Economic Analysis of China

This report analyses the economy of China on the basis of recent 4 years of data. It covers production performance analysis, labour market analysis, price level analysis and international trade analysis. The report concludes that China has maintained a positive economic growth rate above 6% and has introduced effective policies to control inflation and maintain it to the targeted level. However, the low export of steel in the last 5 years and the trade war between US and China has worsened the BOP of China.

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Economic Analysis of China
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1ECONOMIC ANALYSIS OF CHINA
Table of Contents
Introduction................................................................................................................................2
Production Performance Analysis..............................................................................................3
Labour Market Analysis.............................................................................................................4
Price Level Analysis..................................................................................................................5
International Trade Analysis......................................................................................................6
Conclusion..................................................................................................................................7
Reference....................................................................................................................................8

2ECONOMIC ANALYSIS OF CHINA
Introduction
The People’s Republic China (PRC), a socialist market economy, is the largest
economy in the world in terms of purchasing power parity. The country is also the second
largest country in terms of nominal GDP (Oecd.org 2019). China was growing faster than any
other country since 30 years, until 2015, at an average growth rate of 6%. China has recorded
a 2.7% of annual inflation in the month of August in 2019. As per the IMF data, China is the
73rd country in the list of top countries on the basis of GDP per capita in 2019 (Imf.org 2019).
China has the total banking sector assets worth of $39.93 trillion and total deposits worth of
$27.39 which is the world’s largest share. China ranks fourth in terms of inward foreign
direct investment and eleventh in terms of outward foreign direct investment. The world’s
largest reserve of foreign exchange belongs to China which is worth of $3.1 trillion (Imf.org
2019). Moreover, China’s economy is the fastest growing economy in the consumer market,
largest exporter of goods, second largest importer of goods and largest manufacturing
economy. This economy has free trade agreements with Australia, Pakistan, Switzerland,
New Zealand, South Korea and ASEAN (English.mofcom.gov.cn 2019). The largest trading
partner of the country are Japan, Hong Kong, Australia, Vietnam, Brazil, USA, South Korea
and EU. In terms of trade volume and stock exchange China’s stock exchange named
Shanghai Stock Exchange and Shenzhen Stock Exchange belongs to the largest stock
exchanges in the world. Labour force of China was the largest in the world in 2018
(Stats.gov.cn 2019). On the basis of Ease of doing business Index and Global
Competitiveness, China ranks 46 and 28 respectively (Oecd.org 2019).
Here, the report analyses the economy of China on the basis of recent 4 years of data.
An economic growth can be measured or observed by looking at the real GDP, growth rate of
GDP, per capita GDP, rate of unemployment, inflation and net export of the country. Each of

3ECONOMIC ANALYSIS OF CHINA
the above mentioned economic factors are discussed and analysed on the basis of recent
year’s data and economic condition of China through 4 years.
Production Performance Analysis
Real GDP, Real GDP growth and GDP per capita are used as the measurement of the
product output performance of the economy. Nominal GDP is simply defined by the total
amount of goods and services produced by the country in a specific year. Now, when the
nominal GDP is adjusted with the inflation then the factor is called Real GDP and it is
considered by the economist as a better indicator of economic performance as it consists the
inflation and GDP. Percentage change in real GDP over a period is known as the Real GDP
growth rate. GDP per capita is derived by dividing the real GDP of the country by the
population of the country. Now, these 3 factors shows positive impact on economic growth
which means if the Real GDP, Real GDP growth rate and GDP per capita of a country is
rising then a positive economic growth is observed in that country.
The real GDP of China in 2015 was $8.89 trillion which raised over time and it
became $10.80 trillion in 2018. In the last 4 years the real GDP is raised by approximately $2
trillion. The GDP per capita is observed to be $6484.44 in 2015 and it raised to $7754.96 in
2018. A rise in GDP per capita of almost $1200 is seen in last 4 years. The real GDP growth
was higher than 6% for the last 4 years which implies there is a constant growth in GDP has
occurred. Economist usually attributed much of China’s production growth to two important
factors that are large amount of capital investment and the growth in productivity (Barro
2016). The large amount of capital investment is funded by the huge savings of the
country and the foreign investment. China has attracted a huge amount of FDI which is
around $1.35 trillion in FDI stock by the end of 2016. This makes China the largest FDI
recipient among all other developing economies (Su and Liu 2016). Moreover, the Chinese
firms have already invested into Europe which is worth of $324 billion and this is the 31.03%

4ECONOMIC ANALYSIS OF CHINA
of the China’s outbound FDI. It also has invested in Switzerland, France, Russia, Germany
and Italy. Innovation is the top in the list of priority for Chinese Economic Planning which
includes a number of impressive initiatives for example “Made in China 2025” that has been
announced in 2015 (mof.gov.cn 2019). This is implemented in order to upgrade the modern
Chinese manufacturing majorly focusing in 10 important sectors and the aim is to make those
sectors a significant global player.
Labour Market Analysis
The unemployment is defined as a situation when an individual with potential full
time employability at its working age does not get a job. There are more definitions of
unemployment and all of these describes the unemployment in a more or less same way
depending on the reasons of unemployment. Generally there exists three different types of
unemployment which are structural unemployment, frictional unemployment and cyclical
unemployment. There are several reasons of unemployment of which increase in population,
slow growth of industrialisation and slow economic growth are the major reasons. Moreover,
a technological change have played important role in raising the unemployment problem by
replacing the humans with machines and technology. Rising cost could be the reason of
unemployment as the companies are not able to pay the optimum or even the minimum wage
to their employees due to rising input cost which leads the employees to reject the low wage
jobs.
In china, the unemployment rate was 4.04% in 2015 which falls to 3.8% in 2018
(Stats.gov.cn 2019). This shows that China has controlled the unemployment rate and
managed to create enough employment to reduce the unemployment rate. However,
unemployment is a critical issue in the economic growth of China as the population is huge.
Due to tension in US-China trade, a large number of employees are fired in the
manufacturing sector. The slowest growth since global financial crisis is seen in the last

