Macroeconomics of China
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Transcript of Macroeconomics of China
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CHINAA MacroEconomic Analysis
Section:B Group:5
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INTRODUCTION• Second largest Country by Area behind only
Russia• Most populous country with a population of
over 1.35 Billion• Second Largest Economy by total GDP of
about $9.4 trillion as of 2013• Fastest growing major economy with an
average growth rate of about 10% over the last 30 years.
• Largest Importer as well as Exporter of goods
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TIMELINE OF CHINA’S ECONOMY• Before 1979, China had a Russian-style centrally planned economy with the goal to
make china self sufficient, Growth was stagnant
• In 1979, reforms such as allowing foreign investment, permissions to entrepreneurs to start business were introduced.
• However most industries were still state owned
• In late 1980’s and 90’s privatization of many state owned industry was allowed.
• Price controls & other protectionary measures were also abolished
• Private sector contributed about 70% of china’s GDP growth
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NATIONAL INCOME National Income is total value of a country’s final output of all goods and services produced in a year.
Other than 2009, the GDP growth rate was in double digits. The impact of global recession of 2008 was seen, yet it maintained a growth rate of 7.96%.
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INFLATION• As you can see in the graph, from
1998 to 2007 inflation in China has mostly been low at about 0-6%.
• There has even been deflation in between 1998- 2000 and 2002-2003.
• These fluctuation did bring about changes in china’s economic policies as we will see in the further sections.
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UNEMPLOYMENT
Unemployment is said to occur when a person is vigorously searching for a job but is unable to find one.
As per 2013 statistics the unemployment rate of china stands at 4.1%.
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FISCAL POLICY
• Fiscal policy of a country deals mainly with the Government’s income (usually in the form of taxes) and its expenditure and how they can be used to influence the economy.
• It involves the government altering its expenditure and revenue in such a way so as to smooth economic fluctuations in the country’s economy.
• The tools used in fiscal policy are subsidies, Government investment programs, tax changes and government bond policies.
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CHINA’S FISCAL POLICY• To fuel its economic growth China has consistently spent huge amount of money in
developing its infrastructure.
• In 1998 to deal with the Asian financial crisis China adopted an expansionary fiscal policy and issued long term bonds of 910 billion Yuan specially for construction.
• Then in 2005, to curb fiscal deficit, it adopted a neutral fiscal policy
• In this expenditure was reduced, and Govt. control over the prices of commodities was eased, in fact prices of 90% of goods and services were now being determined by demand and supply without any govt. interference.
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CONTD.
• However in 2008 due to the global financial crisis china once again adopted an expansionary policy as China’s GDP growth rate fell form 14.2% in 2007 to 9% in 2008
• Unemployment hit 4%, highest since 1980.
• FDI decreased by 36.5%, imports as well as exports both declined for the first time in seven years.
• To battle this, China increased its investment by 4 trillion Yuan ($650 billion)
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• The 4 trillion Yuan were spent on projects such as houses for low income groups, construction of railroads, airports, bridges, and highways etc.
• China also excluded investments from the VAT tax base so as to boost investment by private sector.
• These measures greatly helped China’s economy to get back on track towards sustainable growth after the global economic slowdown
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MONETARY POLICY• Monetary policy involves using instruments such as interest rate to influence demand
and supply so as to combat market fluctuations.
• However, since the banking system is not fully liberalized the effect of interest rate is not as big as it is in other countries.
• State owned enterprises are responsible for 60% of loans and enjoy huge monopoly power and are thus immune to interest rate changes
• The main tool that china uses to enforce its monetary policy is the required reserved ratio (RRR)
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• As seen in the graph RRR is the preferred tool of the PBOC to control the liquidity in the market
• From 1984 to 2007, the RRR was changed just 7 times to manage inflation/deflation
• Between 2007 to 2011, it was altered 35 times, the maximum by any country.
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EXCHANGE RATE• From 1994 to 2005 China followed a
fixed exchange rate by pegging its currency with the US Dollar at 1 USD = 8.28 Yuan
• Chinese currency was not allowed to appreciate
• This created tensions with the US as it made China’s exports cheaper whereas US exports to china more expensive.
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CONTD.• In 2005, China allowed market forces to influence the exchange rate, but in a controlled
way.
• This is called a ‘managed float’. Yuan was allowed to appreciate to 6.83.
• However in 2008 economic crisis, demand for Chinese products fell and the Govt. decided to halt the appreciation of Yuan at 6.83 to protect China’s exports.
• Control over the exchange rate was loosened in 2010 after China recovered.
• Current exchange rate is at about 1 USD = 6.12 Yuan. US claims it is still ‘significantly undervalued’
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FOREX RESERVES• For maintaining its peg to the USD constant,
PBOC had to buy/sell as many dollar-denominated assets in exchange for newly printed Yuan as needed to eliminate the excess demand/supply for the Yuan
• To prevent Yuan from appreciating, China ended up with huge reserves of foreign exchange -- 3.3 trillion in 2012.
• Appreciating Yuan and the huge amount of investments made by china to combat slowdown means that forex reserves are now decreasing.
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BATTLING THE 2008 FINANCIAL CRISIS
• To battle the slowdown, China decreased the RRR and decreased the interest rates for loans so that loans and investment increased.
• Various other measures such as decreasing mortgage loan interest rate etc. These lead to a huge spike in bank lending (by mid 2009 the loans had increased by 300% from 2008.
• In addition a 4 trillion Yuan stimulus package was deployed to strengthen the economy.
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CONCLUSION• While China progress towards liberalization continues, sectors such as banking and
petroleum are still government owned, which may be holding china’s economy from reaching its full potential.
• Chinese Govt. is frequently involved in the economic market and has embraced Keynesian economics. It was one of the first countries to recover from the 2008 crisis
• By and large china has successfully used its fiscal and monetary policy to maintain an impressive growth and is well on its way of achieving its goal of becoming a fully developed country by 2049.
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THANK YOU