1. behind several of the main negative aspects

1.      HOW CHINESE ECONOMY WAS BEFORE 1979

     Chinese economic power has not always been recognized as such. Until 1979, it was very-poor, inefficient, centrally-controlled by the State and, last not but not  least, isolated from the global economy. It was only in this year that some steps forward were taken by China, who opened itself to globalization and to international trade. Thanks to several reforms proposed, China was allowed to leave behind several of the main negative aspects that Chinese State imposed. Before the reforms indeed, it was the central State that set production goals, controlled prices and, in a few words, commanded the economy.

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     Actually, during 1950s and 1960s, the central government invested in physical and human capital and, “by 1978 nearly three-fourths of industrial production was produced by centrally controlled, state-owned enterprises (SOEs), according to centrally planned output targets. … Since most aspects of the economy were managed and run by the central government, there were no market mechanisms to efficiently allocate resources, and thus there were few incentives for firms, workers, and farmers to become more productive or be concerned with the quality of what they produced”.1

     The most important economic reforms introduced in 1979 had as main objectives: introduction of incentives of price and ownership for farmers – who could then sell a portion of their crops on the free market; encouragement of the citizens to start their businesses; trade liberalization;  establishment of specific coastal zones in order to attract foreign investment; promotion of exports and imports of high technology products into China; abolition of the idea that imports were only allowed  for products who could not be found or produced in China.

     In the next chart, it is possible to effectively see how, in percent, the Chinese GDP grew up between 1979 and 2016.

Source: IMF and Chinese National Bureau of Statistics.

 

     The growth levels are tangible, even though, quite a lot of ups and downs are observable. In the last decade, a global economic slowdown has started, in 2008, and had a significant impact on the Chinese economy. As China’s media reported in early 2009, it would depend on 20 million migrant workers’ return home after losing their jobs because of the financial crisis. Despite this huge problem, Chinese government managed to pick partially up Chinese economy by implementing a $586 billion economic stimulus package (approved in November 2008), in order to fund infrastructure and loose monetary policies to increase bank lending. However, the rate of GDP has since then slowed for the past six consecutive years.

 

2.      HOW GLOBALIZATION INFLUENCED CHINESE ECONOMY

     Beyond the economic proposals applied starting from 1979, Chinese economy achieved its position of global power taking part also into another process that involved all the main global powers: the Globalization. Yet in 1979, when Chinese Government understood that actually, having relations with foreign State could represent a great opportunity for the market, China opened its barriers and started importing and exporting great quantities of products.

     A big step that China took improving its productivity was to reallocate resources to more productive uses, “especially in sectors that were formerly heavily controlled by the central government, such as agriculture, trade, and services. For example, agricultural reforms boosted production, freeing workers to pursue employment in the more productive manufacturing sector”2. 

     Having more freedom to choose in which area workers wanted to work, industrialization took place. China became step by step an economic and productive giant, also described as “the replica of the Britain of the 19th century which took the lead through industrial innovation”3. China, indeed, is today a member of the WTO (World Trade Organizations).

     To achieve this important position, starting from 1979, specific coastal regions were made open cities and development zones, giving China the possibility of experimenting with free market reforms and to offer tax and trade incentives to attract foreign investment. In addition, state price controls on a wide range of products were gradually eliminated and trade liberalization became a fundamental factor for Chinese economic success, encouraging greater competition and attracting FDI  (Foreign Direct Investment) inflows by removing trade barriers4.

     China, later, during the 1980s and 1990s, used a strategy for modernizing itself and growing, continuing to have as its main purpose to attract FDI and consequently to help the development of domestic firms. In 2000 a new strategy was introduced and actually permitted China to “go global”, encouraging Chinese firms (primarily SOEs) to invest overseas. Among the smart moves Chinese government did, China managed to obtain natural resources, such as oil and minerals, described as necessary to sustain China’s rapid economic growth. Moreover, in order to make Chinese firms more globally competitive with their own brands, Chinese government needed to obtain technology, management skills and internationally recognized brands. Following this purpose, it invested and acquired foreign firms. An example that Morrison reported is that “in April 2005, Lenovo Group Limited, a Chinese computer company, purchased IBM Corporation’s personal computer division for $1.75 billion”5.

     Opening its barriers to exterior economy and taking part into the global competition, China saw some consequences, both in economic and social point of view, with positive and negative connotations.

