The Peoples Republic of China (PRC) is a densely populated country in East Asia. It has passed a long way from a centrally planned economy to a more liberal one oriented on market. Currently, the Chinese economy now is one with the highest speed of development and is able to compete with the developed countries of the Western hemisphere. The economic situation in China was heavily influenced by its history and the attempt of the governments of all times to make it a most developed nation. The present report discusses the Chinese economy, trends, and policies and provides a recommendation on whether one should make a major investment in China.
Analysis of Trends
The growth of the Chinese economy began in 1978 when it has undergone reformation and opened up. The average yearly GDP growth equals almost 10 percent (The World Bank in China, para. 1). According to the most recent data available, the GDP, PPP of China equals $21,414,903.68 million, which is the highest value all over the world (The World Bank, 2019). However, with a rate of GDP of $14,342,902.84 million, China remains the second-largest economy overtaken by the US (The World Bank, 2020). The growth of the Chinese economy is caused by “resource-intensive manufacturing, exports, and low-paid labor” (The World Bank in China, para. 3). In recent years the growth was decelerated by such structural constraints as slowing down productivity, declining growth of labor force, and decreasing returns to investment (The World Bank in China, para. 4).
Inflation and Interest rates
Trading Economics (2020) reveals that the annual inflation rate increased up to 2.5 percent in June of this year from 2.4 percent in the preceding month which was the lowest rate during the preceding 14 months. On average, the interest rate hovers around 5 percent. In April 2020, thought, China reached a record low rate of 3.85 percent (Trading Economics, 2020).
Currency and Foreign Exchange
The official Chinese currency is called Renminbi. Currently, 1 RMB equals to 0.14 USD (HSBC, 2020). Although the Chinese currency has been one of the most stable in the world, the ongoing US-China trade war undermines the national currencys stability. Trading Economics (2020) provides data that indicate the recent growth of the PRCs foreign exchange reserves up to $3.102 trillion. This result is below market forecasts that predicted $3.12 trillion (Trading Economics, 2020).
The major trading partners of China include the US, Japan, South Korea, Vietnam, and Germany (WITS, 2018). Most of all, China exports machinery and equipment, followed by textiles and clothing, and metals (WITS, 2018). The PRC heavily imports raw materials, fuels, chemicals, and minerals, as well as intermediate goods (WITS, 2018).
Employment and Unemployment Levels
WITS (2018) China tends to increase the unemployment rate. The data provided by the World Bank (2020) reveals that in 2018 unemployment was 3.8 percent, while in 2019 it rapidly increased up to 5.15 percent. That is almost equal to the historical maximum that was 5.4 percent in 1979. Despite this fact, in comparison with other countries, the level of unemployment is moderate.
Fiscal and Monetary Policies
The trade war with the US heavily influences the fiscal and monetary policies of the Chinese government. This way, domestic policies are focused on the maintenance of economic stability rather than on increasing the speed of economic growth. The PRC claims that it pursues such fiscal and monetary policies that complement each other and assist to achieve stability, close gaps in infrastructure, gradually decrease tariffs, and advancing manufacture (Bloomberg, 2019).
Supply Side Policy
In 2015, Xi Jinping announced the implementation of the supply-side structural reform, created in the response to the Great Recession. It includes policies that lead to the development of the industrial sector and the reduction of curvatures of the supply side (Boulter, 2018). The critical goals of Chinese supply-side policy aimed at the economic liberalization, diminution of excessive industrial capacities, and decrease of costs for businesses. Particular attention is paid to the promotion of innovations, reduction of coal and steel capacity, and eradication of inefficient companies.
Conclusion and Recommendations
The trends described above reveal that the overall Chinese economy is marked by stability and high speed of development. Apart from this, China could be called a politically stable country. Social unrest and rebellions might cause hyperinflation that leads to the devaluation of the domestic currency, which is undoubtedly harmful to business. From this perspective, the political environment makes the PRC an attractive destination for investments. Besides, it is essential to take into consideration the size of the Chinese population that equals almost 1.5 billion. This means that there is considerable consumer demand, and it is beneficial to invest in the IT sector, healthcare, and in the production of luxury goods as well as in the building sector. Additionally, the Chinese government acts according to the plan “Made in China 2025” that is aimed at making the country the so-called “world factory”. This plan is focused on the development of the IT, automotive, and aerospace industries. From this, it could be inferred that investments in the field of high technologies are promising since the government, by all means, would facilitate its development.
At the same time, investors should not forget that the ongoing tariff war with the US means uncertainties for the future well-being of both nations. Nevertheless, it is recommended to approach China as a favorable destination for investments since it shows impressive economic growth and the potential to become the most economically developed nation in a while.
Bloomberg 2019, China Signals More Effective Fiscal Policy to Stabilize Economy, Web.
Boulter, J 2018, “China’s Supply-side Structural Reform”, Reserve Bank of Australia, Web.
HSBC 2020, Foreign Exchange Rates, Web.
The World Bank 2019, GDP, PPP (current international $) – China, United States, Web.
The World Bank 2020, GDP (current US$) – China, United States, Web.
The World Bank 2020, Unemployment, total (% of total labor force) (national estimate) – China, Web.
The World Bank in China 2017, Web.
Trading Economics 2020, China Foreign Exchange Reserves, Web.
Trading Economics 2020, China Inflation Rate, Web.
Trading Economics 2020, China Loan Prime Rate, Web.
WITS 2018, China exports, imports and trade balance by-country, Web.