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

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Challenges of Chinese Economy and Trade
the sentiments of both the nationals. China is expected to face the difficult challenges in
terms of foreign trade during the time period of 2016-20 and this time is also the 13th Five-
Year Plan. It has been anticipated that the low pace of economic growth and the unbalanced
recover situation will be continued and the pattern of the international foreign trade will be
undergoing several changes for intensifying the competition (Aglietta & Bai, 2016).
However, there are two major global challenges which are faced by the foreign trade of China
and these two challenges include competition of more developing countries with China in
terms of product market of middle and low ends. On the other hand, the developed countries
will be making more efforts for maintaining and enhancing the strength in the product
industries of middle and low ends. However, country of China can cope up with these
challenging situation with a fast growing service sector and sound industrial system. At the
same time this country is also trying to improve the supply chain as well as value chain for
the purpose of making an efficient co-operation between the upstream along with the
downstream industries. The country is also focused about the fast development of the
investment and the strategy of “go global” of the country (Wang & Lu 2016).
There are certain characteristics which mark the foreign trade of China. These
characteristics are (Sun, 2018)-
 The growth rate of the export of China has been expected to gradually slow down
 The quality as well as the price of the exports are expected to increase gradually. The
trade growth rate of China has been anticipated to be higher than that of the global
level and the share of China in world trade is continuously increasing.
 The recent advantage of China for the foreign trade will be brand, technology, service
and quality other than the low prices. There are other additional adjustments that
should be focused by China and these are to optimize the structure of the foreign
trade, more coordination is needed by China for the foreign trade development along

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Challenges of Chinese Economy and Trade
with national economic growth, adjustments in the industrial structure, environmental
resource protection and strategy for regional development.
 The country will be participating in the global labour division and competitiveness
more actively.
 There will be higher growth of service trade than the growth of goods trade.
 There will be balance in the exports and the imports as well as gradual reduction in
the proportion of trade surplus in GDP.
 There will be more contribution of foreign trade for the promotion of new
industrialization and sustainable economic development along with the livelihoods of
people, employment and growth in GDP.
Therefore, China needs to implement innovative strategy as well as direction and it
should be cultivating a new engine for the purpose of growth which is driven by innovation to
establish a new system of trade and economy for facilitating the free flow of essentials (Fu,
2015). Moreover, for achieving these goals China needs to undertake several measures and
these measures include (Amador & Cabral, 2016)-
 China should focus on stabilizing the export of labour intensive goods as well as
increase the export of new and developed tech-products. It should also focus on
the construction of the international trade routes. On the other hand, it needs to
adopt the strategy of import for facilitating the advanced technology of import and
its key components. It also needs to stabilize the import of resources and energy in
order to address the demands of the people of China.
 China should focus to adopt transformation and upgrade labour- intensive
industries for the purpose of gaining global competition and cooperation.
Additionally, it should also focus on improving the trade policy for encouraging
the enterprises of domestic brands for making them a major aspect of the

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Challenges of Chinese Economy and Trade
international value chain cooperation. However, it should also focus on
developing a service trade after exploring the new frontiers of trade service
cooperation.
 China should develop an environment of free trade and for this it should resolve
the conflicts of major trade with the help of negotiations with the developed and
developing countries. On the other hand, several measures are to be taken so that
other countries do not take discriminative actions against it for bending the rules
of the World Trade Organization for exploiting the foreign trade of China.
Theoretical framework of the case
In the second quarter, the GDP growth of China had slowed to 6.2 percent. This gain
is the smallest gain since the year 1992 when the economy of the country was first
accelerated. The experts from “Wharton and Stanford University” say, this growth is the
sluggish growth and this sluggish growth rate figure is not due to the current “trade war” with
the U.S. The challenges to Chinese economy are structural, longer and deeper term if over
investment, high savings are included. The followings are also included- high debt, rising
consumer spending and low industrial output. These views are given by professor Marshall
W. Meyer who is a long term China expert. (Meyer, et al., 2017).
Less export- dependent
The Net export as a proportion of economy of China have reduced tight for years and
now it is under one percent of total GDP. According to the Dasher, as the export of China to
the U.S. is just 5 percent of total export, the trade tension between China and U.S. is not the
cause of reduction in export. So while the export between China and U.S. fell 7.8 percent
during the month of June, the result did not show a finishing stroke to China’s $13.6 trillion
economy. Chinese growth of the economy has been decreasing since 2009, according to

