China and the Dawning of a New Economic Era

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On being founded in 1949, the People’s Republic of China was characterised by a centrally planned economy and the absence of private businesses or capitalism. In an attempt to modernise, Mao Zedong initiated the Great Leap Forward in the early 1960s, a programme aimed at moving towards a more industrialised Communist society. The result of this movement was decidedly mixed. However, following the end of the Cultural Revolution, a market-orientated, mixed economy was eventually achieved. The economic liberalisation that followed Mao’s death has been a story of success and today China is the fastest growing economy in the world. It is a – if not the – major economic player on the world stage.

China’s economy has flourished in the modern era. For ten years in a row, from 2001 to 2010, it has beaten expectations and the world has watched as its growth rate has continued to defy the forecasts of the IMF, often by a large margin [1]. Three decades have gone by now with China’s growth topping 9 per cent [2]. And all of this prosperity has occurred in the face of widespread scepticism from foreign observers. China owes its success, in a large part, to astonishing levels of investment and exports [3]. Now, the country is an economic giant and the second largest economy in the world.

We only have to look to the current financial crisis to see the importance of China on a global scale. It has undoubtedly propped up the global market in troubled times. In the three years following the start of the international economic crisis, China has contributed 33.4 per cent of global market growth – more than four times that of the US [4]. The role of China on the world stage is often underestimated, but evidence clearly shows that its growth has become a determining factor not only for its domestic markets, but also for global markets.

However, it is not all blue skies and plain sailing. For the first time this century, in 2012, we could see China’s growth rate drop below 8 per cent [1]. Obviously, with the world growing more and more reliant on China, this is a worrying prospect. In August, new export orders for Chinese manufacturers dropped to their lowest level since March 2009. The first quarter of 2012 saw GDP grow by 7.2 per cent – the biggest drop off since the financial crisis. Meanwhile, industrial production between January and July this year was a mere 9.2 per cent, a figure 4.8 per cent lower than the one a year previously. [5]

Some critics argue that these are the sorts of problems the rest of the world can only dream of: in the UK a growth rate of 8.9 per cent would be heralded and yet in China, where it actually exists, it is disappointing to say the least [2]. Nonetheless, there could be serious consequences for the global economy if this dip in growth was to become permanent. As one commentator notes, “before 2008, the global economy had two locomotives: the US and China. Now it has one.” Should the engine of our global economy slow down, it follows that there is potential for a global downturn. Whether it likes it or not, China has become a crucial part of the world economy. Now, it falls to the Chinese government to take decisive action.

Previously, the Chinese government would react to such a drop in growth by repealing property curbs and appealing to state-owned firms to expand capacity. This is the sort of action that policy-makers outside of China are longing for – a move that reinvigorates the Chinese and, therefore, the world economy. However, things are different this time. There has been an ideological shift in China where although policy-makers are capable of reviving growth, they are not willing to do so at any cost [1]. By postponing such action, the government could allow for crucial domestic structural reforms that would otherwise go amiss. The most striking example is further financial liberalisation, which government intervention only serves to delay. In short, China is faced with a decision between rebalancing its own domestic economy or coming to the rescue of the world economy once again.

Looking beyond China, the prospects for the world economy are even more bleak. The harsh reality is that the time of the developed world has past and established economies must now take a back seat. From 2007 to 2010, developing economies accounted for a staggering 78.6 per cent of world growth [4]. And developing countries, such as China, are bypassing the western world in favour of establishing links amongst themselves. China’s trade is increasingly focused on developing links with countries like India, Brazil and Africa – countries that can provide Chinese industry with all the natural resources and investment opportunities it needs [2].

China, and the rest of the developing world, continue to challenge the fundamentals of the world market and are threatening the western way of doing business. For the foreseeable future, it is these developing countries that look set to determine global growth. So although the future is bright for developing countries, it is a scene of doom and gloom for the developed world.

Article by Joe Austin. Edited by Lily Parr.

Further Reading

[1] The Economist (2012) “Slow Boats”, The Economist [online], retrieved 28 September 2012, from: http://www.economist.com/node/21561887

[2] The Guardian (2012) “Chinese Economy: Headaches to Die For”, The Guardian [online], retrieved 28 September 2012, from: http://www.guardian.co.uk/commentisfree/2012/jan/20/chinese-economy-headaches-to-die-for?INTCMP=SRCH

[3] Speakman, C. (2008) “China Must be Cautious in Raising Consumption”, China Daily [online], retrieved 28 September 2012, from: http://www.chinadaily.com.cn/bizchina/2008-11/21/content_7228346.htm

[4] Ross, J (2012) “China and Developing Economies Will Determine the Chances for World Growth in 2012”, Key Trends in Globalisation, retrieved 28 September 2012, from: http://ablog.typepad.com/keytrendsinglobalisation/2012/01/china-and-developing-economies.html

[5] The Economist (2012) “Summertime Blues”, The Economist [online], retrieved 28 September 2012, from: http://www.economist.com/node/21561933