Economy policies of Chinese in the post crisis period

 

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1.        Introduction of China

 

With the accession into WTO in the late 2001, the beginning of the 21st century, China finally demonstrated its power and important role in the global economy. With the fast raising of its economy, China as an Asian country has been using a very typical Asian economy growth mode which is low cost and export oriented mode. And the recent economy crisis which has being influencing the global economy and every economy entity with severe impacts, this study after an introduction of the Chinese economy environment will focus on analyzing the economy policy in term of fiscal policy, monetary policy and supply side policy to see how the Chinese government in the post economy crisis ear managed to adjust its policy to make the economy maintain the fast growth and the study also make a comparison between China and Japan in term of various economy indicators regarding the economy performance of the two economies in the past ten years and this study ends by giving some recommendations on the polices that the government could use to better improve its current economy policies to bring a better life to the people.

 

2.        Background of the economy in China

 

2.1    Role of state

 

The economic reform that happened since 1979 till now under the leadership of Deng XiaoPing, who was later considered as the designer of the economy of China, changed the plan economy that had dominated during the majority of time after formal independence of the new China with the market system as secondary (Yabuki, 1999). The government started to reform the economy and introduce the market economy which had previously been considered as the economy form of the capitalism into the socialism economy because the Chinese leadership had found out the shortcoming of the over centralized economic planning and the effectiveness of using market forces (Chow 1987, p.65). Though the economy reform has speeded up its pace in the new century especially with close interaction with the global economy and under the pressure in the WTO framework, the government is still playing a critical role in the national economy life. And some of the reasons are listed below:

 

Firstly, while the activities of plan economy are largely reduced, the Chinese government still has long-term plans for national economic and social development in its five year economy plans. And one of the major economy planning activities that the government still insists on controlling is the construction of the infrastructure. And the infrastructure building and the relative industrial structure readjustment which is a strategic position of the government’s plan of “Development of the Western Part of China” both involve the direct allocation and reallocation of resources by the government (Chow 2007, p183). Secondly, the Chinese government tends to have direct control of the particular resources and key industries to prohibit competition to the state owned enterprises. Thirdly, without the well developed economy regulation and national law system, the government needs to monitor the economy closely and even perform interventions in the economy life if needed.

 

2.2    Financial system

 

When the economy reform has severe influences over most industries and people’s life in the past three decades, banking system as a crucial industry had been protected by the government with special measures (Singh 2005, p.39). The banking system has long been controlled by the four major state owned banks and the state owned banks provide major funds for the state owned enterprises’ financial needs as their policies differentiate toward private business and state owned business. Though according to the WTO agreement, in 2006 the geographical and client restrictions on foreign banks operating in China had been eliminated and foreign banks are said to have great incentives to expand their business in China, the network advantage of the big four state-owned banks and the fact that foreign banks frequently have difficulties with the regulatory and supervisory requirements (Chen 2009, p.135) make the linearization of the banking system of little immediate effect to the economy activities.

 

2.3    Labor system

 

The relationship between population growth and economic development remains a subject of endless debate among economists and demographers (Wong & Liu p.334). And For the last three decades, the fast growth of the economy development has been greatly contributed and supported by the population dividend which is a rise in the rate of economic growth due to a rising share of working age people in a given population. Despite the ageing population is anticipated in the future, there are still problems come along with the population dividend and these problems have severe impacts on the labor system of the giant country. First, as the table below demonstrates, the number of annual the fresh graduates has grown dramatically since the 1980s and in 2008 the number of graduates had reached 5 million but in contrast, the unemployment rate of the fresh graduates is rising as there is an estimated 30% of the students could not get a job (Gallagher, Hasan, Canning, Newby, Yiu & Whitman, 2009. p.59). Secondly, given the long time lag between the major selection and students’ entry into the labor market and the institutional inflexibility in the major and course setting, there is commonly found mismatch of skills as students could not find jobs that fit in their respective majors.

 

Table 1 Increase in number of college enrollments and graduates in China

 

2.4    Social and cultural conventions

 

 

Figure 1 Analysis of five cultural dimensions of China

Source: Adapted from Hofstede 2004

 

 

Figure 2 World average socres in five cultural dimensions

Source: Adapted from Hofstede 2004

 

In term of the social and cultural conventions according to the findings of Geert Hofstede, in the five studied cultural dimensions, China shows a typical Asian country cultural model with its own features. As the figure demonstrates, compared to the world average, China has much higher socre PDI (Power Distance Index ) suggesting that the power is distributed very unequally and power is under control by a much smaller number of people compared to its large population and the scoring is Individualism (IDV) much lower than the world average level which explains the reason why the Chinese society with a high PDI is even more stable than many developed countries. What’s more, the high Long-Term Orientation (LTO) score which is the highest in the Asian countries reconfirm the long lasting Chinese tradition in the history to have a long term plan for life and for work.