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Challenges of Chinese Economy and Trade
Meyer. (Meyer, 2015). Three of the most important problems are 1) Demographics and the
workforce is beginning to reduce, 2) countries that grow in a fast, face a rapid slowdown in
growth at certain point of time. 3) extreme dependence on “capital investment”. It has been
found that the financial market had not reacted very unfavorably to the extreme low Gross
Domestic Product growth rate as consumer spending has gone up over and above 9 per cent.
According to Meyer (Meyer, 2015), China faces the most critical problem for China’s
future which is lagging efficiency as it drives the gross domestic product during the long run
and it has been less in China. Therefore, in the meantime the country has been a debt ridden
economy. The country has been in debt by local government and consumer. China will have
to increase its production to repay the debt. It means the country has to move up the chain of
value into “leading-edge industries”. According to some Chinese analysts, the economy of
China must shift from investment-led growth towards consumption-led growth. (Pirie, 2018).
Racing towards Innovation
While China is trying to change the structure of its economy, there is an increase in
gap between the poor and the rich. Dasher noted that in East Coast Chinese cities wages have
been increasing drastically while the gap of wage between the Coast and interior is higher
and higher. Many economists agree that the main problems of Chinese economy are domestic
and creating social pressure. (Shapiro, 2016). Prices of housing and assets have become very
high that many young professional find themselves out of the price of the market in China’s
blooming cities. Some argue that the actual competition between U.S. and China are not trade
as it is rather about which country will lead the future in technology and innovation. Meyer
noted that though U.S. has the productivity advantage still U.S. does not have any company
that can compete with company like Huawei (Meyer, 2015).
Tariff as a blunt instrument

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Challenges of Chinese Economy and Trade
According to Dong, Ishikawa & Hagiwara, 2015, tariff is a dull instrument which are
not effective in solving the problems that China does face with U.S. Due to global economic
crisis, China’s imports,exports and FDI inflows decreased, GDP growth has slowed and
many workers did loose their job during 2008. While China is expanding so fast than any
other major nation, still it could not meet the official target of Beijing which further added
worries about broader prospects for worldwide growth. There are other problems which has
been noted that in China where nation’s vast automotive sector has shrunk as the real estate
sector reaches a steady rate and as from swine fever epidemic its pig die in huge number. The
growth of China was set to slowdown, the size of the economy of China is now twice of the
size than it was about a decade ago, now China’s labor force is shrinking, and it has been
seen that China is already full of roads, railways which limits potential new investment. The
government of China has implemented a $586 billion economic stimulus package, also took
another measure which is “loosened monetary policies” to raise lending of the bank, provided
various incentives to increase consumption of the household. China is allowed by such
policies to efficiently whether the impact of the international decline in demand for product
of China. It has been suggested by some economists that China will pass United States as the
largest economy of the planet within a time period of few years. In the long run, whether
China still has the ability to carry on a rapidly expanding country will depend on the
capability of Government of China to introduce inclusive economic policies that more
quickly help China in movement towards the free market economy that by making demand
for consumers and enhance protection of environment it can again meet the equilibrium the
China’s economy (Christensen, 2015).
China is growing rapidly which finally led to substantial increase in trade with the
United States. According to the U.S. Trade data, it has been observed that the total trade
between two countries raises from $5 billion in 1980 to an estimated $562 billion in 2013.

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Challenges of Chinese Economy and Trade
Currently it has been seen that China is the United States’ second largest trading partner, and
it is the main source of imports and is the third main export market. Many companies of
United States have processes in China selling their products in Chinese market so that they
can take chance of lesser cost of labor for export oriented industry. China purchases U.S
treasury securities in huge scale which have permitted the Federal government to fund its
deficit budget facilitating to keep the interest rate of U.S relatively small. This makes China
the largest marketplace for U.S. export and critics have said that many trade and investment
obstacles put restriction on chances for U.S firms selling in China. There are other concerns
that relate to Chinese economic growth which take account of China’s increasing demand for
raw inputs and energy and it is emerging as the leading emitter of the world of “greenhouse
gasses”. However, China does face major challenges of economy including deformed
economic policies which has been caused due to over-dependence in fixed investment and
export for the growth of the nation (rather than demand for consumer goods) government
does sustenance for public firm, a feeble system of bank, broadening income gaps, increasing
pollution. These problems have been identified by the government of China and have been
decided to solve them by applying effective policies to rise spending of the consumer and
encourage development of industries that pollutes less.
China’s economy has suffered from economic downturn when Mao Zedong was the
leader, including during the Great Leap forward from 1958 to 1960 and the Cultural
Revolution from 1966 to 1976 (Xizhe, 2015). The slowdown of global economy have started
in 2008 and it has a bad influence on the China’s economy, mainly the export sector. The real
GDP growth of China has declined from 14.2 percent in 2007 to 9.6 percent in 2008 and then
it slowed to 9.2 percent in 2009 and after this expansionary monetary policy was
implemented by the Chinese government. This measure raises consumption and domestic
investment and as a result it helped to prevent severe economic slowdown in China. In the

