends, Impacts and the Future

Curtis Andressen

• Publisher: Routledge
• Year: 2016
• eBook ISBN: 9781317369004
• Edition: 1
• Topic: Social Sciences
• Subtopic: Ethnic Studies
• Index: Social Sciences

One of the most dramatic events in the global economy over the past few decades has been the rise of China as a global economic power. From humble beginnings in the late 1970s, the policy shift in China from a planned to market economy has led to economic growth of tremendous speed.

This book examines the changes taking place in China's economy today and the impacts of these changes in China and abroad. The central theme is that the rapid economic growth has come at a cost, as many problems have emerged as a result in China's economy and society, including a dramatic rich-poor gap, labour issues, problems in the banking sector and severe inflation in the cost of housing, as well as challenges with respect to China's external trade. The Chinese government recognizes these problems and is taking steps to rebalance its economy and society. The book takes a political economy perspective in order to investigate the interplay between the political system in China and the way in which the economy is structured, and the manner in which economic changes take place. Demonstrating that in order for China to achieve sustained economic growth and social improvement it must undertake serious policy changes, it also highlights that if countries are going to deal with China in a stable and productive manner, a thorough understanding of key contemporary developments in that country is vital.

Covering a range of the most pertinent issues facing China today, this book will be of interest to students and scholars of Chinese Economics, Economic Development and Political Economy.

1 China's changing economy

Trends, impacts and the future

Curtis Andressen

DOI: 10.4324/9781315671062-1

Perhaps the most dramatic event in the global economy over the past few decades has been the rise of China as a global economic power. From humble beginnings in the late 1970s, the policy shift in China from a planned to market economy has led to economic growth that has been nothing short of spectacular.

Much has been written about this dynamic economic shift. Consider a few selected statistics. China is the world’s second biggest economy. Its GDP in 2013 stood at US$9.4 trillion (Roberts, 2014), up from about US$2 trillion in 2004 (World Bank, 2013), and China’s GDP could overtake that of the US in under 15 years (Lubin, 2010). Per capita GDP (PPP) has increased commensurately, from just over US$4,000 (PPP) in 2005 to over US$9,000 in 2012 (OECD, 2013). In 2010 China became the number one exporting country in the world. From 2000 to 2010 China’s economy grew seven times faster than that of the US (Lubin, 2010). Finally, in 2013 mainland China overtook the US to become the world’s largest trading nation (China Daily, 2014).

But, this is only part of the picture. The reality is that China’s economy, like most others in the world, is dependent on other countries. Its growth over the past three decades has relied heavily on foreign investment. For example, approximately 60 per cent of Chinese exports to the US are from foreign-owned companies in China (Hughes, 2005: 1). This is, of course, a major benefit for the US. Not only are American companies making profits that are repatriated to the US, but the low cost of goods means that industrial inputs are of lower cost as well (the loss of jobs notwithstanding), thereby boosting American competitiveness. The sheer size of the trade in this respect is noteworthy. As Hughes (2005) points out, ‘Wal-Mart alone purchased $18 billion worth of Chinese goods in 2004, making it China’s eighth-largest trading partner – ahead of Australia, Canada, and Russia.’ Today, China is no longer just a recipient of investment, either. Its corporations are beginning to buy into resource and technology companies from the US to Australia to various South American and African countries. The Chinese government is active as well, via the China International Investment Corps (CIC), its sovereign wealth fund and state-owned enterprises (SOEs). Chinese companies are also manufacturing offshore, and brands such as Huawei, Lenovo, Great Wall and Geely are becoming as well known as the Japanese brands became in the 1960s and 1970s.

This interdependency means that increasingly China has to interact with the rest of the world in a responsible manner, in political as well as economic terms. The US is China’s largest trading partner and obviously this dependency means that the two countries have much to gain through a cooperative approach. China’s other trading partners show an interesting pattern. Australia (seventh), Brazil (ninth) and Russia (tenth) are predominantly providers of raw materials for China’s export industries. Hong Kong (second) and Taiwan (fifth) are, more or less, a part of greater China. Japan, the third spot, has a fractured relationship with China, with economic dependency but political difficulties (as in the case of Taiwan). The Republic of Korea is fourth, enhancing the importance of the region of north-east Asia to China. Finally, Germany comes in at number six, with that country’s high-technology products being important for China’s own industrial growth.