 

3.        Economic policy

 

According to the Report of the 16th Congress of the communist Party of China (CPC), in 2003 the GDP of China had exceeded US 1.4 trillion and at the same time the per capita GDP in the first time reached and exceeded the milestone of USD $1000. And China had since then entered a critical period as economy continues to grow from USD $1000 to $3000 USD in term of capita GDP and during this period according to the economy theories raising economies could fall into the “middle income trap” which occurs when rapidly growing economies exit lower income levels only to become trapped as they are unable to compete with the low income and low wage economies in the low end industries such as manufacturing (Hock 2011, p.49). To avoid the “middle income trap”, the report proposed the goal for the economy to reach the USD $3000 in term of capita GDP.

 

A sudden global financial crisis triggered by the US sub-prime mortgage crisis in 2007 had soon been spreading in the major global economies with a comprehensive impact on the global economy sector through the inter-dependency among the countries in the globalization trend. It has no doubt that his global financial crisis also has long term significant impacts on the development of the export oriented Chinese economy which was on its way to achieve the 2020 vision. Below we will discuss the post-crisis era economies policies in term of fiscal policies, monetary policies and supply side polices that have been carried out by the Chinese government, its central bank the People’s Bank of China and other relative departments to achieve the short term goals of stimulating the domestic demand, maintaining the economic growth momentums, creating the sufficient job opportunities and in a large sense to maintain social stability (Huang 2009, p.12) which is always the fundamental rule that the Chinese government follows to manage the country.

 

 

 

 

 

 

 

 

3.1    Fiscal policies

 

3.1.1            Increase public investments

 

Chart 1 Breakdown of the four trillion yuan stimulus package

Source: Jeffries 2011

 

Like many other major economies, to keep the economy crisis from spreading and deepening in the domestic economy and make the people rest assured the Chinese government had also issued its economy stimulus package which totaled four trillion yuan or about 570 billion U.S. dollars in a quick speed and aggressive manner as the major scheme to contain the direct impacts financial crisis which can be seen from the fact that the manufacturing dropped off 25 percent at the end of 2008 (Howley 2010, p.182). From the breakdown of the four trillion yuan stimulus package which is demonstrated in the chart above, we can see that the focus of the large stimulus government spending had been put in the infrastructure building (around 45 percent), post earthquake reconstruction (25 percent), rural sector, affordable housing projects and education. As in November of 2009, the end the two years schedule for the implementation of the four trillion yuan stimulus package, the Chinese government had totally allocated 95 percent of the planned budget.

 

3.1.2            Stimulation of the domestic consumption

 

To mitigate the influence of the sudden export drop, the Chinese government had used its fiscal policy to boost the domestic consumption and at the same time encourage consumption by motivating the people to consume more using the political appeal. One of the major plans that were designed to stimulate the domestic consumption was the “Home Appliances to the Countryside” scheme which had been running since December of 2008 in more twelve provinces (Jeffries 2011, p.205). The scheme provided the people in the rural areas direct subsidy to purchase television sets, washing machines, mobile phones and computers. In 2009, the “Home Appliances to the Countryside” scheme together with the “Car to the Countryside” plan took up 25 billion in the single year of 2009.

 

3.1.3            Increased the export refund

 

Chart 2 Export of China from January 2000 to June 2009

Source: Tradingeconomics.com 2011

 

While the domestic demand could not be stimulated in a short period as it is also the Chinese people’s long lasting tradition to save money to prepare for the long term life, it takes time for the two third of the Chinese people who still live in the rural areas to change to a more modem and positive consumption thinking and mind, but the drop of the export happen quickly as the chart above demonstrate, so the Chinese government had no better alternatives in the short run but to rely on stimulating the export. And of the major techniques in the fiscal policy of the Chinese government is to increase the export refund ratio. In the late 2009, the Ministry of Finance of China had by then all together raised the export refund ratio for 2,486 kinds of products accounting for about 25 percent of all the products in the exports list by the Chinese customs authorities. In the single textile industry, the export refund ratio had been raised for four times in 2009 indicating the government’s strong concern of the export drop which had directly led to the closure of thousands of factories and millions of migrant workers’ employment being threatened (Woollard 2011, p.18).

