People’s Republic of

China

Sean Gallagher

Wells Brewer

April 8, 2014ECON 3331

Introduction China:

Capital - Beijing

Language - Mandarin, Cantonese

Government System - Communism

Economic System - Socialistic/ Free Market

United States:Capital - Washington D.C.

Language - English

Government System - Democratic Republic

Economic System - Free Market

Timeline

Imperial China Republic of China

221 BC

Peoples Republic of China

1911 1949 Now

Notable Dates

1971 Accepted into the United Nations 1978 Economic Reforms Started2001 Became apart of the World Trade Organization2010 China has 2nd largest Economy2012 The economic growth of china began to decrease

Fiscal Policy

Set by government of China primarily parliament

“Proactive” fiscal policy is officially what the government is supporting

This can be translated as a moderate expansionary policy that creates demand and stimulates the economy primarily by expanding domestic demand

Source: China Daily

Monetary Policy

Set by People’s Bank of China

“Prudent” monetary policy

The goal of a “prudent” monetary policy is to maintain price stability, as it usually means a relatively expansionary monetary policy when the economy turns sluggish or a relatively tight monetary policy when the economy shows signs of expanding too quickly

Source: China Daily

“Healthy” GDP Growth Rate

When considering where the healthiest growth rate occurs, multiple points of intersection involving the highest economic growth rate while still maintaining acceptable price stability and a natural rate of unemployment are the essential elements. These are important elements of the growth rate:

real GDP growth rateGDP PPP($) growth rate real per capita GDP per capita GDP PPP($)

Healthy Growth Rate

3%

GDP (PPP) $16.72 trillion

GDP per Capita (PPP) $52,800

United States

Healthy Growth Rate 7.5 %

GDP (PPP) $13.37 trillion

GDP per Capita (PPP) $9,800

China

A “Healthy” 7.5% In comparing the historical inflationary percent changes with the GDP

growth rate changes, we see that the acceptable price stability occurs around the GDP growth rates of 7-9%

The next piece that we must look at is the per capita GDP PPP ($). By calculating the percent change from year to year, we have determined that growth of 9.3% occurred in per capita GDP PPP ($) from 2012 to 2013. This is a good example of the per capita GDP PPP ($) increasing at a high rate while having acceptable unemployment

In these years, if the real GDP growth rate was closer to 7.5%, unemployment at around 4% and inflation was relatively stable, the economy of China would have been healthiest

Sources: CIA World Fact Book, Index Mundi

Agriculture: 9.7%

Industry: 45.3%

Services: 45%

Agriculture: 1.1%

Industry: 19.5%

Services: 79.4%

GDP by Sector

United States China

Population

Labor Force

Labor Force Participation Rate

Total Unemployed

Unemployment Rate

“Healthy” unemployment rate for China is 4%

“Healthy” unemployment rate for United States is 5%

Factors that must be considered in determining the healthy unemployment rate are:

China’s Population

Labor Participation (Total Population)China United States

48.73%58.83%

According to the official statistics regarding China, when the unemployment rate was below 4% there was rapid GDP growth with increased CPI volatility that hurt overall economic health in the country. The rate that would best serve China’s economic health is around 4%, officially

Again, this is the official statistical conclusion. This can be extrapolated from the graph measuring from the years 2000-2010 during which time there has been minimal change in the unemployment rate

In spite of large changes in other key areas which indicate economic performance such as GDP growth rate, GDP per capita, CPI, etc., the unemployment rate has remained nearly constant over the last decade. This is cited as an unreliable statistic

Unemployment

Sources: CIA World Fact Book,International Monetary Fund

The direct method of data collection, corruption by the National Bureau of Statistics, and the use of the registered unemployment rate (RUR), as opposed to the unemployment rate (UR) are all highly criticized elements of China’s unemployment statistics

China also has a massive migrant worker population estimated at around 260 million. The inclusion of these workers in the normal employment statistics can create inaccuracies when comparing it with other countries’ numbers

Possible Issues with Unemployment Statistics

Sources:Bureau of Labor StatisticsChina Economic and SecurityReview Commission Staff Research Project

Demystify the labor statistics in ChinaFang Cai, Yang Du, Meiyan Wang China Economic Journal Vol. 6, Iss. 2-3, 2013

Problems with Aging Chinese Population and Labor Force

Shrinking number of people entering into labor force

Growing number of the aging in the labor force

In 2010, there were 110 million people 65 and above in China; by 2030, the number will be more than 250 million. By 2050, 25% of the population will be over 65

The One Child Policy which came about in 1979 is largely responsible for these problems with the labor force

Rural area working environments are also improving causing large numbers of potential migrant workers to stay nearby for work, thus dwindling the urban labor force even further

Source: CNBC: China's Aging Population Threatens Its Manufacturing Might

“Healthy” Inflation Rate

A “healthy” inflation rate can be determined by analyzing a number of factors including:

Consumer Price IndexProducer Price Index

Money SupplyInflation Rate

These factors should be used to arrive at an inflation rate that is stable yet allows for maximum economic growth.