 

2.1 CHINA AND THE WORLD

     Yet in the late 1970s, due to its huge population and to the low wages, China managed to get an important competitive advantage when economic reforms and trade liberalization were first introduced by the government. But times are changing and wages in China, luckily, are rising, diminishing at the same time this advantage. As it is possible to observe in the following figure, Chinese average monthly wages (converted into U.S. dollars) in 1990 were $37, compared with $54 for Vietnam and $505 for Mexico. However, in 2016, China’s average monthly wages (at $854) were 306.7% higher than Vietnam’s wages ($210) and 122.3% higher than Mexico’s ($384). From 2007 to 2016, China’s average monthly wages rose by 213%.

 

Average Monthly Wages for Selected Countries: 1990-2016 (U.S. dollars)

Source: Economist Intelligence Unit.

Together with the increase of the wages, number of exports and imports also rose, from $14 billion of merchandise exports in 1979, China achieved the $2.1 trillion in 2016 while, from $18 billion of imports, they passed to $1.6 trillion.

China’s Global Merchandise Trade: 1979-2016 ($ billions)

 

Source: Global Trade Atlas and China’s Customs Administration.

 

      Growing with this rapidity and power, China became an important trading power for many countries, exactly 130, in 2013. From 2000 to 2008, the annual growth of China’s merchandise exports and imports was around 25.1% and 24.2%, respectively. These numbers, unfortunately, were not hold for a long time since, due to the impact of the financial crisis, China’s exports and imports fell respectively by 15.9% and 11.2%. The trade could only recover a few years later, in 2010 and 2011, with export growth averaging 25.8% and import growth averaging 31.9%. Despite the good numbers, since then, its trade flows slowed sharply. From 2012 to 2014, China’s exports and imports grew respectively at an average annual rate of 7.2% and 4.1%, but, between 2015 and 2016, exports and imports fell again, respectively by an average rate of 4.7% and 11.6%. This last fall reflects the slow global economy and the decline in commodity prices (such as oil and ores).

Annual Change in China’s Merchandise Exports and Imports: 2000-2017

(percent)

Source: Global Trade Atlas and China’s Customs Administration

     Another stupefying fact about China concerns its merchandise trade surplus. It grew incredibly sharply in 4 years, from 2004 to 2008, rising from $32 billion to $297 billion; but it started falling right after, achieving the $158 billion in 2011. It was after this low point that its trade surplus could recover so well to achieve a record: $679 billion in 2015, before falling to $611 billion in 20166.

     2009, despite all, was a good year for China. It overtook Germany, and became both the world’s largest merchandise exporter and the second-largest merchandise importer (after the United States). In 2012, China overtook the United States as the world’s largest merchandise trading economy (exports plus imports). As indicated in the next figure, China’s share of global merchandise exports grew from 2.0% in 1990 to 14.1% in 2015, but fell to 13.4% in 2016. The World Bank projects that this figure could increase to 20% by 2030.

China’s Share of Global Merchandise Exports: 1990-2016

(percent)

Source: Economist Intelligence Unit.

 

            2.2 NEGATIVE ASPECTS

            Despite the positive effects that Globalization and Chinese economy opening brought to the country and to a part of the citizens, there are some aspects that cannot be undervalued. Some of the economic policies applied in the system present flaws, such as: over-reliance on fixed investment and exports for economic growth (rather than on consumer demand); government support for state-owned firms; a weak banking system; widening income gaps; growing pollution, and the relative lack of the rule of law in China. For this purpose, Chinese government has already announced the desire to change economic model in next years, in order to produce a more “non-harmful” growth, reducing over-reliance on energy-intensive and high-polluting industries and rely more on high technology, green energy, and services; obtaining also a more balanced economic growth.

            Beyond the flawed economic model followed, another problematic aspect concerns China’s debt levels. In the last few years, they have risen sharply and could cause even bigger problems in the Chinese future. From 2006 year-end to mid-2016, China’s total non-financial sector debt as a percent of GDP increased from 143% to 254% (up 111 percentage points). A great part of the rise in that debt came from the corporate sector, which, as a percent of GDP rose from 107% in 2006 to 171% in mid-2016 (up 64 percentage points). Therefore, China’s corporate debt rose from $3 trillion to $17.8 trillion (up $14.8 trillion) and currently great exceeds U.S. corporate debt levels7.

U.S. and Chinese Corporate Debt: 2006-2016 (As of second quarter 2016)

($ billions)

 

            According to many observers, Chinese credit growth may be too extensive and could “undermine future growth by sharply increasing debt levels, causing overcapacity in many industrials (especially extending credit to firms that are unprofitable to keep them operating), and contributing to bubbles (such as in real estate), and reducing productivity by proving preferential treatment to SOEs and other government-supported entities”8.