 

3.1.4            Structural tax reduction and reform on tax and fee

 

A series of polices and new tax regulations had been used adopted in 2008 and 2009 to reduce the burden of the companies and the individuals. In the end of 2007, the guidance of the new Enterprise Income Tax Law (EIT) was issued, and stating in which the new tax law has unified the income tax levied on domestic and foreign enterprises with a reduction of the income tax rate from 33 percent to 25 percent[1]. The tax reduction also differentiates in different industries to show the government’s support and encouragement for the specific industries. For example, 15 percent tax reduction is granted for the high technology enterprises and 50 percent of tax reduction is allowed for investments in the agricultural, forestry, animal husbandry, and fishery industries and a three years time bounded 50 percent tax reduction had been granted in the investments in infrastructure facilities construction, environmental protection investment, and energy and water saving projects (Lang, Liu & Tang 2010, p.22). On the other hand in 2008 witnessing the stock market slumps the government also cancelled the 0.1 percent stamp duty on share purchases to shore up the share prices in the crisis. What’s more the reform on tax and fee will also continue targeting the long term fast and steady economic growth particularly in the rural areas (Deng 2009, p.107).

 

3.2    Monetary policy

 

With the Chinese economy continue to become more market oriented and integrate more closely with the global economy, it is expected that the monetary policy of China will play a even greater role in boosting the economy with a stable and non-inflationary growth (Hammond, Kanbur & Prasad 2009, p.136). But in the recent years, the relative independent monetary policies have been put under many critics not only from the foreign economy partners but also from the people living in China. For a long period, the Chinese currency had been pegged to the US dollar with little flexibility, but with the fast growing of the Chinese and a weakening dollar, the China Yuan had been said to be too much undervalued resulting in unfair competition in the global economy environments. Faced by the external pressure majorly from the US and EU, on 21 July 2005, the government had announced that the value of the Chinese Yuan will be set with reference to a basket of currencies and allowed the Yuan to appreciate by about 20% relative to the US dollar and since this announcement the government started to initiate actions to build a more flexible exchange rate system. And soon after the economy crisis, beside the expansionary fiscal policy, the central bank, People’s Bank of China (PBOC) had issued a very expansionary monetary policy as a support to the fiscal policy which will be discussed as following.

 

 

 

3.2.1            Money supply

 

At the first six month of the year 2009, according to People’s Bank of China (PBOC) the bank credit had increased by RMB 7.3 trillion and this digit had exceeded the whole year target of bank credit, this increase is large as the same data were 3.18 and 3.63 trillion in 2006 and 2007 respectively. And M2 money supply which is a broad measure of the amount of money in circulation in the economy grew at a record rate relative to GDP (Yu 2009). The fast growth of the M2 money supply and bank credit helped to avoid the appearance of the liquidity shortage that may probably happen during a financial crisis.

 

3.2.2            Interest rate

 

Dramatic changes could be witnessed in the interest rate policy. At the beginning of 2008, the benchmark interest rates had been raised five times to avoid the inflation (ESCAP 2008, p.47), but soon after the bankruptcy of Lehman Brothers the central bank, People’s Bank of China (PBOC) had responded quickly in term of adjustment of the monetary policy. In November 2008, the central bank announced a full percentage point cut of the interest rates which is the largest interest rate reduction after the Asian economic crisis (Bradsher 2008).

 

3.3    Supply side policy

 

Supply side polices are mainly micro-economic policies designed to improve the supply-side potential of an economy, it is believed that the supply side policy by encouraging increased competition and efficiency and lower barriers could help achieve economy prosperity without causing inflation. Supply side policy could be used as an effort to increase the aggregate supply in the economy without the direct control and intervention from the government so one of the most evident benefits of using supply side policy is to reduce the government’s role in the economy life especially in case of economy crisis in which adaptations and changes need to be done but government’s intervention will usually come with cost in term of government budget deficit and other long term and short term impacts (Brux 2008, p.370).