5ECONOMIC ANALYSIS OF CHINA
quarter of 2018 which has a contribution to the unemployment in China (Su and Liu 2016).
However, China has managed to control it by encouraging the youths towards own businesses
and start-ups by providing the tax relaxation.
Price Level Analysis
Inflation is a measure of rate at which the price of goods and services are rising in the
economy over a period. In simple terms, inflation reduces the purchasing power of that
country’s currency. There are several reasons to rise inflation rate and the major reasons are
rise in money supply, high national debt, demand pull effect and cost push effect. A rise in
money supply means a rise in the availability of liquid money to the individuals which raises
the aggregate demand. This leads to an increase in the price level. In a high national debt
situation, a country can either raise the tax or print money. Rise in tax will lead the businesses
to raise the price of goods and services and printing money raises the money supply (Cui
2015). Demand pull effect simply means that a rise in wage enables individuals to spend
more and thus demand rises which in return raises the price level. Cost push effect means that
a rise in input costs will raise the price of goods and services as the producer transfers the
cost to the consumers.
The inflation rate in china is around 2% in the last 4 years which implies the inflation
is in control. In 2015 and 2016, the inflation rate was recorded as 1.44% and 2% respectively.
The major reasons of inflation in China is excess money supply which also devalues the
Chinese currency as per the China National Bureau of Statistics (Stats.gov.cn 2019). In case
of China, first the excessive money supply inflates the price of houses and then the share
prices (Lee, S.P. and Isa 2019). However, over the time China has tried to control the price
level by taking suitable steps through introducing monetary policies. For example, controlling
the forex rates, sterilization, controlling reserve ratio and discount rate are the measures of
inflation taken by the central bank of China (Day 2018). This helps China to control the

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inflation rate. In 2018, the inflation rate in China was 2.07% which is very close to the
targeted inflation rate that is set to be low and stable for the future plans and constant
economic growth (mof.gov.cn 2019). Moreover, China is focusing towards the manufacturing
sectors which produces labour intensive goods.
International Trade Analysis
International trade means import and export by a country which raises the foreign
currency reserves through raising the net export. Export is supported by the fiscal policies
like tax relaxation and providing subsidies to those producers who exports. Similarly, a
country maintains its imports by reducing and restricting the amount of imports. Imposing
tariff and quota on imports is the best way to reduce the amount of imports (Brandt and
Morrow 2017). However, there are some important factors that have an influence on balance
of trade (BoP) of a country. For example, factor endowment, exchange rates, inflation, trade
policy, foreign currency reserve and demand are the major factors that can potentially
improve and deteriorate the BOP which is measured by the net export. A currency which is
appreciated may have created a challenge to the exporters in terms of cost competition, as the
domestic goods become costly in foreign market. Higher inflationary situation can potentially
worsen the trade situation and have direct negative influence on the export as the cost of
production is higher than the cost in low-inflation country.
China is very much aware and a key player in the field of international trade and has a
wide range of trading partner including Japan, Hong Kong, Australia, Vietnam, Brazil, USA,
South Korea and EU. It is recorded that the China’s net export was $357.87 billion in 2015.
In spite of having free trade agreements with Australia, Pakistan, Switzerland, New Zealand,
South Korea and ASEAN and large countries as its trading partner, the net export has fallen
to $102.92 billion in 2018. Prior to 2018, the net export was $217 billion in 2017. These
means the net export is continuously falling in last 4 years which is an alarming situation for

7ECONOMIC ANALYSIS OF CHINA
Chinese economy (Chiu 2018). The major reason behind the drastic fall in net export is the
trade war between China and US which has the direct impact on the export of China (Silver
2018). However, there are some more reasons which has impact on over all fall in net export
of China. A continuous fall in steel export from 2015 to 2018 is one of these reasons. In
2015, the amount of crude steel export was 110 million metric ton which falls to 88.9 million
metric ton in 2018.
Conclusion
The People’s Republic of China is a developing country that is keen to take the 1st
place in every aspect of economic growth for which it has immensely well oriented and
organised plans for the improvement of each economic factor in each sector. China has
already introduce the “Made in China 2025” to raise the GDP, GDP per capita and
employment. China is open for the foreign direct investments and it has the large amount of
capital investment funded by the foreign investment. This types of effective policies has
maintain the economic growth rate above 6%. Again to control inflation and maintain it to the
targeted level, China has the monetary policy which are maintain the forex rates, sterilization,
controlled reserve ratio and discount rate. Devaluation of its currency is an important and
very impressive step of China which has helped China in its international trade and has made
a huge foreign currency reserve. However, due to low export of steel in last 5 years and the
trade war between US and China has the largest influence on the exports of China and it has
worsen the BOP of China (Lee 2019). Now, if China can tackle this critical situation then
again it will get the economic growth pace.

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Reference
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