            Local government debt is seen as a big problem in China, most of all because of the potential impact it could have on the Chinese banking system. It started swelling because, at the beginning of the global financial slowdown, many Chinese subnational government entities borrowed extensively to help stimulate local economies, especially by supporting infrastructure projects. In December 2013, the Chinese National Audit Office reported that from the end of 2010 to mid-year 2013, local government debt had increased by 67% to nearly $3 trillion, while the government debt rose to $4.3 trillion as of 2015. Efforts have been made during the past few years by the central government to restructure local government debt and restrict local government borrowing, with mixed success, according to some press reports, because of pressures on local governments to maintain rapid economic growth.

            According to many economists, an important part of this debt depends on the closed capital account. The Chinese government, indeed, has restricted capital inflows and outflows for many years; partly with the purpose of controlling the exchange of its currency, the renminbi (RMB), against the dollar and other currencies so to increase the exports. These restrictions on capital flows seem to have distorted the financial markets in China, not permitting to take effectively advantage of the capital, such as over-investment in some sectors (such as real estate) and under-investment in others (such as services).

            As already described, the Chinese economic model has received several critics, for which the private consumption represents a great problem. Indeed, between 1990 and 2014, the GDP percentage portrayed by Chinese gross savings and gross fixed investment has in both cases increased significantly while, on the other hand, private consumption percentage of GDP declined strongly. To better explain the differences between the two parties, the first two percentages are the highest among any world’s largest economies, while China’s private consumption percentage of GDP is among the lowest. Households seem therefore not to have benefited as much from China’s economic growth as other sectors of the economy.

            The fall of private consumption is said to be related to two main factors: China’s banking policies and the lack of an adequate social safety net. The first point, according to some economists, is explained because the Chinese government, restricting the export of capital, leads the Chinese households to put a large share of their savings in domestic banks. Chinese government sets then the interest rate on deposits, which is often below the rate of inflation and therefore lowers household income. Some economists consider this policy to promote a transfer of wealth from Chinese households to Chinese firms, who benefit from low interest rate on deposit. The second point is explained because, since pensions, health care, unemployment insurance, education etc. are not equally developed, induce households to save a large portion of their income. According to one estimate, between 1982 and 2012, the average urban household saving rate rose from 12% to 32%. Corporations are also a major contributor to the high savings rate in China. Many Chinese firms, especially SOEs, do not pay out dividends and thus are able to retain most of their earnings9. According to many economists, obliging SOEs to pay dividends and investing the money in social welfare programs could increase private consumption in China.

 

2.3 INTERNATIONAL RELATIONS

            In order to highlight the importance that China has acquired at a global level, in the following lines will be presented some of the most important trades and trading partners China has. The next table presents the details of Exports, Imports and China’s Trade Balance, referred to China’s total trade in 2016. It is important to take them with detachment, since China’s bilateral trade data often differ from that of its trading partners.

China’s Major Merchandise Trading Partners in 2016  ($ billions)

 
Country

 
Total Trade

Chinese Exports

Chinese Imports

China’s Trade Balance

European Union

546.9

339.0

207.9

131.1

United States

519.6

385.2

134.4

250.8

ASEAN

451.8

255.6

196.2

59.4

Hong Kong

305.2

288.4

16.9

271.5

Japan

274.8

129.2

145.6

-16.4

South Korea

252.4

93.5

189.9

-65.4

Taiwan

179.6

40.4

139.2

-98.9

Source: China’s Customs Administration.

 

 

The countries to which China exported the most were the United States, the EU28, and Hong Kong, taking into account that a good part of Chinese exports to Hong Kong are later re-shipped elsewhere. Instead, the countries from which China has imported the most were the EU28, ASEAN (whose members include Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the Philippines, Singapore, Thailand, and Vietnam), and South Korea. According to Chinese data, it maintained large trade surpluses with Hong Kong ($272 billion), the United States ($251 billion), and the EU28 ($131 billion), and reported large trade imbalances with Taiwan ($99 billion) and South Korea ($65 billion).

         China’s trade data differ significantly from those of many of its trading partners and, these differences, appear to be largely caused by how China’s trade via Hong Kong is counted in official Chinese trade data. China treats a large share of its exports through Hong Kong as Chinese exports to Hong Kong for statistical purposes, while many countries that import Chinese products through Hong Kong generally attribute their origin to China for statistical purposes, including the United States10.

