澳洲group coursework代写—The Economy of China

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Abstract

This paper examines empirically the relationship between economic growth and the Chinese government’s economic polices by analyzing the quantities of economic performance. The result shows that the optimization of economic polices push the economic growth up, and to the financial reform. Moreover, this article talks about our economic goals on the basis of the national economic growth and how to develop a healthy economic performance. In addition , we also analyze the current economic situation focusing on the current problems, striking to find keys to them and improve our living standard.

Materials Recourse: Angus.(2008); Shi and Li.(2008); Zhou Muzhi.(2008); et. http://www.chinadaily.com.cn ; http://english.gov.cn. http://www.pbc.gov.cn/english/

Chapter I  Introduction

China’s economy is huge and expanding rapidly. In the last 30 years the rate of Chinese economic growth has been almost miraculous, averaging 8% growth in Gross Domestic Product (GDP) per annum. The economy has grown more than 10 times during that period, with Chinese GDP reaching 3.42 trillion US dollars by 2007. In Purchasing Power Parity GDP, China already has the biggest economy after the United States. Most analysts project China to become the largest economy in the world this century using all measures of GDP. This paper analyses the Chinese economy in recent years from a perspective view. Chapter II takes a closer look at the Chinese economic policies and targets that set by Chinese government, including the  fiscal, monetary, trading and economic growth policies adopted by China government in the past 10 years. Chapter Ⅲ identifies the overview of Chinese economy, that is, Chinese performance in the economy in the past years. Chapter Ⅳ makes out some suggestions about how to  soundly develop the economy in the future. Chapter Ⅴ concludes our general ideas that our economic aim is to build a harmonious and moderately prosperous society. To achieve the goal, the Government will address its development challenges through a balanced strategy that aims to build a harmonious society and a socialist market economy that is energy-efficient and environmentally friendly.

Chapter II The Chinese Economic Polices and targets

2.1 The monetary policies

The Chinese government’s monetary policy instruments applied by the PBC(People’s Bank of China ) include reserve requirement ratio, central bank base interest rate, rediscounting, central bank lending, open market operation and other policy instruments specified by the State Council. The objective of the monetary policy is to maintain the stability of the value of the currency and thereby promote economic growth.In 1998, the national bank credit quota was scrapped and the PBC in theory has had to rely on adjusting its own balance sheet to manage the monetary base. Since then, the PBC has tried to develop the influence of the interest rate. The tools for influencing money creation in China are now mostly present. However, they are not yet as effective as they need to be to enable the PBC to run an effective monetary policy. Consider the three main ones: OMO, discount rate and reserve requirements. Open market operations in China began in October 1998, when the PBC started cash trading of bonds. In comparison to repos, bills can be traded, which improves liquidity, and regular bill auctions allow an interest rate benchmark to be formed. The PBC has developed the primary bill market to include 52 dealers, including banks securities companies, insurers, rural credit co-operatives etc. PBC bill auctions use both volume- and rate-based bidding. The PBC is reported to have a dedicated OMO trading room managed by the PBC’s Monetary Policy Division.Box 1 below. At first the PBC only engaged in one OMO a week. In the early days, cash bond trading was the most common means of adjusting the monetary base. After a short period, this was replaced by bond-based repo transactions since these had the advantage vis-à-vis bonds of affecting money market rates (and not impacting on the bond market). On June 25th 2002 the central bank started using reverse MoF- bond-based repos to cope with new FX inflows. However, by September 2002, the PBC had run out of bonds upon which to make repo transactions. To resolve this, the central bank determined that all outstanding repo contracts issued between June 26th and September 24th would not be honoured as such, but would be converted into a new instrument, PBC bills. The conversion resulted in bills worth CNY193.8bn (USD23.3bn), which appears on the central bank’s balance sheet in September 2002. The first auction of ‘new’ central bank bills took place in May 2003 and since then the market has grown substantially. From February 25th 2003, the central bank has engaged in two (or more) OMOs a week.It has also developed a liquidity management system, which now provides a daily update on banks’ liquidity positions.Table 1 summarises the PBC’s OMOs since 1998 (China Financial Stability Analysis Group,2005).

Table 1: Open market operations

Released base  Withdrawn base  Net base  money effect

5-12/98  176  107  +70

1999  708  526  +181

2000  447  573  -127

2001  825  873  -47

2002  185  305  -120

2003  1,024  1,223  -198

2004  1,218  1,997  -669

Source: PBC Monetary Policy Reports, Author, Shui and Sun (2003)

Second, the discount rate, the rate at which the PBC lends into the money market. On March 25th 2004, the PBC introduced ‘floating rate’ central bank rediscount lending. In other words, the PBC now has right to set the discount rate without having to seek State Council permission each time. At the same time, the PBC added 63 bps to the benchmark discount rate for financial institutions, and 27 bps to the standard rate to take the central bank’s core rediscount rate to 3.24%. Floating rate rediscount lending will be phased in over three years for the rural credit co-operatives (Financial Stability Analysis Group, 2007).

