A Deep Dive: Challenges of Chinese Economy and Trade

This case study delves into the multifaceted challenges confronting the Chinese economy, examining issues such as declining growth rates, shifts from export-driven to consumption-driven models, the viability of banking and manufacturing sectors, tax revenue shortfalls, and regional imbalances. The study explores China's economic objectives, including its transition to a new growth model, the role of free trade agreements, and foreign direct investment. A SWOT analysis highlights the strengths, weaknesses, opportunities, and threats impacting China's economic trajectory. The analysis covers key problems like falling GDP, over-reliance on exports, and domestic issues such as rising housing prices, and the study explores the challenges and opportunities for China's economic future. The paper also provides a theoretical framework for the case study, which helps to understand the economic challenges.

Running Head: Challenges of Chinese Economy and Trade
Challenges of Chinese Economy and Trade
Name of the Student
Name of the University
Author Note

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Challenges of Chinese Economy and Trade
Table of Contents
Introduction................................................................................................................................2
Body...........................................................................................................................................3
The key problems...................................................................................................................3
Objectives...............................................................................................................................5
SWOT Analysis of China along with its growing economy..................................................7
Case Solution.......................................................................................................................10
Theoretical framework of the case.......................................................................................14
Conclusion................................................................................................................................20
References................................................................................................................................23

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Challenges of Chinese Economy and Trade
Introduction
The economy of China has been considered as the second largest economy in the
world after the economy of United States. Mao Zedong, the former chairman of the “People’s
Republic of China” has unleashed his tough policies on the people of China. It is after then
when an economic miracle took place and as a result of this miracle China became a powerful
global economic organization (Chow, 2018). Moreover, China has also been considered as
the third largest importer of the world after United States and Europe and it is the largest
consumer of the commodities like iron and steel, cement, oil. Therefore, all these above
mentioned credentials has made it clear that the economy of China plays crucial role in trade
and commerce globally (Carter, 2019).
The reason for choosing the topic of Chinese economy as a topic of research because
during these current years it has been found that China has accelerated the gap with the
United States. The World Bank as well as the International Monetary Fund of the Chinese
economy have measured the size of the economy of China with the help of the purchasing
power parity which is basically the golden standard for making a comparison between the
sizes of the economies (Angang, 2015). It has been found that the Chinese economy has
supressed that of the U.S.A in the year 2014 and now it is 125% the size of the economy of
United States. Therefore, it is then when the Chinese economy has been identified as the
world’s second largest economy (Naughton & Tsai, 2015).
The one and half part of the world economy is largely dependent on China, United
States and the European Union. These three economies are largely capable for setting the
pace of the global cycle of business dynamics with the help of their scope and magnitude of
trade as well as the financial flows along with an effective co-ordination of the management
policies of demand (Sassen, 2018). However, the trade balance of China has turned negative

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Challenges of Chinese Economy and Trade
but this country has the capability of supporting the world economy by opening its market
and generating growth based on the consumption and investment of household (Chow, 2018).
During the last financial year, the economy of China has faced a number of criticisms.
There has been crash in the stock market, the property market was in a bubble and the
Chinese economy has been facing a downfall due to its own weight. There are major issues
which have been plaguing the economy of China like the falling of the growth rate, type of
the economy, tax revenues and expenses, regional imbalances, viability of banking and
manufacturing (Day, 2016).
The economy of China has been growing on a slower rate for the past 30 years as a
result there has been decline in the GDP rate. According to the analysts, the downfall has
been caused due to the current trade disturbances with US but it is not the exact cause. The
challenges to the economy have been building for years and these challenges are structural,
deeper and long term (Zhong, 2015). However, China is trying rapidly to get over the
challenges and for this China has to get a good grip in the industries for increasing the
productivity for the purpose of paying off their debts. On the other hand, the domestic
problems are China’s chief economic problem due to the rise in the asset prices specially the
housing prices (Chen & Wen, 2017).
Body
The key problems
 Falling of the growth rate-
There has been an unparalleled growth rate in the economy of China. The economy
was growing at a rate of 10% per annum for a period of decades. However, the growth rate of
the economy has been planned by the government since it is a centrally planned economy and
hence the ambitious infrastructure projects which are undertaken by the economy have a

