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Case study for China - Economics topic 1...

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CHINA CASE STUDY QUICK STATS -

GDP 2018: 14.2 trillion USD GDP Growth: 6% per annum (1.5% quarterly) Unemployment: 3.61% Inflation: 3% Interest Rate: 4.2% Population: 1.4 billion HDI: 0.72 Gini Coefficient: 0.3-0.55(1980-2002) 2018 0.468

Deng Xiao Pings economic and the Chinese economic reform  Rural reform (1979) o Following the great famine of 1959 due to Mao’s reckless actions during the great leap forward led to shortages in food and a devastated agriculture sector o Mao also encouraged childbirth, leading to China being over populated leading to food shortages o Deng Xiao ping implemented the one child policy in 1979 to try to curb the population growth o Deng decollectivized the agricr ltural communes into private plots of land that the people managed themselves which led to a productivity growth of 25% between 1975 and 1985  House hold responsibility system was introduced which reduced the quota that farmers had to produce and allowed them to sell any surplus on the free market  Allowed peasants to contract land and equipment from collective organizations o To avoid shortages of goods, state owned enterprises were allowed to produce above the plan quota and private businesses were allowed for the first time since the Mao era  Open Door policy o Country was opened up to foreign investment o Introduction of SEZ’s that have special, free market oriented economic policies that are more attractive for foreign businesses (1979)  SEZ’s include ShenZhen, Zhu hai, Shan tou, Xiamen and Kashgar  Provinces: GuanDong, Fujian and Xin jiang  ShenZhen grew from a small town to a city with a population greater than 10 million  Due to their close proximity to the largest FDI attracting regions of Taiwan and Hong Kong  Hainan as an entire province is and SEZ  14 other coastal development zones were introduced in 1984 to attract foreign investment similar to the SEZ’s although having higher corporate income tax  Primarily geared to exporting processed goods and combine science, innovation and industry with trade  Foreign investors enjoy lower tax rates, reduced regulations and special management systems  Allowed to develop their own infrastructure without approval from central government  Normal corporate tax rate is 33% but can go as low as 15% in SEZ’s  Duty free exports  Benefits of SEZ’s to China  Greater employment and raising standards of living o In Shenzhen employment  Develop smaller areas  Can be used to test economic policies on smaller scale before implementing them nation wide

 Have boosted Chinas GDP by up to 10%  45% of Chinas FDI’s o Decentralization of state controlled enterprises  State owned enterprises were still being privatized  Decentralization of state control, leaving provincial leaders to experiment with methods of improving economic growth and privatize the state sector  Private businesses and corporatized start to increase market share at the expense of the state owned sector  Shanghai stock exchange reopened in 1990  Economic troubles in the inefficient state sector led to the private sector being reclassified from a complement to the state sector, to an “important element to the socialist market economy”  Large scale privatization begun in 1997-98 after Deng’s death, taken over by Jiang Zhemin and Zhu Rongji  All state owned enterprises except a few large monopolies (petroleum and banking) were liquidated and sold to private investors  Between 2001 and 2004 the number of state owned assets shrunk by 48%  Forms of protection and regulation reduced, reformed banking system and dismantling of Mao era banking system and forced the PLA to divest itself of military run businesses  Reduced inflation that was increasing during 1980-90  Joined WTO in 2001  Domestic private sector exceeded 50% of GDP in 2005 and china surpassed Japan as largest Asian economy o Pegged the RMB to allow more attractive prices and competitive stance as well as giving the government more control (1994)  One Child policy o To curb population growth a restriction of 1 child per couple was placed, anymore and you had to pay a large fee o Fertility rate fell from 2.8 births per woman to 1.5 in mid 1990s  Only children received education benefits o Burden of an ageing population (social welfare + lower workforce)  25% of the population will be >60 in 2030 Post Deng Xiao Ping  Western development (1999) o Covers 71.4% of Chinas area, but only 28.8% of its population as well as 20% of its economic output of 2015 o Overall 1 trillion invested in developing western area o The rural areas of China lagged behind in its switch from a command economy to a market economy and Jing Zhemin decided after Deng Xiao Pings death that the Western Area of china needed to be developed. o Vast network of railways o 2002 – Construction of west east gas pipeline o 2003 – policy of returning grazing land to farm land o 2007- 280 billion Yuan invested into western development program o 2009 – West Triangle economic zone  Contributes nearly 40% of Chinas GDP  Chong Qing, Xi’an and Cheng du Airports  Joining the WTO o Had to repeal over 18,000 tariffs o Allowed many multilateral trade agreements including ASEAN, APEC, CPATPP and ChAFTA  Response to GFC o Economy that best responded to GFC and avoided recession o Implemented 586 billion stimulus package to boost aggregate demand and maintain growth rate of 8%