Third, the reserve requirement. The PBC reduced this ratio in the late 1990s as table 2 shows, in an attempt to stimulate credit growth and to give the banks more flexibility in how they managed their funds. At the same time, the central bank has steadily reduced the rates it pays on reserves, both required and excess, as table 3 shows, in an attempt to encourage banks to lend into the money markets rather than place their excess funds on deposit with the central bank. On April 25th 2004, the PBC adopted a differentiated reserve ratio system, meaning that second-tier banks, with capital adequacy ratios or asset quality etc. below certain standards would have to hold 8% reserves (compared to the standard level of 7.5%). Rural and urban credit co-operative were exempted from this rule for the time being. Ma and McCauley (2004) note that by mid-2004, 38 second-tier banks were subject to the new higher level, affecting about 10% of deposits in the system (Financial Market Department of the PBC,2006).

Table 2. China’s banks’ required reserve ratio, %

RRR %

1985-86  10

1987  12

1988-98  13

1998  8

1999-2002  6

2003  7

2004  7.5

2005        13

2006 8.5

2007 13.5

Source: People’s Bank of China

Table 3. Interest rates paid on required reserves, %

1998.03.25 5.22

1998.07.01 3.51

1998.12.07 3.24

1999.06.10 2.07

2002.02.21 1.89

2003.12.21  1.89 (with new, lower, rate on excess reserves)

2004.10.09 5.22

2006.04.28 5.4

2006.08.19 5.58

2007.03.18 5.67

2007.05.19 5.85

2007.07.21 6.03

2007.08.22 6.21

2007.09.15 6.48

2007.12.21 6.57

Source: People’s Bank of China

Note: Before December 2003, there was only one interest rate, 1.89%, for both required and excess reserves. After this date, however, while this rate was maintained for required reserves, excess reserves were paid a new, lower rate of 1.62%. On March 17th, the rate was lowered again to 0.99%(The PBC Shanghai Head Office, 2006).

2.2  The fiscal policy

A fiscal policy is when the government changes taxation and increases government spending. Through an expansionary fiscal policy it aims at increasing the amount of disposable income people will have. This income will, depending on the marginal propensity to consume, be spent in the economy. The result of this will be that aggregate demand will increase thus eliminating the deflationary gap which is caused by either growth or unemployment. Moreover fiscal policy aims at increasing government spending. If government spending increases the investment in the economy which will be translated as an increase of investment in the economy and which will in turn close the deflationary gap. Through a contractionary demand side policy the government aims at decreasing the amount of disposable income and thus reducing consumption within the economy which will in turn lead in a reduction of aggregate demand. In terms of government spending the government will reduce government spending so as to reduce investment and t hus close the inflationary gap. discretionary fiscalpolicy should focus on long run issues, such as tax reform and social security reform (Ji and Lin, 2008).

From the following figures you can see China’s economy performed well in the first half according to the economic indicators.
Sources: National Bureau of Statistics of China

Sources: National Bureau of Statistics of China

Take 2007 for example, According to the numbers, China’s GDP grew 11.4%, retail sales grew 16.8%, fixed asset investments grew 24.8% and foreign trade exports grew 23.5%. Economists point out that the turnaround in China’s economy shows that China’s active fiscal policy is working. The fiscal policy has undoubtedly expanded domestic demand. China’s fiscal expenditures continued to increase in the first half along with the growing economy. Fiscal earnings totaled 624 billion yuan, up 94.6 billion from the same period last year or 17.9%. Fiscal expenditures totaled 583.8 billion yuan, up 119 billion yuan from the same period last year or 25.6% (The World Bank Group, 2008). China’s active fiscal policy spured economic growth by using greater fiscal spending. In recent years, faced with problems such as lagging domestic demand, increased unemployment, an irrational economic structure and a slow increase in farmers’ income, the CCP and State Council decided to adopt this policy to spur investments and increase consumer spending and exports. In the second half of 1998, due to the Asian financial crisis and lack of domestic demand, the Chinese authorities issued 100 billion yuan worth of Treasury bonds to fund infrastructure construction. In addition to the 50 billion yuan in bonds set aside in the 1999 preliminary budget, another 60 billion yuan long-term debt was issued to increase investments. At the same time, the tax policy to increase investments and expand exports increased the income of the lower class urban residents. In the past two years, the state has used treasury bonds to increase infrastructure construction, support technological renovations in enterprises and spur economic growth. According to the central party’s economic conferences held towards the end of last year, China continued implement its active fiscal policy. Early this year, 100 billion yuan in Treasury bonds was penciled into this year’s budget. The state continued 2000’s tax policy and income adjustment policy. Foreign firms investing in the central and western regions of China enjoyed a 15% cut in income tax. Foreign investors undergoing restructuring was not allowed to receive tax drawbacks. And, 238 transportation and car “administration fees” imposed by local governments were eliminated (Wang, 2008).