From this pattern we can deduce a range of issues. Regional cooperation is very important, but the political history of the region creates problems, from the lingering effects of Japanese militarism to various islands claimed by more than one country. Importing of raw materials is critical, but the countries providing these materials have a delicate relationship with China, whether it is the history of Sino-Russian conflict or the fact that China is Australia’s number one trading partner but has a defence agreement with the US. China’s high-technology exports create problems with Germany and other European countries, such as the recent issue of Chinese-made solar panels. China must therefore practice a high level of regional diplomacy and slowly build political bridges, such as its steady push into Southeast Asia via the China–ASEAN Free Trade Area. On the other hand, the US and its allies are attempting to balance this influence by their own political and economic structures, such as the proposal for the Trans Pacific Partnership (TPP), a regional trading agreement that, at present, excludes China.

The reverse scene shows a similar pattern. China is now a very important player on the international scene, using its economic clout to influence economic and political events beyond its borders. In some respects this is welcomed, such as countries looking to China during the Global Financial Crisis as an economy that grew rapidly while others were (and to some extent still are) mired in difficulties. On the other hand, the Chinese government is using some of its new wealth to build up its military capability. Of the US$17 trillion spent on the military worldwide in 2012, 39 per cent came from the US, but China was at the number two spot at 9.5 per cent (Shah, 2013). China is now a country to be reckoned with in terms of military capability, a fact no doubt making its neighbours nervous, and leading to an arms build-up in those countries.

What lessons can we take from this? We are increasingly in a multi-polar world. China will play a very significant role in the economy and political shifts in the world over this century and beyond. It is now centre stage along with the other major powers in the world.

But, all of this growth in wealth and power has come at a cost. There has been much written about China’s miracle economy, in a similar vein to that written about Japan in the 1980s. But, as with Japan, there are many problems in China that can slow down if not derail its growth, and foreign companies in China as well as China’s trading partners anxiously watch for signs of political and economic difficulties.

It is clear that China’s growth cannot be sustained indefinitely. Any economy that has gone through such a growth spurt, and in the region this would include Japan in the 1960s and the newly industrializing economies (NIEs) in the 1970s and 1980s, demonstrates that social and economic fundamentals become seriously skewed over time. The same has occurred in China. Some of the more well-known issues include an economy overly dependent on infrastructural spending, a wealth gap, lack of adequate social services, corruption and environmental degradation.

The Chinese government, well aware of these issues, has recently decided to make substantial changes to its economy and society. First among these is the shift from an economy dependent on exports to one that is increasingly driven by domestic spending. From the consistent 10 per cent annual growth in GPD in recent decades, China’s leaders are now aiming for a more reasonable and sustainable growth in the 6–7 per cent range. Of course, sudden changes are to be avoided in order to maintain employment and associated economic benefits, not to mention political stability. Indeed, the legitimacy of the Chinese government is dependent on delivering increasingly higher standards of living to its people. Hence, in 2013 China’s growth rate was still a relatively high 7.7 per cent, a slight increase over the target of 7.5 per cent (Yan, 2014).

The growth in China’s economy cannot, in part, be sustained because of the nature of its labour force. Its success as an exporter has been based on low domestic labour costs as well as increases in productivity. But, China’s labour force will soon decline in size and will continue to do so into the future. As Haltmaier (2013) argues:

The GDP growth rate is the sum of the growth in employment and the growth in output per employee. China faces challenges in both of these categories. The rate of working-age population growth has fallen from 2½ percent in 1979 to less than one percent in 2011, and is expected to turn negative before 2020. With nearly 80 percent of the working-age population already employed, there is not much room for employment growth to exceed working-age population growth. Thus, in all likelihood, virtually all of the increase in Chinese GDP over the next couple of decades will have to come from increased output per worker, or labor productivity.