         Other relevant factors related to Chinese trade concern its main production, also offered in the global market. Due to its abundance in low-cost-labor, China is internationally competitive in low-cost and labor-intensive manufactures, leading manufactured products to be a fundamental share of China’s trade. Parts and components to be assembled into finished products, like consumer electronic products and computers, represent an important amount of China’s imports, that is afterwards exported. When shipped abroad, actually, the value-added in China by Chinese workers is relatively low compared to the total value of the product when it is shipped abroad.

            As also Morrison (2017) reported, China’s major imports included electrical machinery and equipment; mineral fuels; nuclear reactors, boilers, and machinery (such as automatic data process machines and machines to make semiconductors); optical, photographic, medical or surgical instruments; and ores. China’s biggest exports were electrical machinery and equipment; nuclear reactors, boilers, and machinery; furniture and bedding; and apparel. They are listed in the following tables using the harmonized tariff system (HTS) on a two-digit level.

Major Chinese Merchandise Imports in 2016

 

 
HS Code

 
Description

 
$ Billions

Percent of Total Exports

2016/2015
% Change

 

Total Commodities

1,525

100.0

-4.8

85

Electrical machinery and equipment

416

27.3

-3.7

27

Mineral fuel, oil etc.

175

11.5

-11.9

84

Nuclear reactors, boilers, and machinery

148

9.7

-6.0

90

Optical, photographic, cinematographic, measuring checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof

93

6.1

-6.8

26

Ores, slag, and ash

93

6.1

-2.5

87

Vehicles, except railway, and parts trucks, and bicycles)

71

4.7

2.6

39

Plastics and articles thereof

61

4.0

-7.0

29

Organic chemicals

44

2.9

-8.3

12

Oil seeds, misc. grain, fruit, plant, etc.

38

2.5

-3.8

74

Copper and articles thereof

33

2.2

-13.4

Source: World Trade Atlas, using official Chinese statistics.

 

 

 

 

 

 

 

 

Major Chinese Merchandise Exports in 2016

 

 
HS Code

 
Description

 
$ Billions

Percent of Total Exports

2016/2015
% Change

 

Total Commodities

2,135

100.0

-6.4

85

Electrical machinery

560

26.2

-6.8

84

Nuclear reactors, boilers, and machinery

346

16.2

-5.1

94

Furniture and bedding

91

4.3

-7.9

61

Apparel articles and accessories, knit or crochet

76

3.6

-9.6

62

Apparel articles and accessories, not knit etc.

74

3.5

-6.9

90

Optical, photographic, cinematographic, measuring checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof

68

3.2

-7.3

39

Plastics and articles thereof

65

3.1

-1.2

87

Vehicles, except railway, and parts

61

2.8

-3.1

31

Articles of iron or steel

54

2.5

-10.6

73

Footwear

49

2.3

-9.5

Source: World Trade Atlas, using official Chinese statistics.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.      SOCIAL AND ECONOMIC SHATTERING EFFECTS

            Another negative aspect in China is represented by the lack of the application of the law, leading to government corruption, financial speculation, and misallocation of investment funds. This, beyond being completely nefarious for its citizens, also prevents China to do business with relevant power economies, from a certain point of view. In fact, many U.S. firms find it difficult to trade with China because rules and regulations are generally not consistent or transparent, contracts are not easily enforced, and intellectual property rights are not protected (due to the lack of an independent judicial system)11. An interesting point was already studied and, between 2001 and 2010, China was considered the world’s largest source of illicit capital outflows at $3.8 trillion, involving also an important number of officials 12.

            Luckily it seems that this situations is slowly improving, thanks to Xi Jinping, that since 2012 has carried out an extensive anti-corruption drive. Many, however, suspect that these new policy is being developed just in order to acquire politic favor. Of course, without basic elements, such as

government transparency, a free press and internet freedom, a meaningful progress against government corruption cannot happen

1 Morrison (2017), p.2

2 Morrison (2017), p.5

3 Yue (2012), from the online publication: http://www.globalpolicyjournal.com/blog/24/05/2012/what-does-globalization-mean-china%E2%80%99s-economic-development consulted on the 29th December 2017.

4 Morrison (2017), p.5

5 Morrison (2017), p.18

6 Morrison (2017), p.20-23

7 Morrison (2017), p.32

8 Morrison (2017), p.32

9 Morrison (2017), p.35

10 See CRS Report RS22640, What’s the Difference?—Comparing U.S. and Chinese Trade Data, by Michael F. Martin.

 

11 Morrison (2017), p.43

12 Global Financial Integrity, Chinese Economy Lost $3.79 Trillion in Illicit Financial Outflows Since 2000, Reveals New GFI Report, October 25, 2012. It is not known how much of the illicit financial outflows in China are directly linked to government corruption.