Chinese Economy

Chinese Economy Overview

After introducing economic reforms in 1978 that included the transition to a socialist market economy, the Chinese economy has grown exponentially. Its gross domestic product (GDP) is growing at an average annual rate of more than 10%, and it is currently the second-largest economy in the world.²

The World Bank currently designates China as an upper-middle-income country. Rapid economic growth based on the production of raw materials, low-paid labour, and exports has enabled the country to lift more than 800 million people out of poverty.¹ It has also invested in health care, education, and other services, resulting in significant improvements in these services.

However, after three decades of exponential economic growth, China’s economic growth is now slowing, recording a decline in GDP growth from 10.61% in 2010 to 2.2% in 2020, largely due to the impact of the Covid-19 lockdown, before reaching 8.1% growth in 2021.³

The slowdown in economic growth is due to the economic imbalances, environmental problems, and social imbalances resulting from China’s economic growth model, which require transformation.

Characteristics of Chinese Economy

Manufacturing, exports, and cheap labour originally drove the growth of China’s economy, transforming the country from an agricultural economy to an industrial one. But over the years, low return on investment, an ageing workforce, and declining productivity created an imbalance in growth rate, forcing a search for new growth engines. As a result, some challenges to the Chinese economy arose, of which these three stand out:

• Creating an economy that relies more on the provision of services and consumption than on investment and industry

• Giving a greater role to markets and the private sector, thereby reducing the weight of government agencies and regulators

• Reducing the emission of greenhouse gases into the environment

In addressing these challenges, World Bank suggested structural reforms to support the transition to the growth model of the Chinese economy.⁴

These proposals are:

1. Addressing mishaps in access to credits for firms. It is believed that this could provide support to the Chinese economy’s shift towards a private sector-led growth

2. Making fiscal reforms that aim to create a more progressive tax system and further boost allocations towards health and education spending

3. The introduction of carbon pricing and power reforms to help the Chinese economy transition into a low carbon economy

4. Providing support to the services sector by opening up the industry, and removing market competition barriers.

These proposals have shifted the country’s focus to sustainable, advanced manufacturing to transition the economy to a low-carbon economy and rely on services and domestic consumption to sustain economic growth.

Chinese Economy Growth Rate

With a population of more than 1.4 billion people and a GDP of $27.3 trillion in 2020, the Chinese economy has a freedom score of 58.4, a reduction of 1.1. The Chinese economy ranks 107th freest market in the world in 2021 and 20th out of 40 countries in the Asia-Pacific region.⁵

When analysing China’s economic growth, the country’s GDP is an important factor. GDP indicates the total market value of goods and services produced in a country in a given year. The Chinese economy has the second-highest GDP in the world, surpassed only by the United States.

Manufacturing, industry, and construction are referred to as the secondary sector and are also the most important sector of the economy due to their significant contribution to the country’s GDP. The other sectors of the country are the primary and tertiary sectors.

Below is an insight into the contributions of each sector to the GDP of the economy.

Primary sector

The primary sector includes the contributions of agriculture, forestry, livestock, and fisheries. The primary sector contributed about 9% to China’s GDP in 2010⁶.

The contribution of the primary sector to the Chinese economy decreased from 9% in 2010 to 7.5% in 2020.⁷

Secondary sector

Including the contributions of manufacturing, construction, and industry, secondary sector’s contribution to China’s GDP fell from about 47% in 2010 to 38% in 2020. This change resulted from the shift in China’s economy toward a domestic consumption economy, a low return on investment, and declining productivity.⁷

Tertiary sector

Including the contributions of services, trade, transportation, real estate, hotels, and hospitality, this sector contributed about 44% of China’s GDP in 2010. As of 2020, the contribution of China’s service sector to GDP will increase to about 54%, while consumption of goods will contribute about 39% to the economy’s GDP.⁷

The recent shift toward a healthy service sector has helped the Chinese economy improve domestic consumption and increase per capita income.

The export of goods is another major contributor to the growth of the Chinese economy. In 2020, the Chinese economy recorded a record $2.6 trillion in exported goods, taking in more than a trillion more than the second-ranked the United States, despite constraints due to the Covid-19 pandemic.⁸ This represents 17.65% of China’s GDP, so the economy is considered relatively open.⁸

Figure 1 below shows the annual GDP growth rate of the Chinese economy from 2011 to 2021.⁵

Figure 1. Annual GDP growth from 2011 - 2021 of the Chinese economy, StudySmarter Originals.Source: Statista, www.statista.com

The decline in the GDP of the Chinese economy in 2020 was mainly due to trade restrictions and lockdowns resulting from the outbreak of the Covid-19 pandemic, with the industrial and hospitality sectors being the most affected. The Chinese economy saw a significant improvement in its GDP in 2021 after easing the Covid-19 trade restrictions.

The industrial sector contributed the most to the Chinese economy, with a contribution of nearly 32.6 % to its GDP in 2021. The Chinese economy table below shows each industry's contributions to China’s GDP in 2021.

Table 1: contributions to the Chinese GDP in 2021 by industry,

Source: Statista¹³

Chinese Economy Forecast

A World Bank report expects the Chinese economic growth to slow to 5.1% in 2022, down from 8.1% in 2021, due to Omicron-variant restrictions, which could affect economic activity and a sharp downturn in China’s real estate sector.¹⁰

In summary, thanks to radical reforms initiated more than three decades ago, the Chinese economy is the second largest globally, with GDP growing at an average annual rate of more than 10%. However, despite the exponential growth that the Chinese economy has experienced due to its economic model, economic growth is slowing due to economic imbalances, environmental issues, and social imbalances.

China is restructuring its economic model to sustain its economic growth. The country is shifting its economic focus to sustainable, advanced manufacturing to facilitate the transition to a low-carbon economy and relying on services and domestic consumption to sustain its economic growth.

References:

1. China economic overview - Worldbank, https://www.worldbank.org/en/country/china/overview#1

2. China’s Economy, Asia Link Business, https://asialinkbusiness.com.au/china/getting-started-in-china/chinas-economy?doNothing=1

3. C. Textor, Growth rate of real gross domestic product (GDP) in China from 2011 to 2021 with forecasts until 2026, Statista, 2022

4. China economic overview - Worldbank, https://www.worldbank.org/en/country/china/overview#1

5. The Heritage Foundation, 2022 Index of Economic Freedom, China, https://www.heritage.org/index/country/china

6. China Economic Outlook, Focus Economics, 2022, https://www.focus-economics.com/countries/china

7. Sean Ross, The Three Industries driving China’s Economy, 2022

8. Yihan Ma, Export trade in China - Statistics & Facts, Statista, 2021.

9. C. Textor, GDP composition in China 2021, by industry, 2022, Statista

10. China Economic Update – December 2021, Worldbank, https://www.worldbank.org/en/country/china/publication/china-economic-update-december-2021

11. He Laura, China’s economic growth will slow sharply in 2022, World Bank says, CNN, 2021

12. Moiseeva, E.N., Characteristics of Chinese economy in 2000–2016: economic growth sustainability, RUDN Journal of World History, 2018, Vol. 10, No 4, p. 393–402.