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o Included infrastructure projects to stimulate employment as well as spending o Managed 10.4% growth in 2010, greatly exceeding growth target o Partial rebalancing of the economy to consumer driven production rather than exports One Belt One Road (OBOR) (2013) o OBOR is a trade corridor that runs through Eurasia and the Indian pacific to link China and Europe as well as Africa and Oceania, through a maritime and overland road. o Supposed to be a modern-day reconstruction of the ancient silk road that connected Asia and Europe, as well as a 21st century maritime silk road that runs through the Indian ocean o This initiative would include 78 countries and include multiple trade corridors o Expected to require 4-8 trillion dollars in funding o When completed estimated to make up 35% of global trade and 31% of GWP as well as 12% increase in world trade o Planned to be completed in 2049 o Includes plans for many infrastructure projects including: roadways, railways, oil and gas pipelines, power grids, maritime ports and other projects Rebalancing o Starting around 2015, planned since the GFC, China started rebalancing its economy away from investment and export led growth to more sustainable and non-inflationary growth generated by expanding household consumption and services sector, an indicator that China is transitioning into an Advanced economy from an emerging one o This has led to reduced growth in the Chinese economy o One of the reasons was attempting to reduce the impacts of financial contagion

USA China Trade War  Trumps entire campaign was to put Americans first, thus his motives to increase protections and part of his motives for starting a trade war o Concerned that US jobs were being undercut by cheaper labour costs in China and Mexico, which was destroying the manufacturing sector in the US  Protectionary methods have worked as short term unemployment has fallen from 4.2% to 3.6%  Accusations that China was stealing US intellectual property rights (never proven) and thus an excuse to legally start a trade war o In the terms and conditions for operation in China’s SEZ’s there are some requirements to hand over intellectual property o Boycott of Huawei using the android operating system o Accusations of Huawei being linked to the Chinese military although most US ISP’s directly fund the US military  Chinese company’s relationship is unclear due to the restrictions of the CCP which makes accusations valid to an extent o Partial ban of Huawei in many areas of the US in development of the 5G network  Full ban in Australia as well as pressures from the US to do so in many other countries  All under the umbrella of Huawei software being used to spy on citizens although disproven by multiple investigations  What has happened? o US has gradually increased tariffs against China over the last 18 months. Current tariffs at 360Bn dollars  10% tariff on steel + 25% tariff on aluminum  15% flat duty across a range of Chinese M, including beef and musical instruments  25% tariff against pork imports o China has retaliated with more than $110 billion in tariffs against the US  5% levy on US crude oil (first target of China is fuel)  72% tariff against US frozen pork  If trade war ends it will return to 12%  33% tariff against soy beans

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16bn worth of X to China each year Forecast to reduce revenue to US by 4.5 billion

Impact on AU o China represents 33% of trade with au o Reduction in Chinese purchasing power has reduced demand for Au Education X and reduction in demand for iron and coal – Australia’s main exports o Due to financial contagion and global volatility, Australia economic growth will drop by 0.3% -0.5% in 2020, which is extremely bad due to Australia’s already suffering economic growth  Economic loss of 36-60 billion over 5 years o If other nations are dragged into the trade war, UE in Australia could increase by 60,000 + lower real wages by $16 a week Environmental sustainability  Currently china makes up 29% of the worlds CO2 emissions  Between 1999-2002 China converted 7.7 million hectares of farmland into forest  Strict laws against corporations that break environmental laws o In 2017, tens of thousands of factories that were not complying with enviro laws  3 gorges dam 2012 o Largest Hydroelectric dam in the world o Increases Yangtze rivers shipping capacity as well as prevents floods o However, has displaced over 1.3 million people as well as increased land slides  Paris agreement o Agreement by nations to achieve set targets for environmental sustainability, including CO2 emission caps, reducing the average temperature increase and more o In some areas, China is on track to meeting these targets 9 years early  Largest and fastest growing electric car market in the world o Sold 1.2 million electric cars in 2018 (3x US sales) o SEZ’s like Shen Zhen and Shanghai are rapidly adopting electric cars in public transport (All 16,000 electric buses in Shenzhen)  Tengger Desert Solar plant China o Largest solar power plant in the world o 43km squared in size o 1547MW of power EFFECTS OF GLOBALISATION ON CHINA’S ECONOMIC GROWTH AND DEVELOPMENT AND THE QUALITY OF LIFE, LEVELS OF UNEMPLOYMENT AND EXTERNAL STABILITY 