Productivity is based on investment and the capability of the labour force. With respect to the former, China’s growth has been driven in large part from government investment in infrastructure and manufacturing. It is clear that investment in infrastructure is on the decline (and indirectly affecting trading partners such as Australia) and one cannot expect further large increases in productivity in this respect. In terms of manufacturing, China is focusing less on low value-added exports as wages increase and products become less competitive. This will be offset to some extent by domestic demand, but overall the secondary sector is not likely to be as vibrant into the future as it has been in the past. Moreover, manufacturing in China has been in part driven by rural to urban migration, but much of that labour has now been used, and the proportion of the workforce in agriculture is now approximately 35 per cent, compared to 70 per cent in 1978 (World Bank, 2014). Finally, education plays a key role in productivity, and though the education levels in China are rising, real problems remain, including vast discrepancies between rural and urban areas, problems with the examination system, and the level of education compared to other advanced economies (Zhou and Andressen, 2013: 65–76).

A problem underlying the issue of labour productivity is the change in the population structure of China. China’s one-child policy has been successful in slowing its population growth, but the flip side is that there is less labour available and, ultimately, there will be a substantial burden of a large number of elderly on a relatively small group of young people. Providing for a growing number of elderly is a challenge facing China in the future, along with most developed countries in the Western world.

There are other severe problems facing the government and people of China. First, there are the clear environmental issues. One can scarcely read the news today without noticing that China’s rapid economic growth has been at the expense of the environment. Air pollution is terrifying the larger cities in China and in some of the secondary ones as well. Even foreign tourism is down, a reaction to the air pollution in China. In this respect a comparative perspective is useful, given that China faces similar challenges to many other countries, especially in the developing world. India, for example, has similar pollution problems, with New Delhi recently taking the unfortunate position of global leader in urban air pollution.

The health implications of heavy pollution are obvious, and this carries both a human and financial cost for China, but its government is clearly having difficulty grappling with this issue. Food safety, for example, has become a prevalent topic in China. This is intrinsically linked to the health of Chinese, directly in terms of eating healthy food and indirectly with respect to problems of virus control. In recent years the world, though particularly Asia, has experienced SARS, swine flu and bird flu, the latter outbreak being under current investigation. The way in which China governs food safety is therefore an issue of global concern.

China also faces growing discontent with the gap between rich and poor. It was only last year that the Chinese government officially released its Gini Coefficient figures retrospectively for the past decade. With perfect inequality at 1, China comes in at 0.474 (The Economist, 2013). While this is a small improvement over previous years, China still has a very wide income gap.

All of this threatens both the political and economy stability of China itself and, because of its role in the global economy, how the Chinese leadership deals with these problems has effects far beyond its shores.

The core question of this book is, therefore, what are the changes taking place in China’s economy today and what are the impacts of these changes in China and abroad? The central theme is that China is facing massive challenges resulting in large part from its rapid economic growth, and is taking steps to rebalance its economy and society. In order for China to achieve sustained economic growth and social improvement (not to mention political stability), it must undertake serious policy changes. But this will not be an easy task given the array of competing forces within the existing political and economic structures of China today.

This book takes a political economy perspective. There is a close interplay between the political system in China and the way in which the economy is structured, and the manner in which economic changes take place. Given that while the economy is, for the most part, a capitalist one, the leadership must also deal with the fact that it is an authoritarian government that allows restricted choices in the way in which it manages economic and social policies.

At the same time Chinese leaders are aware that they are, so to speak, hanging on to the tiger’s tail. They are attempting to control something that is not completely under control. They must deal with a population that is increasingly globalized and aware of the political, social and economic policies and developments in other countries. The growth in the use of the internet and associated social media means there are alternative means of communication within China, even while the government seeks to limit the capacity of the population to organize itself into pressure groups.