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Challenges of Chinese Economy and Trade
great influence on the growth rate (Su & Liu, 2016). There is a problem associated with these
infrastructure projects and the problem is the creation of a lot of debt. As a result, the
economy becomes overburdened with the debt (Dollar, 2018). Recently, the growth rate is
close to 6.5% and it has made the investors panic because the Chinese may not be able to find
any other cheaper source for fuelling up the growth ambitions (Kudrin & Gurvich, 2015).
 Export to Consumption driven economy-
China has been actively participating in the business of export and the countries of
United States has been extensively consuming the produce of China and as a result, one third
of China’s export has been single handedly handled by the United States (Cohen, 2019). The
lose interest rate policies which were implemented by Fed has enabled the consumption of
the United States. These interest rate policy has made a lot of money to float around which
ended up being spent on the goods of China. However, recently there has been increase in the
rate policy and it is expected to reduce the demand of the United States and this will make
China to suffer. This will slow down the China’s economy and will lead to deflation (Nath,
Liu & Tochkov, 2015).
 Viability of Banking and Manufacturing-
The primary objective of the Chinese government has made many mal investments
especially in the sector of manufacturing as well as in the banking sector. The government is
currently looking after this non-performing assets and this is expected to create a mishap in
the Chinese banking sector and it will come under a lot of pressure. Moreover, it will not only
affect the stock market but the whole world (Zeng, 2015).
 Tax Revenues and Expenses-
A falling GDP also lead to falling of the tax revenues for the government of China.
This has made a major impact on the economy of China since China is a communist country.

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Challenges of Chinese Economy and Trade
There has been creation of shortfall which is to be fulfilled after borrowing money since there
is a fall in the tax revenues and rise in the expenditures. China has to figure out some other
ways other than borrowing since it is not a viable option for collecting tax revenues or else
there will be further decline in GDP (Lardy, 2016).
 Regional Imbalances-
China is still considered as the third world country due to low standards of living.
However, China has a widespread development across its coastal periphery but the internal
areas are still severely underdeveloped. This has been considered as a challenge for China
because it is difficult to sustain high Chinese growth rates with such a poor infrastructure
(Seidman, 2016).
Objectives
The economy of China is currently in a slowdown phase and it is in the process to
move towards a different model of growth and development. Initially, before the
liberalization of economic trade and reforms China maintained the policies of economy in a
stagnant and poor way which were controlled centrally and it was isolated from the global
economy since it was inefficient. However, with the emergence of foreign trade and
investment during the year 1979 China became the fastest growing economy of the world
with an average growth on the gross domestic product (GDP) as 9.5% through the year 2018
(Morrison, 2018). According to the World Bank, it has been described as the “fastest
sustained expansion by a major economy in history”. Therefore, such growth has enabled
China to double its GDP in every 8 years. As a result of this, China has helped about 800
million people to raise out of poverty and hence it became the largest economy of the world
along with merchandise trader, manufacturer and the holder of foreign exchange reserves
(Jomo, 2019). The real growth of GDP has slowed down with the maturity of the economy of

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Challenges of Chinese Economy and Trade
China from 14.2% to 6.6% from 2007 to 2014. Moreover, the International Monetary Fund
(IMF) has anticipated the fall in the GDP by 5.5% by the year 2024. The government of
China has embraced a slower growth in economy for the purpose of acknowledging the a new
growth model which will rely more on the private consumption as well as services and
innovation for the purpose of driving the economic growth and putting less attention on
exporting and fixed investment. These reforms are needed by China to avoid the occurrence
of “middle-income trap”. The middle income trap takes place when the countries achieve a
certain economic level and at the same time it experiences reducing rates of economic growth
since they are not able to adopt new sources for the growth of the economy (Yao, 2015).
China is engaged in a multipronged campaign for signing free trade agreements
(FTAs) under the leadership of President Xi Jinping. Initially, China used to conduct FTAs
with the small and developing countries and later during the year 2013 it signed up its first
FTA with the advanced European countries like Switzerland and Iceland (Nguyen & Cao,
2016). The direct foreign investment in the early stages of 1990 was led by the trade and
investment reforms of China and it has been a major source of productivity gain in China and
it also helped in rapid growth in trade and economy (Gubak & Samuel, 2015). The outflow of
China’s FDI has been growing rapidly after 2005 and it has exceeded the inflows of FDI for
the first time in the year 2015. The FDI inflows during the year 2018 was $139 billion which
made China the second largest receiver of FDI after the United States (OECD, 2016).
However, in the trade agreements with China there are several trading partners which enjoy
bilateral trade surplus with China and at the same time they have competitive advantages in
industries which will be protected from outside competition by China. The way of negotiation
of China is also confounding and it has wider scope as well as strength unlike the United
States. China has not yet reached at that position which matches with the standards of United
States but it has demonstrated greater flexibility and ambition than many other developing

