Chinese Economic Policy in the 21st Century: Growth, Imbalance, and Considerations for Australia

By Reuben NS. Tang
2013, Vol. 5 No. 08 | pg. 1/3 |


This report examines the Chinese economic model, the potential for future Chinese growth, and the implications for Australia. An examination of factors that have contributed to the rise of the modern Chinese economy including demographic factors and productivity gains is conducted via a review of existing literature. The pattern of Chinese economic development and the basis for its GDP growth is considered within the context of this literature and the prospects for future Chinese economic growth are discussed while raising and addressing potential imbalances in China. These imbalances principally revolve around a growing assymetry between household consumption and investments and China's changing demographic composition. Finally, implications for the Australian economic and political landscape are addressed with attention focused on the path Australia has taken in the early 21st century.

In 2003, China was admitted to the WTO following reforms that included tariff reductions and the dismantling of most nontariff barriers, accepting conditions more stringent than the terms under which India and other developing countries acceded (Branstetter and Lardy, 2006). This admission, heavily championed by certain members of the international community, was seen almost romantically by the West: China’s admission would solve its domestic issues, creating a Western Chinese system (Glen and Murgo, 2007, Green, 1999, Wilson, 2003).

The Chinese entrance to the WTO, nevertheless, failed to meet Western expectations. While Chinese integration into the world economy contributed to sustained growth in international trade, issues such as trade imbalances and increasing tensions with its partners continue to undermine Western hopes for China (Lam, 2009).

The Chinese Economic Model

In 1978, Deng Xiaoping, then leader of the Chinese Communist Party (CCP) instigated a series of political and economic reforms that are typically credited as the beginning of China's transition toward a market economy (Jacques, 2009). This reform, coupled with the disintegration of the Soviet Union after 1989 and the Asian financial crisis in 1997, particularly shaped the belief that the legitimacy of the CCP lay in its ability to develop China into a powerful modern economy and to raise individual living standards (Downs and Saunders, 1998) for which Chinese leadership see stability as key to achieving (Wang and Chee, 2011).

To a large extent, the CCP has succeeded with China’s real GDP and international trade growing at 9.58% and 18% per annum respectively since 2003 (People's Daily, 2003, Trading Economics, 2012). For the purpose of this report, it is accepted that the Chinese economic model is similar to the East Asian economic model, whereby governments actively regulate financial markets and seek macroeconomic stability whilst creating markets where they did not previously exist (Branstetter and Lardy, 2006). Within this context it is further understood that the Chinese economic model differs in its relatively early dismantling of tariff barriers, acceptance of large quantities of foreign direct investment (FDI), and earlier engagement in international trade (see Figure 1 & 2; Boltho and Weber, 2009). Implications as a result of this model resulted in Chinese companies taking advantage of large flows of foreign capital for investments. This had the added result of causing such companies to learn from the outside world via transfer of foreign technologies and management practices (European Commission: Enterprise and Industry, 2004).

Figure 1: FDI as a percentage of GDP in China, Korea, Taiwan and Japan over their fastest growth period (Jacques, 2009) [modified].

Figure 1

Figure 2: Foreign Trade GDP ratios (ratio of exports and imports of goods and service to GDP at current prices). China’s trade/GDP ratio increase faster compared to Korea and Japan (Boltho and Weber, 2009).

Figure 2

This earlier exposure to international markets also compares starkly with the ‘dual economy’ of other Asian tigers, which is characterised as a successful export-orientated sectors, but poor performing domestically orientated service sectors (McKinsey & Co., 2000, Fund, 2005). This raises the possibility that the Chinese service sector is at a significantly higher level of productivity than that of Korea and Japan at a similar stage of development. The net effect of this increasing openness to trade and FDI is the limiting and ‘disciplining’ of state owned enterprises via the fostering of competition in product and service markets that would otherwise had not existed (Branstetter and Lardy, 2006). This also represented the reason as to why China was willing to participate in the WTO despite more stringent terms of ascension as described by Premier Zhu Rongji in his visit to the US in 1999 (The White House, 1999).

Within context of modern China, Chinese economic growth has been largely sustained by a rapidly developing manufacturing sector. In this regard, a Heckscher-Ohlin viewpoint realises that China’s comparative advantages lie mostly in its favourable demographic factors and accelerated growth productivity, contributing greatly to its export-orientated growth. With regard to Chinese demographics, the total population of China in 2011 was estimated to be 1.35 billion people, of which 74.4% were of working age. With its relatively low dependency ratio, rapid urbanization has resulted in 51.27% of the population living in urban areas, allowing for a rapid transition of labour to formal employment.

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