Economics

Economics

WILL CHINA BECOME THE

NO.1 ECONOMY IN THE
WORLD?
China has what it takes to become number one.

T
Figure 1. Chinese Real GDP Growth

he dominance of the Western

world is coming to a close, as China

rises to become its formidable
opponent.

China has become a global

economic power in 28 years time,
with its GDP growing at an average
of 9.7% per year. Despite recent
slowdowns, China still grows at a
higher rate than US, and experts
predict it wont be long until China
overtakes the US economy. But
what are the obstacles that stands
in the way of Chinas journey in
becoming number one? Since then, Chinas
economy accelerated
impressively due to mass
CHINA SINCE 1978 privatisation's and the
Chinas rapid economic growth countries open up to
began when the Chinese foreign investment.
Communist party introduced the Businesses overseas
country to capitalist market in 1978 chose to locate their
(see Fig 1). factories in China, taking
Figure 2. Chinas factories

Figure 3. Chinas Trade with Each Country
advantage of the low labor costs.
The prompt growth has been
reflected by the increase in Chinas
energy consumption, as thousands
of power stations were built to
provide electricity for all the new
factories in the country.
As the number of factories
increased, tens of millions of
migrant workers left the rural areas
to find higher paid jobs in cities,
resulting in a mass population
transfer. This has then opened up a
new domestic retail environment,
with increased demand for
consumer products, further
powering the development and
growth of urbanisation.
China's growth has significantly
raised the wealth of the country's
population, especially in cities,
where factory workers' income
have risen strongly, providing them
with more disposable income.
China's strategy for of growth was
to attract foreign direct investment
in the country to boost development
of domestic firms. There were
reportedly 445,244 foreign-invested
companies registered in China in
2010, employing 55.2 million
workers.
Figure 4. The Peoples Bank of China
Economics
Moreover, the increase in efficiency
was a major factor in China's
economic growth, which were
caused by reallocation of resources
to more productive uses, especially
in sectors that were previously
controlled by the government, such
as agriculture, trade and services.
In addition, cheap exports of
products such as equipment and
machinery assisted Chinas growth
(see Fig. 3). China was the world's
largest exporter from 2013 to
2015;$2 trillion of its productions
were exported in 2016. The country
also had a significant comparative
advantage during the late 1970s
due to its large population and
relatively low wages.
Furthermore, The People's Bank of
China, the nation's central bank,
controls the yuan to dollar value
tightly, and manages the pricing of
exports to the United States, which
makes them slightly cheaper than
those produced in America.
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Figure 5. Chinese feel an increasing need to save money

CHINAS GROWTH
PROSPECTS
1. Boosting Domestic
Consumption:
Professor Anil K. Gupta, a global
expert in Chinas economy, saw
major transformations happening
in China, that is the shift from
manufacturing to services, from
investment to consumption.

China maintained its high

economic growth rates by
becoming the worlds factory,
focusing on an export-driven
development model. However,
expectations of future income have The low spendings of Chinese
many economists argued that the
to be met. China has savings rate of citizens are caused by problems
Investment and Export Oriented
around 50% of GDP (Refer to Fig. 5). such as increased housing costs or
Growth is not sustainable, as we
Comparing this to Chile, a country scarce pension and social security
are facing a weaker global demand
which falls in the same income safety net. Reduced saving rates
for Chinese exports.
group, has a gross savings rate of and increased domestic
22.3%. At the other side of the consumption can only be achieved
To guarantee sustained growth,
extreme sits the US, with 14.4% by increasing peoples assurance in
stable domestic consumption has
savings and a consumption rate of a dependable social security
to be achieved. In order for Chinese
two thirds of GDP. system.
citizens to spend more money
rather than saving cash, stable
2. Expansion in Services:
According to Capital Economics
(2015), the answer to the question
of whether China's economy is
sinking or swimming lies in its
service sector.

According to Bloomberg, more than

300 million people already work for
Chinese services companies in
retail, hotels, real estate and
restaurants. But when compared to
the size of service sectors to other
nations, China still has significant
room to grow.

