China’s economy acknowledged as a powerhouse propelled by its remarkable growth trajectory and influential economic policies has been ranked as one of the world’s leading economies. China is the world’s second-largest economy, closely trailing the United States. This is because of adaptability, innovation, and strategic planning that have helped to capitalize on its strengths, address vulnerabilities, and embrace progressive policy solutions. Its rapid economic expansion in recent decades has firmly established this position, especially through inclusive economic growth and development both domestically and internationally. However, it is essential to note that economic rankings fluctuate due to changes in GDP growth rates, exchange rates, and global economic circumstances. This report gives a detailed and comprehensive analysis of the macroeconomic landscape of China and assesses its crucial indicators, the current financial status, policy implications, and theoretical perspectives.
Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is a pivotal indicator of a country’s economic performance. Policymakers, economists, and investors rely on GDP to make informed decisions about financial policies and investments. Gross Domestic Product (GDP) quantifies the collective market worth of all goods and services generated within a nation over a defined period, often annually or quarterly. This metric offers valuable insights into the magnitude and vitality of a country’s economy. It provides insights into the size and health of the nation’s economy by calculating aggregating consumption (C), investment (I), government spending (G), and net exports (exports minus imports). GDP offers a snapshot of the economic activity within a country’s borders (Amacher & Pate, 2019). The Gross domestic product (GDP) of a country is like the measure and score sheet of its economic prowess. It is used to assess the general worth or value of the goods produced and services offered. Policymakers and investors are able to ascertain the state of their economies and determine the ability to grow them further through monitoring and evaluation of their Gross domestic product.
Over the past three decades, China’s GDP has had remarkable growth, with an average annual growth rate of approximately 10 per cent. The growth of economic reforms and policies regulates aggregate demand, preserves domestic employment, and mitigates excessive inflationary pressures and financial risks. The Chinese government regularly sets annual GDP growth targets, typically around 7.5 per cent, according to global and domestic business environment shifts and responses to emerging domestic imbalances (Sadeghian et al., 2013).
Balancing between Price Stability and Public Debt challenges
Consumer Price Index (CPI) is like a measuring tool that does not give measurements alone but influences the prices of all items on it. This shows how powerful the Consumer Price Index (CPI) is when it comes to the management and stabilization of our economies. According to the People’s Republic of China (2023), the consumer price index (CPI) showed a modest yearly increase of 0.3 per cent, maintaining overall price stability. They attributed stability to factors, including reduced inflation resulting from declining commodity prices, notably in the food and energy sectors. China’s national government debt reached Renminbi (RMB) sixty-one trillion, equivalent to around 50.6 percent of the country’s 2022 GDP of (RMB) 120.47 trillion. Local government debt primarily supports infrastructure investment, backed by tangible assets, and generates positive external factors for the local economy. However, despite China’s official debt burden staying below international thresholds, a sustained rise in total debt-to-GDP and potential spillovers from export restrictions pose economic stability and growth challenges.
Dealing with Inflation
In 2023, China experienced significant fluctuations in its inflation rate, peaking at 81 percent in September. Factors such as more significant economic slack, fluctuations in food and energy prices, and disparities in housing markets influenced this inflation rate. The People’s Bank of China (PBoC) responded by adjusting policy interest rates and implementing sound monetary policies by ensuring enough money and credit available while keeping the financial environment favorable by maintaining reasonable levels of liquidity. Additionally, the PBoC reduced the reserve requirement ratio twice, allocated substantial funds for medium- and long-term support, and offered targeted financial assistance for critical sectors like technological innovation and green development.
Moreover, the PBoC optimized real estate financial policies, guided commercial banks in adjusting interest rates, and assured the solidity of the RMB exchange rate. China’s trade balance in 2023 consistently showed a surplus, with trade balance as a percentage of GDP ranging from 2.7% to 3.7%. This surplus indicates that China’s exports consistently surpassed imports, contributing to the accumulation of gross official reserves, which increased from 3,168 billion U.S. dollars to 3,787 billion U.S. dollars during the same period. China’s ability to maintain a robust trade position and accumulate significant reserves reflects positively on the country’s economic stability and prowess in international trade (People’s Republic of China: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the People’s Republic of China, n.d.).
Strategies of Diversification and Increased Domestic Demand
The outlook for the Chinese economy appears promising, with various indicators signaling growth and stability. Key economic factors such as industrial production, market sales, retail sales of consumer goods, and the overall value of imports and exports have shown encouraging growth patterns. Additionally, China remains a significant economic player, supported by its advantageous market scale, the potential of domestic demand under the new “dual circulation” development pattern, and the transformation of the demographic dividend into a talent dividend. Even with the positive growth there are still some challenges like potential slowdowns in global trade and high household debt levels. Therefore, as a new strategy, China needs to have diversified export markets and focus on domestic consumption of its local produce (Fan et al., 2022). When the economic concept of “dual circulation” and patterns of development succeed, China’s rapid economic growth will progress sustainably as the strategy focuses on both domestic and international markets.