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Challenges of Chinese Economy and Trade
countries (Brooks & Wohlforth, 2016). There are certain theories which are followed by
China in terms of trade policy which include (Handley & Limão, 2017)-
 Most of the preferential trading partners of China revolve around the policy of “one
China” for countering the perception of “China Threat” and assuming the regional
leadership.
 China prioritizes “cooperation” over the self-interest of narrow economy in its
negotiations with the potential partners of FTA.
 China has always been preoccupied with the idea of “non-market economy” in the
World Trade Organization and unlike many other small countries China has been a
trading hub which greatly relies on the trade agreements for avoiding trade diversion.
 The commodities which are important to China for the sectors like energy,
manufacturing and agriculture are exported from the various FTA partners of China
and for this purpose China has attempted to make a negotiation of trade agreements
for ensuring affordable as well as stable supply of those commodities.
 China prefers to have trade agreements with smaller countries since it is a home for
many powerful interest groups of the government and other industries which operate
under the policies of market-distorting.
SWOT Analysis of China along with its growing economy
China has been considered as the rapid growing economy among the economies in the
world and yet it faces several problems in terms of declining industries, rates of
unemployment and negative impressions. The power of China to overcome such problems
has been explained after undertaking a SWOT Analysis of China for highlighting the
strengths, weaknesses, opportunities and threats (Yan, Xia & Bao, 2015).
Strengths- A boost in the GDP of the country

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Challenges of Chinese Economy and Trade
The GDP growth of China has exceeded the expectation of government of 6.5% by
reaching to the number of nearly 7% and it has been the highest since 2010. There has been a
steady and consistent increase in the GDP rate for the last few years and this boost in the
GDP has been received after registering for $3 trillion and more USD in the foreign cash
reserves. Another advantage which China has is the cheap labour and this country is globally
renowned for this and this is the reason why a huge number of international businesses have
their products manufactured in China. However, the quality of the products are not up to the
mark but there are countless companies which have problems for hiring cheap labour and this
cheap labour also benefits the local businesses of the economy as it is capable of providing
greater number of jobs for the citizens of China.
The increasing rate in the use of mobile in the rural as well as populated parts of
China is another strength of China. This increasing boom in the telecom sector of China has
been receiving more requests from the citizens of China for subscriptions of mobiles and
there is even increase in the networks for accommodating the new growth.
China is home for billions of people and the Chinese government is comprised of four
political parties which make the task of decision making of the country an easier task even
with a vast population.
Weaknesses- The government which sees all
China being a country which offers cheap labour with jobs to the public but at the
same time this country faces the problem of unemployment. As a result, the rural areas of
China is facing problems and are almost fading along with the agricultural sector. There is
another problem in China regarding the problem of the control of government. It has a
restrictive government and it does not even allow social media sites like Facebook, Twitter