The book begins with one of the most critical aspects of China’s changing economy, namely the shifts produced by rising labour costs. Michael Schiavone delves into this issue, pointing out that there are advantages and disadvantages to this inevitable shift as China’s economy grows and develops. On the one hand, its status as the ‘world’s factory’ is under threat with increasing wages, where foreign investment looks for better returns elsewhere. On the other hand, with increasing wages the Chinese economy can move away from an export-oriented model of development and shift increasingly to a domestic demand-driven one. Chinese companies can also use their industrial expertise and strong currency to invest in other countries, thereby bringing both financial and political benefits for China. In any event, given that China accounts for nearly one-quarter of the world’s economic growth, these shifts will have impacts far beyond China’s borders.

Linked to China’s labour costs, Helen McLaren investigates China’s reliance on rural–urban migration for its economic growth. This has provided a much-needed source of low-cost labour for the factories in the eastern parts of China. Within Australia a less substantial though still important development over the past 15 years has been the movement of workers to the booming mines in outback Australia. McLaren offers new insights into this geographic labour mobility, comparing Australia and China. In particular, she looks at how the trade in minerals has led to migration (either circulation or permanent) within Australia from the cities to the rural mine sites, and compares this with China’s rural–urban migration experience. McLaren looks at the different economic systems in China and Australia and the way in which both of them deal with workers having to move to find employment and how this affects the families left behind. She argues that the benefits of economic development in both countries are unevenly distributed, and that the human costs of development have yet to be thoroughly researched. It is within this context that labour migration takes place.

One of the many sources of this labour is the Xinjiang Uyghur Autonomous Region, in the far west of China; while a recipient of substantial funds for regional development, it has recently been a hotbed of political unrest. Gerry Groot focuses on the social and economic problems of this region, arguing that its development by the central government has not had the intended consequences. Instead, there are severe inequities, widespread discontent and political instability.

Following the theme of regional development, Jiajun Liu uses a spatial analysis approach to investigate the way in which industry has restructured in China in order to create greater regional energy efficiencies. He notes that the role of energy is critical in production costs, and indeed is related to China’s domestic economy more generally, the profitability of its external trade and also, of course, to the environment. He uses a mathematical model to examine industrial energy use in China’s 31 provinces. His findings are interesting, with industrial restructuring along the east coast of China not bringing significant improvements in energy efficiency. But, in the north-west and south-west of China, where industrial development took place later, there have been improvements in energy efficiency. Furthermore, the central and north-eastern areas of China have a low level of industrial structure and energy efficiency, in part because of their historical role ...

Table of contents

• Cover Page
• Halftitle Page
• Series Page
• Title Page
• Copyright Page
• Dedication
• Table Of Contents
• List of figures
• List of tables
• Notes on contributors
• Acknowledgements
• 1 China’s changing economy: trends, impacts and the future
• 2 Rising labour costs in China: a problem or an opportunity?
• 3 Geographic labour mobility, workers and family in China and Australia
• 4 The contradictions of developmentalism and the Chinese Party-state’s goal of ethnic harmony: the case of Xinjiang
• 5 Spatial analysis on the contribution of industrial structural adjustment to regional energy efficiency: a case study of 31 provinces across China
• 6 WTO accession and efficiency gains: evidence from China’s banking sector
• 7 The faster things change, the more they stay the same: the infuence of cultural norms, customs and traditions on venture capital in China
• 8 Inter-generational transitions of family businesses using private equity: lessons for China and Australia from Chinese family-owned enterprises in Singapore
• 9 Confucian principles to enhance China’s environmental governance
• 10 The contribution of the Clean Development Mechanism (CDM) towards China’s climate change mitigation and sustainable development
• 11 Changing economies for a more sustainable future: the infuence of stakeholders and environmental reporting developments in transforming Chinese corporate practices
• 12 Education, globalization and rural contexts: learning for staying, learning for leaving or learning for choice?
• 13 Why Beijing rules the property market: rethinking the role of ‘five new measures’ in regulating the property market under a new era of China’s leadership transition
• 14 China: accelerating the strategic transformation of foreign trade development mode
• 15 Correlation analysis of trade in services OFDI and industrial structure optimization in China
• 16 Conclusion and discussion
• Index