Economic growth o 1979 Deng Xiao Ping economic reforms involved mass privatization of state owned assets, as well as breaking down trade barriers, encouraging international businesses introduction into China  This resulted in China becoming an emerging economy  From 1978-2005, China averaged an economic growth rate of 10%, peaking at 15.4% o Introduction of SEZ’s brought in mass foreign investment and allowed foreign TNC’s to operate in China with favorable conditions  Normal corporate tax rate is 33% but can go as low as 15% o Overall, Chinas economic growth skyrocketed due to the globalization that was allowed to occur  Economic development and quality of life o Between 1990 and 2017, Chinas HDI increased from 0.502 to 0.752, a 49.7% increase o Life expectancy has increased by 7.1 years o Infant mortality rate fell from 83.7 deaths per 1000 in 1969 to 7.4 per 1000 in 2018 o Between 1990 and 2017, average schooling has increased by 3 years and expected years of schooling increased by 5 years CHINESE GOVERNMENT ECONOMIC POLICY IN RELATION TO THE DOMESTIC ECONOMY AND ITS RESPONSIVENESS TO WORLD ECONOMIC EVENTS. BE AWARE OF ANY SUCCESSES AND/OR FAILURES. WHAT ARE THE FOCUS AREAS OF GOVERNMENT ECONOMIC POLICY? HAVE THE PRIORITIES SHIFTED OVER TIME? 

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5 year plans Eco Growth o Open Door Policy  SEZ  Privatization o OBOR o Rebalancing o Response to GFC Eco Development o Rural reform o Western Development o Environmental reform o One Child policy

TO WHAT EXTENT HAS THE CHINESE GOVERNMENT BEEN FORCED TO ADOPT ECONOMIC POLICIES DUE TO THE PRESSURE APPLIED BY GLOBAL MARKETS AND INTERNATIONAL ORGANIZATIONS (SUCH AS WTO AND WORLD BANK)? 

Joined the WTO in 2001 o Had to repeal over 18 thousand tariffs

GLOBALISATION DRIVERS IN RELATION TO CHINA: TRADE IN GOODS AND SERVICES; FINANCIAL FLOWS; INVESTMENT AND TNCS; TECHNOLOGY, TRANSPORT AND COMMUNICATION; INTERNATIONAL DIVISION OF LABOUR, MIGRATION.      

Trade o Financial flows o Investment and TNCs o Technology o Transport and Communication o International Division of Labour and Migration o

CHINA’S DISTRIBUTION OF INCOME AND WEALTH AND ENVIRONMENTAL SUSTAINABILITY, TRENDS AND ITS EFFECTS 

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Distribution of income and wealth o Gini coefficient: 0.468  UN consider a gini higher than 4 severe income inequality  From 1980- 2002, Gini rose from 0.3 to 0.55 Top 1% own a third of Chinas wealth o 25% of poorest households owned 1% of the countries wealth o Urban residents have nearly 3x higher income than rural residents o Slow pension income growth in urban areas o Rural and western development program  Rural development program allowed farmers to have their own plots of land and allowed any excess production above government quota could be sold on the free market  Western development program (1999) involved infrastructure projects as well as the West triangle economic zone  Contributes 40% of Chinas GDP  In some areas of the zone employment doubled

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Environmental sustainability o

THE EXTENT OF CHINA’S INTEGRATION WITH THE GLOBAL ECONOMY AND THE EFFECT OF THE INTERNATIONAL BUSINESS CYCLE ON ITS ECONOMY 

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Asian Financial Crisis (1997) o Thailand could no longer afford to peg its currency, due to US purchasing the dollar en masse, resulting in the government forced to float the dollar. This resulted in capital flight due to the market severely undervaluing the dollar resulting in a huge crash in the market. The Thailand government was already bankrupt at the time  Financial contagion spread the effects throughout the rest of south east Asia  Falling stock markets, devalued currencies GFC o China learnt from the AFC and knew how to respond in the GFC, prompting them to develop large capital reserves to counter speculator attacks.  Prevented speculator attack in Hong Kong o Only economy apart from AU that avoided recession

THE ECONOMIC LINKS BETWEEN AUSTRALIA AND CHINA 

Trade agreements o 33 percent of Australia’s trade is with China o ChAFTA o CPATPP o ASEAN o APEC...