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Challenges of Chinese Economy and Trade
for the Chinese people to use. There are also restrictions from the part of the local
government for selling property and lending of mortgage.
There has been restrictions of price which has led to decrease the sales of the
residential homes. Therefore, there has been a severe effect in the construction businesses as
there are no homes to sell and as a result, the workers of this industry are not getting paid
properly and they end up leaving the industry in order to find some other place to work.
Opportunities- Migration and the new industries
There are two major opportunities which are to be focused by China. These two
opportunities are service sector and urban migration. The country needs to emphasize the
service-based businesses since there is a downturn in the agricultural industry and the people
working in the agricultural industries living in the rural areas are shifting to the populated
regions. It is important because the agriculture and the manufacturing industries are the two
leading industries of China till now. The citizens need to move to the urban areas in search of
new work as there is no agriculture to focus on. There are around 55% of people who are
migrating to the urban areas and most of them are aged 50 and over.
Threats- Rise of the negative implications
The negative perception are the reasons behind the sufferings of the people of China.
The country of China has been viewed as a country which is a restrictive land and the
government has the ultimate controlling power. There are regulations like one-child policy,
which allows families to have only one child and therefore this does not improve the
perceptions. There is also the problem of smog in the air of China and this is the reason why
the people of China wear masks on their faces. The concept of cheap labour though adds
strength for the country but at the same time it adds some negative perceptions. There are
negative perceptions like people from other countries are worried about the exploitation of

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Challenges of Chinese Economy and Trade
the workers of the factories and they often wonder how these workers work on such a lower
hourly wages.
There is a population of around 1.4 billion which is maintained by China and
therefore the government of China rules the people in a strict and restrictive manner with
restrictions in the usage of media, products and services. There is an employment rate of over
70% however there is also a steady rise in the unemployment as there is decline in the
manufacturing as well as agricultural industries and the people of the rural areas are forced to
move to the populated cities for finding new work. Thus, it can be concluded that China has
the opportunity of offering more service-based business to the local individuals as well as
international companies. China has the ability to have a steady rise in the GDP even higher
than what it is already. On the other hand, the country should focus on urban migration of
both young and old for taking positions in the service sector. China has no intention of
changing its policies even after having a negative impressions from the neighbouring
countries as well as other international countries.
Case Solution
According to the prime minister of China, the country of China will shift to a new
economic growth of 7%. However, there are challenges due to the slower growth phase but at
the same time it also helps to create a vital opportunity for the purpose of long-term economic
development. As a result, the leaders of China are able to recognise the opportunities and are
taking suitable actions for supporting the shift towards more sustainable growth models. The
finance ministry of China has already taken the initiative to raise the deficit of the budget of
the central government from 1.8% to 2.7% and this will also allow the local governments for
swapping the debt which are to be matured this year with bonds with lower rate of interests.
Similarly, the “People’s Bank of China” is also providing monetary support for gradually
lowering the rate of interest and reserve requirements. The purpose of doing the same is to

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Challenges of Chinese Economy and Trade
control the inflation rate as wages are rising (Chen, Chow & Tillmann, 2017). It has also
projected a stable environment for exchange rate for the current year despite of remarkable
depreciation of the currencies of different countries. Therefore, it can be said that that the
government of China has clear long-term vision as the policies are expected to reflect an
exceptional determination for continuing a path of structural reform despite of the strong
headwinds resulting from the domestic structural adjustments and external environment
(Beeson & Li, 2016). The adaptive policy making of China which can be applied across the
country has produced failures and successes, both. At some places there were a positive
contribution which has witnessed the growth of GDP however, there were also some
problems like corruption, pollution, excess capacity of industries as well as creation of ghost
towns. It is to be noted that the Chinese bureaucracy should adapt radically in order to cope
up with the risks and take the advantages of the benefits like globalization and technology
since the path ahead is not smooth and the biggest challenge is to get shift to a stable
industrial base which is knowledge based and at the same time environmentally conscious
(Steger, 2017).
The ongoing problem of China and US trade war has taken the attention from the
biggest problems of China which is the blowing of the multiple bubbles and growing debt of
the country which is actually killing the economic growth of China (Liu, 2018). However, it
has happened in earlier days in Japan during the time period of 1980 and it is presently
happening in China. The economic growth of China depends largely on exports but the trade
war which is going on in China has been blamed for slowing down the economic growth of
the country (Tandon, 2015). As a result, it has shaken the power of the Chinese technology
companies to compete in the global markets. Therefore, for overcoming this problem the
manufacturers of the company have come up with the solution for minimising its impact. It
can be solved once China along with the United States come up with any formula to satisfy