Currently, the U.S has the world’s largest economy followed by Japan, Germany and then China. Most economists now argue that China’s growth can not be ignored as it is a force to reckon with. According to Harford, (2005, p.25), China’s economy has been growing at a rate of 10% while on the contrary, the U.S economy is reeling in huge debts and deficits leaving many questions unanswered. This is the advantage that China is likely to use as it grows to the top.
Today its economy is said to be among the fastest-growing economies in the world. This has been made possible by massive industrialization and unprecedented policies that have been crafted by the communist party which is the opposite of the yesteryears when there were few incentives to spur production distribution and investment (BBC News, 2010, p.3). China has been able to grow its economy due to increased labor productivity, high savings and investment, high incentives and continuous capital inflows in the form of foreign direct investments.
Determinants of China’s economic growth
The formation of rural enterprises and private businesses have been cited as reasons for this growth but sharp and sustained productivity has been the main driving force from 1979-94. Harford, (2005, p.25) argues that productivity-led growth is better than any other growth. Overtime the country has moved to capital-led growth which is not good for the economy. According to Hu and Khan, (1997, p.4) price and ownership incentives for farmers contributed largely to growth after the “open door policy” of 1979. Deng Xiaoping made it his top priority to spur populous into productivity through incentives in agriculture.
The use of incentives was also extended to other sectors of the economy like manufacturing, trade, textile banking and other services. Special economic zones were established at the coast to attract foreign investment, boost exports and import high technology products. The economy has also been boosted by high savings and investments. Gross savings are estimated at 50% of the total GDP. All these have increased growth and labor productivity. It means that residents are financing most of the increase in capital stock.
Coy, (2010, p.14) claims that high savings and investment have been brought by foreign investors who came after the liberalization process and it has increased substantially after China started operating as a market economy. Foreign direct investments have been beneficial to China’s domestic firms, by demonstrating new technologies and providing technological assistance to local suppliers and customers. These firms have increased competition in the domestic market making domestic firms to be more efficient (Keidel, 2008, p.6). The government has in turn offered preferential policies. FDI flow has also been encouraged by large domestic markets, low wage costs, improved infrastructure and sound government policies.
Can China sustain high economic growth?
Though the country has achieved high growth because of high incentives, productivity, savings and investment rates it is being questioned if it can attain high growths. Many economists are of the view that China’s investment growth will be its undoing in the long run. It is also predicted that Chinas economy will surpass that of the U.S by 2035 but its undoing will be its market that is restricted to export (Fan, 2002, p.18). Their economy surpasses the U.S economy by standard economic development and trade theories.
Chinas demographic in the form of quantity and quality of labor are enough to sustain its economic growth. Proponents argue that their growth will be pushed by enormous investment in education, an ever expanding rural sector, decision to switch from investment driven growth to consumer driven one and underestimation of its growth. Gabberty,(2005,p.4) feels that this growth creates a series of imbalances in the economy at the macro level while it leading to poor financial performance of firms, with low efficiency of technological innovations at the micro level. Economists argue that time is running out on investment driven, export led growth that has propelled China. The country also has an underdeveloped rule of law which is characterized by lack of adequate means to enforce contracts and protect property which will affect growth. In addition to these political arrangements will make it difficult to establish economic conditions for growth. The country might also experience social instability because of the skewed ratio of males to females. Makin, (2006, p.7) adds that other problems are territorial disputes, water shortages, a faulty banking system, fuel scarcity and environment pollution. These and many other factors will lead China down the drain if not taken care of.
Chinas Export Capacity
It’s the largest exporter and a major trading partner with the U.S at 50% which has come at the latter’s expense. On the other hand the U.S has remained lethargic at 20-25%. The settlement of the skewed renminbi-dollar exchange rate is likely to save the U.S from being overtaken. Chinas export competition is driven by low costs, growing processing industry and proper policies (Mufsons, 2010, p.14).
US Exports to China
China has advanced as a large market for U.S exports. U.S services export have also grown from $3 billion to $7 billion. This explains why the two countries are important to each other as far as growth is concerned.
Relationship between China and U.S
It is argued that U.S is the most benefactor of the trade between the two countries. In addition Chinas growth requires U.S cooperation in, the environment, energy, safety, consumer, trade and financial policies. Morrison, (2006, p.8) argues that for a good relationship they need good policies based on facts and not fear.
So do we need to fear for China?
The U.S needs not to fear as they are the ones who are still molding most of China’s domestic and international practices. There is also a change in the trade deficit that should not be a course for alarm.
China has grown pretty fast because of increased productivity, incentives, high savings and investments; a high rate of foreign direct investment; increased exports of goods and services as well as sound economic policies from the leadership. On the other hand there are factors that might hinder Chinas continued growth. Its investment led growth is prone to market fluctuations. It also has to deal with social unrest that comes due to liberalization and solve territorial disputes among other things. There is no reason for the U.S to worry as most of the research favors it.
The U.S can salvage itself through sound economic policies and cut back on policies of bipartisanship. China needs to work on issues that have been raised to be hindering continued growth or it will end up not being able to enjoy that rapid growth as projected. There are also worries that China might go the Japan way.
BBC News. (2010). China Country Profile. Web.
Coy, P. (2010). The U.S. Trade Gap Won’t Go Away. Bloomberg Business Week.
Fan, E.X. (2002). Technological Spillovers from Foreign Direct Investment-A Survey. Asian Development Bank.
Gabberty, J.W. (2005). The Rising of U.S. Trade Deficit with China and why it won’t go away. International Business &Economics Research Journal. Edinburgh: European Applied Business Research Conference.
Harford, T. (2005). The Undercover Economist. New York: Random House Trade Paperbacks.
Hu, Z.F., & Khan, M.S. (1997). Why is China Growing so Fast? IMF Staff Papers 44(1): 103-133.
Keidel, A. (2008). China’s Economic Rise-Fact and Fiction. Carnegie endowment for International Peace.
Makin, J.H. (2006). Does China Save and Invest too Much? Cato Journal 26(2): 307- 315.
Morrison, W.M. (2006). China’s Economic Conditions. Congressional Research Service (CRS Report for Congress).
Mufsons, S. (2010). China Surpasses Germany as World’s Top Exporter. Washington Post.