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Challenges of Chinese Economy and Trade
recent times, the economy of China has been growing slowly- real GDP has declined by 7.7
percent in 2012 and 2013. According to International Monetary Fund, it has been observed
that China’s real GDP fell to 7.0 percent from 2014 to 2019. It has been provided a valuable
competitive advantage by Chinese huge population and comparatively little wage rates when
the government first started economic reform and trade liberalization in the late 1970s (Fu,
2015).
There is a huge increase in Foreign Direct Investment in the beginning of early 1990s
due to Chinese investment and trade reforms. These waves have been a main source of
China’s gains in productivity and fast growth of economy and trade. During the time period
of 2013, foreign-invested enterprises (FIEs) in China recorded for 47.3 percent of China’s
exports and 44.8 percent of its imports though the level was low in 2006 when FIEs share of
Chinese exports and imports were 58.2 percent and 59.7 percent respectively. It has been
witnessed that FIEs in China influence Chinese high tech exports. It has been cleared that the
share of high tech export of China by FIEs rose from 79 percent to 82 percent from 2002 to
2010. At the same time, the share of China’s high tech exports by wholly owned foreign firm
rose from 55 percent to 67 percent. According to the United Nations, annual FDI moves to
China upsurges from $2 billion in 1985 to an estimated $121 billion in 2013. The FDI stock
in China through 2012 is at $832.9 billion (Sun, 2018).
The Chinese merchandise exports increased from $14 billion in 1979 to $2.2 trillion
in 2013 on the other hand the merchandise imports increased $18 billion to $1.9 trillion. The
annual growth of China’s exports and imports from 1990 to 2013 were on average 18.5
percent and 17.3 percent respectively (Wang & Lu, 2016). However, in 2013 China’s exports
and imports increased by 7.8 percent and 7.3 percent respectively. In the first half of 2014, it
has been observed that China’s exports and imports rose by 0.9 percent and 1.7 percent over
same period in 2013. The merchandise trade surplus of China has increased sharply from

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Challenges of Chinese Economy and Trade
2004 to 2008, increasing from $32 billion to $297 billion. This surplus decline each year
from 2009 to 2011, fell to $158 billion (Steger, 2017). Again, it has been observed that
China’s trade surplus rose to $233 billion in 2012 and to $261 billion in 2013. In order to
become the largest merchandise exporters of the world as well as the second largest
merchandise importers, China passed Germany in 2009 to become both the most major
merchandise exporter and importers. During 2000 to 2013, China’s share of global
merchandise exports rose from 3.8 percent to 12.1 percent. On the other hand, according to
World Bank (Zeng, 2015), China has been considered as the planet’s maximum active users
of industrial policies and administration. According to some estimation, Chinese SOE (State
owned enterprises) may include up of 50 percent of non-agriculture GDP. Although the
amount of SOEs has shrunk tight, those SOEs keep on to dominate a number of sectors and
are shielded from competition. There have been studies which found that SOEs set up 50% of
the 500 largest manufacturing companies in China (Lardy, 2016).
A particular amount of Chinese import is composed of those components which are
assembled into finished products such as electronic goods and computers which are then
being exported. The major exported products includes electrical machineries. These
machineries add computers, furniture and knit apparel, while major imported items including
machine, ores electrical machine and mineral fuel. However, growing difficulty has been the
local government debt in China because it could have a potential effect on the Chinese
Banking system. During the starting of the worldwide financial slowdown, many China’s
sub-national government bodies borrowed excessively in order to help to restore native
economies. Again, floating currency is not allowed by China, so it must make huge scale
acquirement of dollars so that it can maintain the exchange rate within a fixed levels.
However, it has been appreciated against dollar since the economic reform period and some
analysts said that it stays highly undervalued. Thus, it can be said that this undervalued

