The Pecularities of Chinese Economy: Trade, Export, Fiscal Policy

Introduction

China’s economy seems to be losing some steam in Q4 as the economy is transitioning towards a more sustainable growth trajectory. Courtesy the cooling property market, investment growth decelerated in November. Government’s campaign to improve air quality also led to the weakening of industrial production during the same period. On the other hand, the same period saw robust growth in retail sales. This was a clear indicator of the fact that the role of consumer spending in the economy is gradually strengthening. The GDP growth and inflation targets are expected to remain unchanged at 6.5% and 3.0%, respectively.

China’s Economic Growth

The Chinese policy makers will continue their efforts to rebalance the economic model of the country. Hence, it is expected that the Chinese economy’s slow-but-steady deceleration will continue in 2018. Further downward pressure on growth will be exerted by stringent regulations in the property market and stricter environmental regulations. As per forecast by Focus Economics panellists, the Chinese economy will grow at 6.4% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is expected to grow at 6.2%.

The capital accounts have been a beneficiary of strong inflows of Foreign Direct Investment (FDI). With record inflows of USD 118 billion in 2013, the last decade saw a strong performance from FDI thereby becoming the second largest recipient of foreign investment. Among the countries that invest more in China are Hong Kong, Singapore, Japan, Taiwan, and the United States. Additionally, China’s outward investment grew leaps and bounds in recent years and, according to some analysts, the country has the potential to become a net exporter of capital in the coming years.

Since 1993, China has experienced uninterrupted trade surpluses. Total trade saw a near 100 times increase and rose to USD 4.2 trillion in only three decades. China surpassed the United States as the world’s biggest trading nation in 2013. China has been prompted to become a major manufacturing hub because of the government’s massive investment programs.

China’s Economic Policy

Chinese government’s bold support for economic activity and the country’s increasing integration into the global economy led to the soaring of economic growth in the last few decades. However, the successful economic model that lifted hundreds of millions out of poverty and fostered its economic and social development has also brought many challenges. In order to ensure the country’s sustainability, the new administration lead by President Xi Jinping will in the near future have to tackle issues like severe economic imbalances, mounting environmental issues, rising economic inequality and an aging population.

Electronics and machinery form around 55% of total exports, garments make up for 13% and construction material and equipment constitute 7%. Sales to Asia represent over 40% of total shipments, while North America and Europe have an export share of 24% and 23%, respectively. Despite expanding rapidly, the exports to Africa and South account only for 8% of total shipments.

China’s Fiscal Policy

In 1994, the government launched a bold fiscal reform in order to struggle against a rapid decline in the tax/GDP ratio. This diminished the government’s ability to conduct macroeconomic and redistribution policies. As a result of this reform, there was a steady increase in revenues which jumped from 10.8% of GDP in 1994 to 22.7% of GDP in 2013. Expenditures too followed the increasing trend and grew at a double-digit rate during the same period. Despite this, the fiscal deficit was kept in check. In the 1994-2013 period, the government’s fiscal deficit averaged 1.4% of GDP.

The debt of Chinese government is almost entirely denominated in local currency and owned by domestic institutions. In addition, the government has cash savings equivalent to 6% of GDP in the People’s Bank of China. This provides a shield to the economy against government debt crises. In 2015, public debt amounted to 15.6% of GDP.