Increasing investments in infrastructure not only caused the production and prices of resources such as concrete, steel, nonferrous metals, it has pushed up the prices of consumer industrial goods. The elimination of taxes on fixed asset investments, such as business tax on real estate, contract tax, value-added tax on land, has stimulated the growth of China’s real estate industry. Many of the government’s tax policy has tried to encourage the development of high tech startups. Billions of bonds were used to provide interest rate subsidies on loans so large- and mid-size enterprises could upgrade their technology (Angus,2008) .

Sources: National Bureau of Statistics of China

2.3  The trading policy

Trade volume is measured in relation to the size of the domestic economy, and is shown as three values: the value of exports as a percentage of GDP, the value of imports as a percentage of GDP, and the combined value of both imports and exports as a percentage of GDP. Trade volume shows how much the economy depends on foreign trade. A nation turns abroad for anything it needs that it cannot generate domestically. Exports reflect dependence on foreign markets, while imports reflect dependence on foreign-made goods and services. High levels of trade volume reflect vigorous engagement with the global economy.The Current Account Balance [CAB] is a record of money flowing into a national economy through foreign trade, minus money flowing out through foreign trade. It is shown as a percentage of GDP. For more detail, see the Glossary. Source: International Monetary Fund.When a nation’s CAB is positive, foreign trade is pouring money into its economy, making more available for investment, consumption and taxation. When the CAB is negative, foreign trade is draining money out of its economy, diminishing the stock of wealth available for these activities (Shi and Li , 2008).The world is rapidly changing. Goods, technology, investments and jobs are moving across borders faster than ever before. Globalisation is fundamentally changing the nature of commerce for countries, companies and citizens the world over, and presents major challenges.In response to this change, Chinese government has adopted appropriate trading policies to keep the current account balance.These are the different trade policies adopted according to the different situations:

1990-1997: Foreign investment grows tenfold between 1990 and 1997. Despite unwieldy contractual and legal framework, China’s billion-plus customers lure many investors, especially from ethnic Chinese in areas near Hong Kong and Taiwan (Mnkiw, N. Goregory, 1997).

1999: China’s global trade totals $353 billion; its trade surplus is $36 billion. China’s primary trading partners are Japan, Taiwan, the United States, South Korea, Hong Kong, Germany, Singapore, Russia, and the Netherlands. In November, the United States and China arrive at a bilateral market-access agreement that paves the way for China’s accession to the World Trade Organization.

2000: China reaches a bilateral WTO agreement with the European Union and other trade partners and begins work on a multilateral WTO accession package. To increase exports, China encourages the formation of factories that assemble imported components into consumer goods for export. The U.S. approves permanent trade relations with China, and President Clinton signs the China Trade Relations Act of 2000.

2001-2003: In 2001 China serves as the Asia Pacific Economic Group’s (APEC) chair; Shanghai hosts the annual APEC leaders meeting. After the 2001 World Trade Organization summit in Qatar, China becomes a full member of the WTO. Many tariffs and regulations are streamlined or ended, but foreign investors still face procedural obstacles. Trading partners complain that the Chinese currency is undervalued.

2004-2005:According to the report (Financial Market Department of the PBC ,2006), China’s foreign trade maintained the rapid growth since the second half of 2002, and climbed from the fifth largest country in foreign trade in 2002 to the fourth, which further consolidated its position as a large trading country, and made more contribution to the development of China’s national economy. Moreover, there was still a large space left for China’s exports to grow rapidly in 2005. However, the complicated and constant-changing international situations pose a potential threat to the world economy, and the keep rising prices of the domestic upstream products would obstruct exports growth. Encouraged by the domestic investment demands, China’s imports would continue to go high, but the growth rate will mainly rest with the development trends of domestic investment and the force and effect of macro-economic control.

2006-2007: In 2006, China’s foreign trade stood at 1.76 trillion U.S. dollars, up 23.6 percent year-on-year, ranking third in the world. China’s imports and exports of goods likely amounted to 2.1 trillion U.S. dollars for the whole year, a growth of 20 percent over the year-earlier level in 2007.External trade has continued to grow rapidly since the beginning of the year, the report says. Foreign sales of machinery, electronics, textiles and clothing and footwear posted sustained growth. Trade with major partners, including the European Union, the United States and Japan, has increased continuously (Chinese Academy of Social Sciences Department of Economics,2008).

