Country Analysis ChinaEssay Preview: Country Analysis ChinaReport this essayEconomic Analysis of ChinaIndex TableStrategyFiscal PolicyMonetary PolicyContext and performancePolitical situationOpportunities and threatsConclusionCompany AnalysisSourcesEconomic Analysis of ChinaStrategyIt is commonly known that economy in China has been booming for the last two decades. The question that remains to most people is how China went from a closed, communistic country, to a country that is thought to be of the highest economic importance in the 21st century. Open-door policies and encouraging foreign investment were not in Chinas dictionary until the 80s. Only then, the government felt the need for change.
A new national currency, the yuan, has been introduced to the country. The name “Chen-Yuan” means “China yuan” and has no specific significance. Rather, a simple system of money circulating can be described as a single entity. This system is based on a double-taxation system that applies a fixed amount for each group of people to their accounts to pay off debt. Those at the lowest end receive money of a limited amount from one of the major banks, with the rest of them receiving it, for example with a monthly interest rate. This system has no central bank and the government always assumes there is no risk, just that the rate is just not as high as the individual person’s. This system has, however, made it possible for anyone to pay off their debt in the future. The economy is in a strong position to survive if the rate is kept low. This process of “exchanging” money is highly complex and has been a long-standing issue in China, with banks holding their share to reduce the risk of a currency crash. There is no central bank currently operating, but the central bank is trying to reduce risk by creating a common base of reserves. This new system, which will be introduced soon, is likely to lead to tighter and more common controls than previously envisaged. China’s economy is based on a unique system of money created by the central government through a combination of various forms of government and central banking. This unique system contains two basic assets: a reserve and a deposit, which may be held by anybody. All of this money is owned by only one entity: the central bank. These are the banks that act as arbiters of the money supply, and this must be kept in check to ensure it runs smoothly. In addition, because the central bank is the official central banker, it is not subject to regulations. But, as we have seen already, there is a very important caveat to taking a position on the issue. This has to do with the concept of the country’s economic freedom. The national income taxes and transfers tax (GST) system in China have been very strict, but they have not changed much over the last five decades, as we see from the above. The GST mechanism is the result of a long, long-discussed debate with several economists. But, as discussed above, the political system in China has gradually moved in a different direction which means it has become less dependent on the central bank of the government. All this needs to change once again. For now, China enjoys a highly competitive currency. Yet, for three different reasons, it has come to be seen as a competitive society. One of the main reasons China has improved in recent years is through the rise of a more developed and educated population. Another major factor which is being felt by people is the
A new national currency, the yuan, has been introduced to the country. The name “Chen-Yuan” means “China yuan” and has no specific significance. Rather, a simple system of money circulating can be described as a single entity. This system is based on a double-taxation system that applies a fixed amount for each group of people to their accounts to pay off debt. Those at the lowest end receive money of a limited amount from one of the major banks, with the rest of them receiving it, for example with a monthly interest rate. This system has no central bank and the government always assumes there is no risk, just that the rate is just not as high as the individual person’s. This system has, however, made it possible for anyone to pay off their debt in the future. The economy is in a strong position to survive if the rate is kept low. This process of “exchanging” money is highly complex and has been a long-standing issue in China, with banks holding their share to reduce the risk of a currency crash. There is no central bank currently operating, but the central bank is trying to reduce risk by creating a common base of reserves. This new system, which will be introduced soon, is likely to lead to tighter and more common controls than previously envisaged. China’s economy is based on a unique system of money created by the central government through a combination of various forms of government and central banking. This unique system contains two basic assets: a reserve and a deposit, which may be held by anybody. All of this money is owned by only one entity: the central bank. These are the banks that act as arbiters of the money supply, and this must be kept in check to ensure it runs smoothly. In addition, because the central bank is the official central banker, it is not subject to regulations. But, as we have seen already, there is a very important caveat to taking a position on the issue. This has to do with the concept of the country’s economic freedom. The national income taxes and transfers tax (GST) system in China have been very strict, but they have not changed much over the last five decades, as we see from the above. The GST mechanism is the result of a long, long-discussed debate with several economists. But, as discussed above, the political system in China has gradually moved in a different direction which means it has become less dependent on the central bank of the government. All this needs to change once again. For now, China enjoys a highly competitive currency. Yet, for three different reasons, it has come to be seen as a competitive society. One of the main reasons China has improved in recent years is through the rise of a more developed and educated population. Another major factor which is being felt by people is the
A new national currency, the yuan, has been introduced to the country. The name “Chen-Yuan” means “China yuan” and has no specific significance. Rather, a simple system of money circulating can be described as a single entity. This system is based on a double-taxation system that applies a fixed amount for each group of people to their accounts to pay off debt. Those at the lowest end receive money of a limited amount from one of the major banks, with the rest of them receiving it, for example with a monthly interest rate. This system has no central bank and the government always assumes there is no risk, just that the rate is just not as high as the individual person’s. This system has, however, made it possible for anyone to pay off their debt in the future. The economy is in a strong position to survive if the rate is kept low. This process of “exchanging” money is highly complex and has been a long-standing issue in China, with banks holding their share to reduce the risk of a currency crash. There is no central bank currently operating, but the central bank is trying to reduce risk by creating a common base of reserves. This new system, which will be introduced soon, is likely to lead to tighter and more common controls than previously envisaged. China’s economy is based on a unique system of money created by the central government through a combination of various forms of government and central banking. This unique system contains two basic assets: a reserve and a deposit, which may be held by anybody. All of this money is owned by only one entity: the central bank. These are the banks that act as arbiters of the money supply, and this must be kept in check to ensure it runs smoothly. In addition, because the central bank is the official central banker, it is not subject to regulations. But, as we have seen already, there is a very important caveat to taking a position on the issue. This has to do with the concept of the country’s economic freedom. The national income taxes and transfers tax (GST) system in China have been very strict, but they have not changed much over the last five decades, as we see from the above. The GST mechanism is the result of a long, long-discussed debate with several economists. But, as discussed above, the political system in China has gradually moved in a different direction which means it has become less dependent on the central bank of the government. All this needs to change once again. For now, China enjoys a highly competitive currency. Yet, for three different reasons, it has come to be seen as a competitive society. One of the main reasons China has improved in recent years is through the rise of a more developed and educated population. Another major factor which is being felt by people is the
The radical change in China was directed by an important metamorphose of government policies in all sectors. The government did not only alter its fiscal and exchange rate policies but also made important progresses in the field of trade and investment policies. They did this to obtain higher growth rates and ensure the countrys autonomy.
