Revision Note: China and the World Economy

A brief revision note on the impact that China’s emergence as a major economy has on the world economic system.

China and the World Economy

China has now experienced thirty years of economic reform - but it is not a transitional economy in the conventional manner of - for example - the transition economies of the former Eastern Bloc. Annual growth rates in excess of 9% are phenemonal - matched only by Botswana, an African country making use of extremely valuable mineral reserves.

By 2015 China will take 19% of global GDP (Brazil 3%, India 7% and Russia 6%)

In many ways the “ICs” drive the BRIC groupings - but China is clearly part of the move towards a world economy where there is more than one engine of growth

The business cycle does exist in China but the main demand and supply-side drivers are different to what we understand in market dominated economies.

Chia has emerged as a major economy and the transformation process is not yet over - indeed the Chinese economy faces many economic and social challenges and there is much to do for China to become a large open economy with strong institutional foundations.

Inequality is a huge economic, social and political issue for the Chinese. The absolute poverty rate has fallen from 53% to 8% of population but high levels of inequality persist leading to social unrest and demands for higher wages. The cheap Chinese good is probably a thing of the past.

It is important for A level students to understand the “China effect” on the world economy (and also on Britain as a medium sized open economy within the EU!). Focus in particular on

1/ International trade e.g. the export-driven nature of the Chinese system - this will change over time as domestic demand takes a higher percentage of GDP

2/ Global capital flows - e.g. the impact of persistent current account surpluses for a country with a very high savings ratio and the effect this has had on world capital markets including Chinese purchases of sovereign debt in many developed countries

3/ Global supply and and demand for commodities and raw materials - this is a really important strand. Everything that China does affects global prices - it is now a market maker and not a price taker!

4/ Generating global growth - e.g. the role that the stimulus policies in China have had on world demand (should the surplus countries do more?) The Chinese economy has grown at astounding rates but there has been Volatility in GDP (resulting in unemployment) and this points to a need for internal re-balancing of the economy and a higher share of consumption in national output.

China is now embarking on the 12th 5-year-plan and the emphasis is increasingly on the Chinese economy “going global” - many Chinese companies such as Lenovo now allowed and encouraged to engage in overseas mergers and acquisitions. In 2008, outward FDI from China totalled $55.6 billion, a 194% increase over a year earlier. Investments in energy, minerals, raw materials have accelerated - notably in Africa.

More blog articles on the Chinese economy available here