Figure 6. China has to increase domestic consumption

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Figure 7. The rise of Chinese Service Sector
According to CIA data, the US
derives almost 80% of its GDP
from services. Even developing
market countries, such as Brazil.
Russia and India, have larger
service sector contributions than
China, obtaining 67%, 60% and
57% of their GDP from services
respectively.

This is a lead China would like to

follow, with raising the service
sectors contribution to GDP a
priority in the 13th Five-Year Plan.
Currently, services sector has
maintained its strong growth,
rising to 52.8% of GDP in the third
quarter of 2016 (see Fig.7).

Research by St. Louis Fed ultimately leading to

CONSUMPTION + SERVICES
suggests that growth in investments sustainability.
is much more volatile than the

=
growth in consumption and By 2030, services are expected to
services, because investments tend rise to 70% of GDP and Chinas
to get postponed depending on the rising middle-class could generate SUSTAINABLE GROWTH
business cycle; but growth achieved a consumption market of US$6
through increased consumption and trillion, the largest in the world.
services will restore stability on
multiple areas in Chinese economy,

Figure 8. Chinese domestic service and consumption has to increase

 Economics
Figure 9. Comparing Working-Age population of China and other countries

CHINAS
OBSTACLES?
China has experienced
extraordinary growth in GDP since
the early 1980s, noticeable by large
state investments, which is why
many analysts facilely predict that
China will overtake the United
States as the largest economy
sometime within this decade. But
they havent considered the list of
problems that might eat into
Chinas ability in growing. maturity, from a 10% annual GDP previously (see Fig. 9). According to
growth down to 7.3%. the National Bureau of Statistics,
Firstly, economic models suggest the population of Chinas working-
that developing countries grow at However, the IMF expects China to age population (ages 16-59) has
faster rates than developed country, continue growing at a rate of 6.5%, dropped for three consecutive
just as how a newborn grows rapidly which still puts China well ahead of years; in 2015, the population over
within weeks of birth but slows down most other major economies aged 60 reached 222 million, which
as they reach adulthood. While growth rates, and keeps it on track is 16% of the whole population. In
China seems to be growing rapidly, it to eventually overtake the US as the 2050, the working population is
is considered a developing country, worlds largest economy. predicted to decline to 700 million;
and will likely slow down when it by then, 1 in 3 people in China will be
gets to later stages of development, Furthermore, China will suffer from aged over 65.
as seen in the decline of growth a generational population due to the
rates for the past three years as it one child policy enforced Being aware of this problem, the
reaches later stages of economic Chinese government made
changes to the policy in 2016,
allowing families to have two
children, hoping that it will lead to a
more consumer-driven society as
parents face pressure from both
children. Though it is unlikely that
the recent alters to the One Child
Policy can make differences to the
demographic problem in the short
term, but when the new generation
from the new policy enter the work
force, the Chinese economy will
start to feel beneficial effects from
the change, as the ratio of retiring
population to working-age people
will be more balanced.

Figure 10. One Child Policy in China puts pressure on the younger generation
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CHINA, THE NEW

ECONOMIC
SUPERPOWER?
Its difficult to make predictions about the future. But
there is no doubt that global economic leadership will
now shift to the East, and China is well on track to
becoming the new economic giant.

Though China has performed considerably worse in

terms of GDP growth rates in 2016 and 2017 than in
preceding years, it is still in a better position than Western
economies. Between 1979 and 2010, Chinas average
annual GDP growth was 9.91%, and dropped to 6.7% in
2016, while somewhat recovering to 6.9% at the start of
2017.

Based on the IMF forecasts for Chinese and US GDP

growth rates to be 6% and 2% respectively, it is
estimated that Chinas economy will overtake the US
economy by 2027, if not well before then. Using
Purchasing Power Parity adjusted per capita GDP, and
scaling up by the ratio of the Chinese to the US
population, Chinas economy is predicted to grow 4.1
times larger than that of US by 2050.

The rise of China will bring significant changes to the

global economy. A clear one is that the dollar will be
replaced by the Yuan, and the US treasury market would
be replaced by the Chinese government bond market as
the global benchmark for foreign exchange market.

Therefore, despite Chinas recent declines, and

possibility of a decreasing working population, it is still at
a better condition than other western countries, and it is
inevitable that China will soon become number one in the
world.
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