“Healthy” inflation rate for China is ≤ 2%“Healthy” inflation rate for the United States is ≤3%

Inflation

Government of China can manipulate the rate of inflation by setting monetary policies

Due to the added volatility resulting from the financial crisis in the late 2000’s, the Chinese government has looked to focus largely on stabilizing the rate of inflation through its monetary policies

This chart demonstrates the slowing rate of inflationary growth in China by measuring the percent change in the CPI.

From this, and by analyzing the historical trends in GDP growth rate, we can conclude that the healthy rate of inflation is around 2%. At this rate, arbitrary redistributions of incomes and wealth will be minimized while growth and consumption will continue to expand

Sources: CIA World Fact Book,Index Mundi

Sources: Trading Economics and U.S. Federal Reserve

One of the primary goals of both the monetary and fiscal policies in China is to produce a shift away from an investment led GDP towards one driven by consumption. This is referred to as “re-balancing”.

Currently, investment spending accounts for more than 50% of economic output

These investments come largely from the state. Again, the goal is to increase domestic consumption primarily through bolstering and enhancing the service sector.

The policy makers are accomplishing this by incrementally making credit more expensive through raising interest rates, which the government has the power to do in China

In the United States, the market sets the interest rates, so this level of direct control is not feasible here

Changes in Spending

Implications of current artificially set interest rates

Because of China’s central ability to set interest rates, low rates on both savings and loans can simultaneously exist.

As a consequence, nearly 39% of GDP is spent by businesses paying interest on loans. Inevitably, businesses will seize making a profit if this policy continues for too long.

Exchange Rate

1 USD = 元 6.21 Yuan

Exchange Rate

International Trade

Current Account Balance

Exports

Imports

External Debt

Foreign Direct Investment Flows

Determining factors when considering flows of foreign trade and investments for both the United Sates and the People’s Republic

of China

China has the world largest surplus

The United States has the largest deficit

Source: IMF

Export Trade Partners

United States

Canada 18.9%

Mexico 14%

China 7.2%

Japan 4.5%

China

Hong Kong 17.4%

United States 16.7%

Japan 6.8%,

South Korea 4.1%

These figures represent a percentage of total exports for the country

Export Goods

China

Electrical and other machinery

Data processing equipment

Apparel

Radio telephone handsets

Textiles

Integrated circuits

United Statesagricultural products

(soybeans, fruit, corn)

industrial supplies (organic chemicals)

capital goods (transistors, aircraft, motor vehicle

parts, computers, telecommunications equipment)

consumer goods (automobiles, medicines)

Sources: CIA World Fact Book, U.S. Census Bureau & Index Mundi

Currency Manipulation

•A major concern with China is that its currency is intentionally kept low by the government through the stock piling of foreign reserves, so that Chinese exports can have an advantage over countries exports.

Import Trade Partners

United States

China 19%,

Canada 14.1%,

Mexico 12%,

Japan 6.4%,

Germany 4.7%

China

South Korea 9.4%

Japan 8.3%,

Taiwan 8%,

United States 7.8%,

Australia 5%,

Germany 4.8% These figures represent a percentage of total imports for the country

Import GoodsChina

electrical and other machinery,

oil and mineral fuels

machinery components

optical and medical equipment

metal ores

motor vehicles

soybeans

United States

agricultural products

industrial supplies

crude oil

capital goods (computers, telecommunications

equipment, motor vehicle parts, office machines, electric power

machinery)

consumer goods (automobiles, clothing, medicines,

furniture, toys)

Sources: CIA World Fact Book U.S. Census Bureau &

Index Mundi

Investments

Unites States

Domestic: $2.815 trillion

Abroad: $4.854 trillion

China

Domestic: $1.344 trillion

Abroad: $644.2 billion

China’s Foreign Direct Investment – Net Outflows (% of GDP)

Source: Trading Economics

China’s Foreign Direct Investment-Net Inflows (% of GDP)

Source: Trading Economics

Analysis of Foreign Trade and Investments

ChinaEstablish greater rapport and respect for other countries laws and policies especially concerning intellectual property and internal financial regulations to bolster currency’s international standingShift GDP to greater domestic consumption and greater foreign domestic investment outflows

United States Reduce external debt, increase financial regulations, reduce trade deficits via expansion of exports of energy products such as LNG

• “Healthy” GDP growth rate

“Healthy” GDP growth rate for China is 7.5%

“Healthy” GDP growth rate in the United States is 3%

• “Healthy” unemployment rate

“Healthy” unemployment rate for China is 4%

“Healthy” unemployment rate for United States is 5%

• “Healthy” inflation rate

“Healthy” inflation rate for China is ≤ 2%

“Healthy” inflation rate for the United States is ≤3%

In conclusion