 

3.3.1            Adjustment of the industrial structure

 

Beside the large stimulus plan that planned to inject 4 trillion Yuan into the economy over the two years period from 2009 to 2010, another government plan that aimed at increasing the production efficiency in the long run was to restructure and invigorate ten key industries which include: automobile, non-ferrous metal, logistics, shipbuilding, textiles, equipment manufacturing, light industry, electronic information, petrochemicals and iron and steel production (Bokova 2010, p.379). Key tasks in restructuring and invigorating these industries are technology innovation, pollution reduction in term of carbon dioxide emission cut, energy saving, overcapacity adjustment and repeated construction avoidance. Though the goals of the industrial restructure were set in long term but the some results were rather immediate and cheering. For example, according to the National Development and Reform Commission (NDRC) within the first six month of 2009 the per unit GDP energy consumption dropped by 3.35 percent which was the best since the Chinese economy entered into the new century (Cdrf.org.cn 2009). What’s more another focus of the industrial restructure belonged to the innovation in term of both scientific innovation in the research field and technological innovation in the enterprises. As shown in the government issued report on the central and local budgets, throughout the year of 2009, the total expenditure on science and technology reached to 151.202 billion yuan with a 30% year on year growth while the majority of the expenditure had been given to the basic and applied research and technology project, and a 20 billion yuan amount had been allocated as technological innovation funds which support more than four thousand technological innovation projects which fostered greatly the cooperation between the research institutes, university and the companies. All these efforts had been attached with great hope that they could further improve the structure of the industries and enable the companies and industries to move to the higher end of the production which paves the basis to eliminate the conditions to nurture the middle income stagnation.

 

3.3.2            Deregulation of markets through administrative reforms

 

Deregulation of the markets needs the major effort from the government side to bring in higher economy efficiency in the economy activities by encouraging increased services, lower costs, and technological development (Kim 2002, p.75). The economy crisis on one hand did bring damages to the economy of China, but on the other hand the chaotic external economy environments also provide a very good opportunity for the Chinese government especially the local governments who may lack the experiences to deal with the substantial economy disruptions to deepen the administrative reforms. During the 6th session of 16th National People’s Congress of People’s Republic of China which was held in 2006, the Chinese government the first time formally announced the concept of building a service oriented government through transforming the economy administrative function of the government. But the process of this administrative reform had greatly speeded up during the post financial crisis era. The deteriorating economy environment in term of closure of large number of factories in some provinces and worker demonstrations had forced the governments to focus on offering better services to the economy activities by changing its traditional and long existing role of supervisor and director of the economy.

 

3.3.3            Focus on social security and well off society construction

 

As mentioned above, 25 percent, or 1000 million out of the four trillion yuan stimulus package had been allocated to the post earthquake construction in Sichuan province in which a 7.8-magnitude earthquake cause more than 100 thousand casualty and a large area to be rebuilt, the government had been very positively participate in the salvage and relief effort and even invited and accepted the relief efforts from other countries and non-governmental organizations. While we can see that social unrest did easily triggered by crisis like the big earthquake, from the successful handling of the Sichuan Earthquake by the Chinese government, we can see that careful and prompt reaction to the reactions to the crisis will bring great social harmony, security and positive social emotions to the society. On the other hand the government also focused on implementing a stronger employment policy. According to the government issued report on the central and local budgets, throughout the year of 2009, the total expenditure on employment work amounted to 42.621 billion yuan with a 55.1 percent year on year growth compared to the previous year. By using policies such as allowing companies which were in financial difficulties to postpone their payments of contributions to five types of social security for a set period of time to help the companies in difficulties and providing state education assistance loans to encourage the employment of the college graduates, the government targeted at eliminating the factors that could cause social unrest which will certainly bring influential impacts to the economy activities.

 

4.        Economic performance indicators

 

Chart 3 Gross domestic product of China

Source: Tradingeconomics.com 2011

 

Chart 4 Gross domestic product of Japan

Source: Tradingeconomics.com 2011

 

Chart 5 Inflation rate of China

Source: Tradingeconomics.com 2011

 

Chart 6 Inflation rate of Japan

Source: Tradingeconomics.com 2011

 

Chart 7 GDP Per Capita of China

Source: Tradingeconomics.com 2011

 

Chart 8 GDP Per Capita of Japan

Source: Tradingeconomics.com 2011

 

Chart 9 GDP growth rate of China

Source: Tradingeconomics.com 2011

 

Chart 10 GDP growth rate of Japan

Source: Tradingeconomics.com 2011

 