Fiscal PolicyTwo important factors in a countrys economy are the fiscal and monetary policy. In China the Nations People Congress, the NPC, manages the fiscal policy, which is the countrys parliament. The Peoples Bank of China, the PBC, is in charge of the monetary policy.
The NPC started to restructure Chinas economy over 25 years ago. They created a fiscal policy that gave more freedom to the market forces. They first applied this restructuring in the agriculture, later in the industry and finally to large parts of the service sector. By 2000 they completely dismantled all price regulations. The NPC also introduced new laws that allowed private individuals to own limited liability corporations. Competition laws were used to unify the internal market. In addition to this, they sharpened the business environment by allowing foreign direct investment, reducing tariffs, abolishing the state export trading monopoly and ending multiple exchange rates. China also became member of the WTO. Hereby many laws and regulations were standardised. In 2004 the government made fundamental changes to the constitution. They stressed the role of the non-state sector in supporting the economic activity and the importance of protecting private property from arbitrary seizure. In 2005 they deregulated infrastructure, public utilities and financial services, among others.
All these interventions allowed the emergence of a powerful private sector in the Chinese economy. The growth in private ownerships did not only have a positive impact on macro economic activity, boosting the level of productivity, it also had a very favourable impact on real incomes. The expanding private sector and increasing incomes resulted in very high savings rates. On the other hand, this expansionary fiscal policy also has its negative sides. Although the expansionary policy reduced the negative effects of the Asian financial crisis in 1998, it also led to overheating sectors. The sectors include real estate, automobile, steel and aluminium. The investment boom also caused energy shortages, clogged transportation and a rise in prices of raw materials.
Monetary PolicyThe Chinese economy is also influenced by the monetary policy, which has been considerable volatility of inflation. The past has shown that Chinas monetary policy has not been successful in maintaining low and stable inflation.
A major issue in Chinas monetary policy has been its expansionistic character in 2003. The government was afraid of the possible negative effects of the SARS epidemic on economic growth and decided to raise the targets for broad money growth and credit expansion. The NPC was ready to accept the risk of higher inflation because of these measurements. The PBC, on the contrary, has never been in favour of this and has repeatedly tried to inform and persuade the government of the risks and dangers of their actions. Fearing the results of the expansionism of the monetary policy, the PBC announced new policy guidelines to restrict lending to the overheating sectors, like the property sector. Unfortunately, they found little support with the NPC and domestic currency lending grew at an alarming rate.
As a result of the alarming rates, the PBC tried to convince the government to either revalue the currency, in order to reduce aggregate demand, or to raise interest rates to restrict the rapid growth of credit that was feeding an unseen boom in fixed asset investment. Yet, China did not revalue its currency. The unwillingness of the authorities is partly surprising, given the frequency with which they adjusted the exchange rate in the 1980s. The authorities defend the fixed exchange rate because the need of stability. This stability is questionable because China matches its currency against the dollar. Seen the volatility of the dollar against other major currencies, like the Japanese Yen and the Euro, the Chinese fixed exchange rate guarantees that the Chinese currency, the Yuan, is also quite volatile on a trade-weighted basis.
Even though the government is not helping the PBC, the PBC does try to change things by for example soaking up excess liquidity. They also threat to raise Chinas benchmark lending rate if the consumer price index growth surpasses the one year lending rate, which would happen if the government doesnt take action.
These changes in fiscal, monetary and exchange rate policies are Chinas strategy to create a better basis for world trade and economy. They have also made improvements in other sectors, for example education. The government has imposed all children a nine-year education trajectory. Significant efforts were also made to raise the number of higher-educated people. Although China is making important steps into the right direction, they still have much work ahead.
Context and performanceA strategy alone cannot change a countrys economy. A strategy should be used in symbiosis with a countrys context. A countrys context is a mixture of the countrys resources, the firms, national and international organizations and the formal and