Economy in China - Mémoire

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Once all the information found, I started building a structure. This part was a very difficult one, as the quantity of information was huge, and approached many ideas. In our report, I decided to analyse the evolution of China from the industry-based economy to a consuming-based one by analysing mainly the two more important components of economy; the supply and the demand. I decided to focus on those two characteristics considering the document size allowed, even if the subject could lead to many other key points to understand China’s situation today.

III. China’s industry-based economy since 1978: An economic structural unbalanced, producer but not consumer.

Since the opening-up of the economy in 1978, the extensive pattern of China’s economic growth has generated an economic structural unbalanced, which has led to a rapid increase in growth rate, but has faced its limit with a decrease since 2010. This unequal economic structure proves that China has been a producing country, which can be explained by the producer pattern of the country, and reveals the needs of change. It can be seen at two perspectives; the production and the income one (Li Wenpu and Gong Min, 2013).

- From the production perspective

China is well known for its production capacity, as a country with a huge number of potential workers. However, with some challenges such as the growth, and the fiscal revenue maximization, the production pattern became more complex. We will focus here on two main characteristics; the extensive pattern of growth, and the undervaluing of production factors.

Since the beginning of its economy, China has been using an extensive pattern of growth. As the definition given the Dictionary of Political Economy (Xu, 1981) and resaid by Li Wenpu and Gong Min, the extensive production is “a mode of production with certain amount of means of production and labor associated with large amount of land, and simple work and managements are carried out”.

This production pattern focuses on the low wages, and the workers power rather than the technology and the advanced means of production. This extensive pattern of growth seemed to be the rational choice for China when the country opened-up, due to its large amount of population, lands, its low-cost of non-renewable resources and its shortage of capital. Using those characteristics seemed to be the best choice to reach a rapid growth. The Foreign Direct Investments in the country were also taking advantages of those characteristics, with labor-intensive, export –oriented and processing manufacturing goals (Li Wenpu and Gong Min, 2013). China used to be assimilated to the “world factory”, and the producer country with a very large labour force. Those characteristics combined with the reallocating of the workforce (from the agriculture to the manufacture) led to a national income boom. The following graph shows the economic growth in China since 1990. The Gross Domestic Product increased of 233% between 1990 and 2000.

Graph 1 : Evolution of the Gross Domestic Product in China between 1990 and 2010[pic 2][pic 3]

Source: International Monetary Fund4

We can then assume that the economic growth of China is due first of all to the country labour force, and extensive pattern of production. However, this is not the only factor for economic growth. We also have to include the value of the production factors, which means the costs of those factors. A country can have a huge workforce, but if the prices are not competitive, an economic growth is not reachable and the country won’t benefit from Foreign Direct Investment (Li Wenpu and Gong Min, 2013).

The other main characteristic of China workforce was is really cheap cost. Since the open-up of the country, a need for growth and maximization of fiscal revenue (State revenue) led the different governments to competition, with a costs fight to attract the Foreign Direct Investments. This cost battle led to an undervaluation of the production factors, especially labour ones. The graphs 2 and 3 show the average hourly compensation costs in manufacturing, comparing different countries. It appears obviously that China’s compensation costs were very far away from the other countries ones.

Graph 2: Comparison of average hourly compensation costs of manufacturing workers in different countries in 2004

Source: Bureau of Labour Statistic5[pic 4]

Graph 3 : Evolution and comparison of hourly compensation costs in manufacturing between China and U.S.

[pic 5]

Source: KKR website6

Even if the differences between China and the other countries (U.S. in this example) tend to decrease concerning the hourly compensation costs of manufacturing, China is still an interesting choice for FDI in terms of manufacturing. With its very cheap labour, and the size of the workforce, the country could be described as the industry of the world, and used this advantage to reach its growth goals. The shortage of capital and technology knowledge of the country didn’t really impact its national income as it was filled by the very intensive used of its resources (lands and workforce). The unbalanced structure between the land, workforce and the capital/technology defined the China’s comparative advantage, and explained its massive production system. However, it is important to also analyse the consumption of the country to have an overview of the national income repartition.[pic 6]

2. Uneven income distribution

Describing a country as a massive production power doesn’t mean that the country is also a consuming power, and the case of China is proving it. For a long time, the country suffered from an uneven income distribution (Li Wenpu, Gong Min, 2013). Before the 90’s, the trend was in favour of the households, with an increase of their part of national income in the GDP (Gross Domestic Product), when the fiscal revenues were decreasing. In 1994 the situation changed dramatically, with 10.4% of fiscal revenue in the country GDP compared to 20.3% in 2008. This radical change influenced the households’ part in the national income, even more as it was increasing slower than the GDP growth. At the same time, the government’s investment in public sector has been decreasing, depriving the population of good social protection. Those two characteristics combined led to a drop in the domestic consumption. The Chinese preferred

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