Turning Innovation into Economic Drivers
China’s emphasis on scientific and technological innovation and its steadfast commitment to goals such as “carbon peaking and carbon neutrality” will drive new domestic investments and industries, contributing significantly to economic growth in 2023. This anticipated strategic focus to position China as a leading contributor to global GDP growth (People’s Republic of China: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the People’s Republic of China, n.d.). I would argue that with the advancements in technology and the potential emergence of new investments and industries, China needs to effectively apply scientific and technological developments to fit into products and services that are economically practical. Achieving this will need adequate research and adequate infrastructure to make the use of new technologies economically. Knowing that “carbon peaking and carbon neutrality” goals come with opportunities and challenges. To achieve the set goals, China must invest heavily in clean energy and technologies that are environmentally friendly.
Economic Balancing between Low Inflation and Growth Pressures
According to Fan, Hu, and Zhang (2022), China was in a phase of low inflation and economic expansion. The construction of China’s core inflation index depends on the continuous influence of monetary policy and inflation projections. The global fiscal crisis and elevated inflation prompted the Chinese central bank to adopt a loose monetary policy. However, after 2012, the Consumer Price Index (CPI) receded and remained subdued, signaling low inflation in China’s economy. Moreover, the core inflation metric is a predictive indicator of overall inflation, demonstrating an ability to forecast short-term inflation trends indicative of economic expansion. Hence, China is witnessing both low inflation and economic growth.
Khan Academy (2016) outlines the connection between GDP, inflation, and China’s unemployment rate. The AD-AS model elucidates the dynamic interaction of aggregate demand (AD) and aggregate supply (AS), while the Phillips Curve illustrates the relationship between inflation and unemployment (Amacher & Pate, 2019). Within the AD-AS model, an upsurge in aggregate demand may lead to higher GDP and potentially heightened inflation, mainly if the economy is operating near total capacity. Given China’s rapidly expanding economy, increased aggregate demand could result in elevated GDP and inflationary pressures. It could stem from heightened consumer spending, investment activities, or government expenditures.
On the contrary, Khan Academy (2016) also highlights the Phillips Curve, an inverse correlation between inflation and unemployment. When China experiences prominent levels of unemployment, it tends to lead to lower inflation due to lower pressure on wages and prices. Especially when unemployment is low, upward pressure on wages and prices may result in higher inflation (Amacher & Pate, 2019). From the inverse relationship between unemployment and inflation, when there are high unemployment rates, competition for jobs becomes low, resulting in reduced wage growth, and prices for goods and services might also be low (Blanchard & Olivier, 2016). This is called deflationary pressure. Also, low unemployment rates show a competitive market in that businesses scramble for a small segment of competent workers. This aspect of inflationary pressures has the potential to significantly raise wages and prices.
However, the connection between GDP, inflation, and unemployment in China may only partially adhere to theoretical models (Amacher & Pate, 2019). China’s distinctive economic structure, government policies, and global economic factors can all impact these relationships. Additionally, the complexity of China’s economy, including its transition from a manufacturing-oriented to a more service-driven model, introduces additional nuances to these dynamics.
Financial Growth and Inclusion through Monetary and Fiscal Policies
The People’s Bank of China (PBC) has made significant strides in promoting financial inclusion through policies and initiatives. The PBC could consider implementing the following recommendations to enhance financial inclusion further. An initiative like continuous reduction of required reserve ratios by persisting in reducing these ratios for banks that have met the required lending thresholds, particularly for underserved market segments, is very phenomenal in promoting financial inclusion. For financial institutions to ensure proper financial inclusion, then they should focus on various sectors like the Micro and Small Enterprises (MSEs) and the agricultural sector.
Also, by expanding digital financial inclusion by leveraging China’s leadership in digital finance and financial technology, the PBC could concentrate on expanding digital financial inclusion initiatives. It may involve the development of digital financial infrastructure, such as mobile and internet access, to extend financial services to marginalized communities residing in remote and rural regions (Chen & Yuan, 2021). Implementing these initiatives could bolster the PBC’s efforts in promoting financial inclusion and contribute to the long-term financial well-being of individuals and businesses in China. The recommendation underscores the importance of the Chinese government persisting in implementing a sound monetary policy. It entails maintaining liquidity, money, and credit in a monetary and financial environment. Moreover, there is a need for increased focus on adjusting over time and counteracting economic cycles while managing the complex connections between short-term and long-term stability, risk mitigation, and internal and external equilibrium.
Trade Balance Through Monetary Policies
It is crucial to enhance the implementation of existing monetary policies to ensure flexibility, appropriateness, accuracy, and effectiveness in addressing the medium-term growth trajectory of China’s economy. Furthermore, the recommendation advises the government of China to contemplate adopting a loose monetary policy. Under such a policy framework, enterprises should increase their capital structure, improve their asset-liability ratio, and accelerate the adjustment process. Furthermore, the research suggests that companies facing fewer financing limitations adjust their capital structure more rapidly than those facing stricter financing constraints in a loose monetary policy environment. By embracing a loose monetary policy, the government can facilitate the upward adjustment of enterprises’ capital structure, fortify their financial standing, and expedite their capital structure adjustment journey. It can, in turn, contribute to the stable development of the economy and bolster the growth and expansion of businesses in China (Wan, 2022).