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Challenges of Chinese Economy and Trade
currency makes its export cheaper and its import costlier than would have been occurred
under a floating exchange rate to keep a fixed exchange rate, the government must expand
money supply purchasing foreign currency (Gubak & Samuel, 2015). Many economist
asserted that declining` share of disposable income and private consumption relative to gross
domestic product is largely brought about by two factors which are lacking of China’s
adequate social safety net and China’s banking policy. As the government of China puts
restriction on export capital, country’s household put supreme share of their savings in bank
and government of China sets interest rate on deposits which is under the inflation rate. Thus,
it lowers the income of the household and this is like a tax on income of the household and it
has negative effect on the consumption. On the other hand, another challenge of Chinese
economy is the growing pollution as Chinese industries are energy-intensive and high
polluting. The level of pollution lingers to deteriorate the situation, causing serious health
disputes to the population of the country (Yan, Xia & Bao, 2015).
Conclusion
It can be concluded from the above discussion that the economy of China has been
considered as the second largest economy of the world and there has been a miracle in China
which has made China a powerful organization of global economy and this country is also the
third largest importer of the world. The paper has discussed about the important role of China
in global trade and commerce and it has also explained the reason behind choosing this topic
as the research topic and this topic has been chosen because China has impressively
accelerated the gap with the United States and that the economy of China has suppressed the
economy of United States. The economy of China is highly capable for setting the pace of the
global cycle of the business dynamics. The criticisms which have been faced by the econmy
of China has also been discussed in the above discussion like the crash in the stock and
bubble in the property market. There are many challenges which has been faced by the

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Challenges of Chinese Economy and Trade
economy of China but this country has been rapidly trying to get over the problems for the
purpose of increasing their productivity and getting a foothold in the industries. The body of
the paper firstly discusses about the key problems of the economy of China. These key
problems include the falling growth rate, transformation of the economy from export to
consumption, the viability of the banking and manufacturing along with the tax expenses and
revenues and the regional imbalances. These key problems are needed to be addressed for
maintaining the economic pace and sustainability. As there has been a phase of slowing down
in the economy of China the economy of China is approaching towards a different model for
the purpose of growth and development and it has adopted a new growth model for relying
mostly on the private consumption for driving the economic growth and it will also help to
avoid the incidence of middle-income trap. The various theories which are being maintained
by China for the purpose of trade policy are also mentioned in the paper which will help in
the maintenance of the trade agreements. The next part of the paper talks about the SWOT
analysis of China. The SWOT analysis of China has mentioned that the growth in GDP rate
has been the strength of China which has shown a remarkable increase from the time period
of 2010 till now along with the advantage of the availability of cheap labor in the country.
The current condition of unemployment has been considered as the weakness for China along
with this the restrictive government and the price restrictions also stand as constraints in the
economy of China. There are two great opportunities in China which are the service sector
and urban migration. On the other hand, the negative perception about the country of China
stands as the threat for its economy and trade. However, China is consistent about its policies
and regulations despite of such weaknesses and threats. The paper also talks about the
remedies with which the China can overcome the problems of economy and trade which will
ultimately help in the long term economic development. There are certain characteristics of
the foreign trade of China which have been discussed in the paper along with the several

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Challenges of Chinese Economy and Trade
measures which are to be adopted by China for achieving its goal of economic growth and
development. The above discussion also presents a theoretical framework about the case
study which further discusses about the deeper and structural challenges about the economy
of China as per the views of various professors and analysts. It discusses about the less export
dependent, racing towards the innovation along with the tarrif system. As per as the trade is
concerned, China is competing substantially with the United States and there has been
increase in the number of exports and imports over a certain period of time. The country of
China has become the largest market in terms of U.S export since the Federal Government
has funded the deficit budget of China. There are also other additional problems which can
affect the economy as well as the economic growth of China and these have been solved by
implementing policies and regulating the consumer spending and developing pollution free
industries. According to (Handley & Limão, 2017), lastly it can be said that presently China
has been considered as the largest manufacturing economy as well as exporter of goods with
GDP of $14.3 trillion in the year 2019 and it is the world’s fastest growing market of
consumers and importer of goods. Thus, China is the net importer of the services products.

23
Challenges of Chinese Economy and Trade
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