Sources: National Bureau of Statistics of China

2.4 The economic growth policy

The economic Growth is measured as the annual per cent change in the value of the gross domestic product after taking account of inflation. A positive economic growth rate means more of everything than before: more production, more demand for labor, and more wealth available for consumption, taxation and investment. A negative growth rate means the economy is shrinking. Jobs are more scarce and do not pay as well as in boom times. These are the economic growth in China from 1998 to 2003:

1998-2000: By 1999, with 1.25 billion people and a GDP of $3,800 per capita, China’s is the fastest growing economy in the world, and also the second largest after the U.S. But the country remains poor, lacking the monetary and fiscal controls to manage its vast economy. The government turns to banks to provide failing SOEs loans, but they are not repaid. The banking system is threatened.

2001-2003: In 2001 China serves as the Asia Pacific Economic Group’s (APEC) chair; Shanghai hosts the annual APEC leaders meeting. After the 2001 World Trade Organization summit in Qatar, China becomes a full member of the WTO. Many tariffs and regulations are streamlined or ended, but foreign investors still face procedural obstacles. Trading partners complain that the Chinese currency is undervalued.

2004-2005:According to the report (Financial Market Department of the PBC ,2006), China’s foreign trade maintained the rapid growth since the second half of 2002, and climbed from the fifth largest country in foreign trade in 2002 to the fourth, which further consolidated its position as a large trading country, and made more contribution to the development of China’s national economy. Moreover, there was still a large space left for China’s exports to grow rapidly in 2005. However, the complicated and constant-changing international situations pose a potential threat to the world economy, and the keep rising prices of the domestic upstream products would obstruct exports growth. Encouraged by the domestic investment demands, China’s imports would continue to go high, but the growth rate will mainly rest with the development trends of domestic investment and the force and effect of macro-economic control.

2006-2007: In 2006, China’s foreign trade stood at 1.76 trillion U.S. dollars, up 23.6 percent year-on-year, ranking third in the world. China’s imports and exports of goods likely amounted to 2.1 trillion U.S. dollars for the whole year, a growth of 20 percent over the year-earlier level in 2007.External trade has continued to grow rapidly since the beginning of the year, the report says. Foreign sales of machinery, electronics, textiles and clothing and footwear posted sustained growth. Trade with major partners, including the European Union, the United States and Japan, has increased continuously (Chinese Academy of Social Sciences Department of Economics,2008).

Sources: National Bureau of Statistics of China

2.4 The economic growth policy

The economic Growth is measured as the annual per cent change in the value of the gross domestic product after taking account of inflation. A positive economic growth rate means more of everything than before: more production, more demand for labor, and more wealth available for consumption, taxation and investment. A negative growth rate means the economy is shrinking. Jobs are more scarce and do not pay as well as in boom times. These are the economic growth in China from 1998 to 2003:

1998-2000: By 1999, with 1.25 billion people and a GDP of $3,800 per capita, China’s is the fastest growing economy in the world, and also the second largest after the U.S. But the country remains poor, lacking the monetary and fiscal controls to manage its vast economy. The government turns to banks to provide failing SOEs loans, but they are not repaid. The banking system is threatened.

2001-2003: After China joins the WTO, foreign investment surges to a record high. Strong growth masks internal disparities between cities and rural areas, coastal and interior regions. Cuts in tariffs and rules streamline business, but the huge state-owned sector remains deeply troubled and extremely hard to reform. In 2003 the spread of the deadly SARS virus has a severe impact on China’s economy. (Ji and Lin, 2008)

2004-2007: The following years continued to witness the rapid economic rise of China, with an emphasis on both quality and speed. In the first half of the 21st century, rural areas remained to be the “strategic citadel” of expanding domestic demand and economic growth. In the face of energy and resource challenges, China plans to lay the groundwork of a resource-efficient society in 30 years. Other priorities include: building a favourable environment for international exchange, persisting in the path of “bringing-in, going global” and advancing international competition and cooperation based on mutual benefit and win-win situations. Moreover, to pursue independent innovation, develop private-run businesses, and engage the initiative of both local government and enterprises to enhance China’s economic vibrancy and sustainable growth(http://www.pbc.gov.cn/english/).

2.5 The economic targets

China adopts the “five-year-plan” strategy for economic development. The 9th Five-Year Plan (1996-2000) was outstandingly successful, and the 10th Five-Year Plan (2001-2005) mapped out the first plan for the new century, setting these main targets:

— Sustaining fairly rapid growth, strategic restructuring, improving the quality and benefits of economic growth so as to

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