According to Wan (2022), expansionary monetary and fiscal policies, such as increasing government public investment and advocating tax and fee reform, can augment liquidity within the financial system in the short term. Consequently, this liquidity infusion can reduce interest rates, facilitating more accessible access to credit and financial services for individuals and businesses. These existing policies stimulate domestic demand and consumption, fostering heightened economic activity and mitigating financial exclusion.
It is evident that the aftermath of monetary and fiscal policies on monetary and financial inclusion will depend on their sustainability and effectiveness. Suppose these policies are successful in promoting economic growth and stability. In that case, they can contribute to a more inclusive financial system by allowing individuals and businesses to participate in the financial sector. If these policies lead to unsustainable debt levels or inflation, they could have negative implications for monetary and financial inclusion by reducing the availability of credit and increasing financial instability. Monetary and fiscal policies significantly influence monetary and financial inclusion in the short and long term. Therefore, it is vital for policymakers to carefully weigh the ramifications of these policies on monetary and financial inclusion and to ensure that they foster sustainable and inclusive economic growth.
Classical economists tend to be fiscally conservative and have more faith in market processes, while Keynesian economists are more willing to intervene in the economy. In the context of Amacher & Pate (2019), in China, the classical economist might favor policies that create incentives in the private sector to increase output and jobs, such as fewer regulations or tax breaks for job creation. Additionally, Keynesian economists might advocate for increased government spending to accomplish the same goal because classical economists typically prioritize concerns about inflation over unemployment and are reluctant to advocate for government intervention to redistribute income from the wealthiest to the poorest. All these show that Keynesian economists are more inclined to deviate from laissez-faire principles and argue that government intervention in the business cycle can expedite the return to full employment. These disparities in approach underscore the broader ideological and theoretical contrasts between the two schools of thought (Amacher & Pate, 2019).
Conclusion
China’s economy has demonstrated remarkable resilience and robust growth over the past three decades, and it maintains an average annual GDP growth rate of around 10%. This impressive growth can enable strategic economic reforms and policies to efficiently manage demand, ensure continuous employment, and mitigate inflationary pressures despite facing challenges like fluctuating inflation rates and increasing government debt.
The prudent monetary policies enforced by the People’s Bank of China (PBoC), along with consistent trade surpluses and burgeoning reserves, have fortified China’s economic strength and positioned it as a beacon of stability in the global economic arena despite complexities within its dynamic economic landscape. Also, to sustain its growth trajectory and global prominence, China must prioritize initiatives to enhance financial inclusion, implement sound monetary policies, and foster economic stability. This paper mainly shows China’s economic indicators paint a positive picture, characterized by stability and promising prospects for further expansion and analysis of how the disparities in economic ideologies between classical and Keynesian economists shed light on the ongoing policy dialogues within China.
References
Amacher, R., & Pate, J. (2019). Principles of macroeconomics (2nd ed.). Bridgepoint Education.
Chen, W., & Yuan, X. (2021). Financial inclusion in China: an overview. Frontiers of Business Research in China, 15(1). https://doi.org/10.1186/s11782-021-00098-6
Fan, Z., Hu, Y. & Zhang, P. Measuring China’s core inflation for forecasting purposes: taking persistence as weight. Empir Econ63, 93–111 (2022). https://doi.org/10.1007/s00181-021-02128-x
Khan Academy. (2016). How the AD/AS model incorporates growth, unemployment, and inflation. Khan Academy. https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregate-supply-demand-topic/macro-changes-in-the-ad-as-model-in-the-short-run/a/how-the-ad-as-model-incorporates-growth-unemployment-and-inflation-cnx
People’s Republic of China: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the People’s Republic of China. (n.d.). IMF. https://www.imf.org/en/Publications/CR/Issues/2024/02/01/People-s-Republic-of-China-2023-Article-IV-Consultation-Press-Release-Staff-Report-and-544379
Sadeghian, D., White, G., & D’arcy, P. (2013). Macroeconomic Management in China. https://www.rba.gov.au/publications/bulletin/2013/jun/pdf/bu-0613.pdf#page=13
Wan, L. (2022). Monetary Policy, Fiscal Policy, and Capital Structure Dynamic Adjustment Evidence from Chinese Listed Companies. Mathematical Problems in Engineering, pp. 1–12. https://doi.org/10.1155/2022/8040641
Blanchard, O., & Brancaccio, E. (2019). Crisis and revolution in economic theory and policy: A debate. Review of Political Economy, 31(2), 271-287. https://www.tandfonline.com/doi/full/10.1080/09538259.2019.1644730
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