Introduction Since.

Introduction
Since 1978, China has been experiencing rapid economic development. Currently, the
country is the world’s second-largest economy and the largest single contributor to world
growth. Although China has made impressive economic gains, its market reforms are still not
completed. Its rapid economic growth has generated many challenges. The country’s per
capita income still remains at the level of a developing country, less than one-quarter of the
average of OECD countries. To find solutions for China and to boost its economy, this essay
looks into how China’s economy has evolved, what has changed, and what has caused the
changes in its economy over the past 15 years.
Analysis
The first indicator which this essay is examining is Savings Rates in China for the past 15
years. Savings is defined as current income minus current spending on means. The definition
can apply to an individual, household, a firm or even the whole economy (Birch 2019, p. 3).
If the savings rate of a country is high while the disposable income of households remains
constant, it can be inferred that the spending of the country is relatively low. Low spending
negatively affects a country’s economic growth.
The line graph illustrates that China’s gross savings remained high at around 45% to 55% for
the last 15 years, reaching its peak in 2008. Even though there has been a downward trend
since 2008, China has maintained the highest savings rates as compared to other countries
during this time. Household savings in China is the biggest component of the whole savings
(shown in figure 2).
Gross Savings Rate as a percentage of GDP of China and other nations
Figure 1. Source:

Household Savings as a % of Total Savings in China
Figure 2. Source:
There are many reasons that explain the changes in savings rates in a country. This essay
focuses on the impacts of the one-child policy, pension reforms and income uncertainty on
China’s savings.
The one-child policy has affected the life-cycle savings in Chinese society. The one-child
policy in China was designed to control the birth rate in a fast-growing population since
implementation of Maoist policies for pronatalism. The policy was strictly conducted in the
urban areas during the early 1980s (Choukhmane, Coeurdacier & Jin 2014). The
consequences of the one-child policy were a sharp fall in nationwide fertility rate and then a
spike in the proportion of the aged population soon after (Choukhmane, Coeurdacier & Jin
2014).
In China, children provide support to the aged generation. Parents bring up their kids and
provide education to them. In turn, these kids grow up to provide financial and other in-kind
support to their parents when they retire (Choukhmane, Coeurdacier & Jin 2014, p. 1).
Beyond this cultural custom, there is a compulsory law that when kids become adults, it will
be their duty to assume full responsibility of their ageing parents (Choukhmane, Coeurdacier
& Jin 2014). Under the one-child policy and constitutional law, parents have to save more to
ensure the expected transfers while young individuals have to reduce spending to support
their parents when they grew up.
Apart from the one-child policy, the pension reforms also influenced China’s economic
growth. The recent reforms in pension policies contributed to a fall in pension replacement
income, which forced households to save more, thus increasing savings rates in China
(Cristadoro & Marconi 2012).
Income uncertainty also played an important role in raising rates for precautionary savings in
China. Over the last few decades, China has amazingly transformed from a closed,
agricultural and socialist economy to an open, industrial and market-oriented economy.
(Chamon, Liu & Prasad 2013, p. 1). These structural shifts have not only brought on rapid
growth for the country but also resulted in increased uncertainty (Chamon, Liu & Prasad
2013). The labour force has to get trained from time to time for upgrading its skillset so that it
can adapt to these changes. This is leading to structural unemployment in the country. The

increased uncertainty due to these massive structural shifts might explain the increase in
savings rates.
The second indicator being examined is the Gross Domestic Product (GDP). GDP measures
the final value of goods and services that are produced in an economy over time (Birch 2019,
p. 7). Real GDP is measured by taking into account the change in prices from one year to the
next (Birch 2019, p. 27). The formula for GDP is equal to consumption plus investment plus
government spending plus net exports. Any of the mentioned elements can change the total
amount of GDP.
China has been witnessed the fastest growth in GDP for the past 15 years, even though its
GDP growth rate has decelerated since 2007 (shown in the graph below). This essay
emphasises the contribution of investment, government expenditure and net exports towards
the GDP growth of the country.
GDP Growth Rate in China and other nations
Figure 3. Source:
As existing literature concerns, foreign direct investment (FDI) is highly correlated with
economic growth (Coughlin & Segev, 2000 cited Xue 2015, p. 16). China’s ‘go global’
strategy, proposed in 2000, has given a massive raise to both FDI within the country as well
as domestic investment in foreign companies (Xue 2015). In order to support the above
strategy, the Chinese government included it in the 10th, 11th and 12th Five-Year Plans (Xue
2015). When gross investment increases, while other elements remain constant, the total
amount of GDP will increase as well. China’s continuous investment in foreign economies is
one of the reasons why its economy grew.
As we know, the Chinese government has enormous impacts on its economic growth. The
most noticeable thing is that the government has been raising spending on Research and
Development (R&D). For example, due to the backing of the government, Huawei
Technologies has become one of the largest manufacturers and telecom equipment suppliers.
One of the secrets of the company’s success has been its spending of about 10% of its annual
revenues on R&D(). The Chinese government not only assists giant technology companies
but also encourages Chinese people to be innovative and own technologies by introducing an