Through the comparison of some of the major economy indicators, we can see that in the past 10 year period, China have been keeping a stable economy growth except during the financial economy crisis but still the young economy managed to respond positively and bounce back to the double digit growth mode but the high and fluctuating inflation rate indicates the possibility of economy overheat and even crisis but still the current economy performance of China in general is very good especially considering the large population and lack of capital accumulation. And in contrast, Japan as the current second largest economies in the world will certainly have to pass this title to China in term of GDP volume in the coming one or two years time due to the fast GDP growth of China and the economy stagnation or little growth in GDP of Japan giving that the two countries’ GDP volume are getting closer and closer. But still in term of per capita GDP China as a developing countries can not match up with Japan which is a developed country and this indicates that it would be will less cheerful for China to become the work’s second largest economies given the fact that the majority of the population are still struggling for a decent living. What’s more, the high inflation rate of China and the mentioned above rapid growth of M2 money supply both suggest that the growth of income for the Chinese people could even means a decrease in purchasing power resulting in worse life quality.

 

5.        Recommendations

 

5.1    Reform on the property tax

 

The Chinese government has been put in a dilemma in the post crisis as on one hand it has to boost the economy by providing momentums to the economy growth while on the other hand it need to avoid the economy from getting overheat especially in the property market in which record housing prices have been refreshed frequently posting great threat and uncertainties to health of the economy and the stabilities of the society. As proposed earlier by many studies and researchers such as Li Jing Guo from Institute of Urban Development and Environment Research, to control the fast growing property price which is one of the main drivers of Chinese inflation the government has to shift the focus of reform on the property tax from the transaction to holding which means that house owners should be taxed rather than the one time transaction tax currently used. And actually in January this year, the government had already introduced its first property tax for home buyers in two major cities: Shanghai and Chongqing to test the viability and effectiveness of such taxation rule. And the tax which would requires the house owners to pay 0.4% and 1.2% of the purchase price adjusted by the differences with the market averages is actually adding up the holding cost of the property with the hope to curb speculations (Bbc.co.uk 2011). The advices given in the reform of the property tax include: firstly, the holding tax could differentiates from residents to companies to avoid house developers from earning money from holding houses to wait for the house prices to rise; secondly, tax reduction should be offered to those who have a second house already but have difficulties in paying the tax according to their financial situations; thirdly the holding tax or property tax should be more for houses owned by developers but left empty with no one living there.

 

5.2    Better coordination between monetary policy and fiscal policy

 

Data has demonstrated that the base money standing is about 3 trillion yuan while the outstanding government debs is only about 2 trillion yuan suggesting that the bonds is insufficient to meet the need of the central bank in enacting and implementing the monetary policies. To resolve this problem, it would be recommended that the government better coordinate the two difference policies and to align them to achieve the same economy goal of the country.

 

5.3    Exit from Fiscal Stimulus Policies

 

Fiscal stimulus policies as mentioned above involve too much intervention from the government which will bring long term uncertainties and malfunction of the economy system, but as the short term strategy, such polices did help the economy from being greatly influenced by the US led economy crisis, but for a long run’s sake the government should exit from the stimulus polices and focus more on the supply side policy which brings a low inflation economy growth and thus provide people with the benefits and value created by their hand rather than simply giving away to the foreign market in exchange for a large amount of green papers (USD) that won’t keep its promise to be exchanged for gold long time ago and keeps falling in their value.

 

 

Reference

 

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Bradsher, K. 2008. China’s Central Bank Cuts Interest Rates. accessed on 18th June 2011 [online] available: http://www.nytimes.com/2008/11/27/business/worldbusiness/27yuan.html

 

Bokova, I. 2010, UNESCO Science Report: 2010. Paris: United Nations Educational, Scientific and Cultural Organizations, p.379

 

Brux, J. M. 2008, Economic Issues & Policy. 4th edition, Mason, OH: Thomson higher Education. p.370

 

Cdrf.org.cn 2009. News Release. Accessed on 18th June 2011 [online] available: http://en.ndrc.gov.cn/newsrelease/default.htm

 

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ESCAP (United Nations Economic and Social Commission for Asia and the Pacif) 2008, Economic and social survey of Asia and the Pacific, 2008. New Delhi: United Nations Publication. p.47

 

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Hammond, G., Kanbur, S. M. R. & Prasad, E. 2009, Monetary policy frameworks for emerging markets. CHeltenham: Edward Elgar Publishing Limited. p.136

 

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Kim, J. Y. 2002, Sorting out deregulation: protecting free speech and Internet access in the United Stages, Germany, and Japan. New York: LFB Scholarly Publishing LLC. p.75

 

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Lecture, 25 November, Melbourne: Productivity Commission

 



[1] A 20 percent tax rate is introduced for small-scale enterprises earning only a small profit

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