Analysts expect that the huge Chinese economy will increasingly rely on state investment, high-tech growth, and domestic demand – with less contribution from its previous staple of export manufacturing – as it prepares to overtake the United States in the following decade. There are also many Chinese Nationals in World Billionaires Club.

Due to a sluggish housing industry and slowing export growth, growth is expected to slow significantly this year compared to last. However, an increase in stimulus measures should bring some relief. There are other dangers, including the government’s stern position on fresh Covid-19 cases, a worsening of the property crisis, and the Ukraine situation, which might further sever China-US ties. GDP is expected to grow 5.0 percent in 2022, according to FocusEconomics, which is down 0.1 percentage points from last month’s prediction. GDP is expected to grow by 5.2 percent in 2023, according to the panel.

How huge is the Chinese Economy

China’s GDP is expected to reach $15.92 trillion in 2020, according to market research firm IHS Markit, with export manufacturing growth and funding for new projects pushing it over $18 trillion last year. Let’s take a glance at the Chinese economy and examine its size.

Chinese Economy Data 2021

Overview of the Chinese Economy

In the previous few decades, the Chinese economy has grown at a huge rate, propelling the country to the world’s second-largest economy. China ranked ninth in the nominal gross domestic product (GDP) with USD 214 billion in 1978 when it began its economic reforms; 35 years later, it jumped to second place with a nominal GDP of USD 9.2 trillion.

China has become the world’s industrial hub since the adoption of economic reforms in 1978, with the secondary sector (which includes industry and construction) accounting for the majority of GDP. However, China’s modernization has spurred the tertiary sector to become the largest category of GDP in 2013, with a share of 46.1 percent, while the secondary sector still accounted for a sizable 45.0 percent of overall output.

China fared better than most other countries throughout the global economic downturn. The State Council announced a CNY 4.0 trillion (USD 585 billion) stimulus program in November 2008 in an attempt to protect the country from the worst consequences of the financial crisis. The enormous stimulus program drove economic development mostly through massive investment projects, raising fears that the country was creating asset bubbles, overinvestment, and excess capacity in certain industries.

China came out of the financial crisis in good health, with a GDP growth rate of more than 9%, low inflation, and a strong fiscal position. However, during the crisis, initiatives aimed at promoting economic growth aggravated the country’s macroeconomic imbalances. The stimulus program boosted investment in particular, although household spending remained low.

History of the Chinese Economy

Deng Xiaoping, the backbone of the second generation of Chinese leadership, became China’s paramount leader after Mao Zedong’s death in 1976 and pushed through sweeping reforms that altered the country’s economy. Deng declared the official commencement of the Four Modernizations—agriculture, defence, industry, and science and technology—at the Third Plenum of the 11th Central Committee of the Communist Party of China in December 1978, which marked the beginning of the reform and opening-up policies. Deng’s economic reforms expanded the role of market processes while decreasing government control of the economy.

Breaking up communal farms, opening China up to international investment, fostering business entrepreneurship, establishing Special Economic Zones, and implementing market incentives in state-owned firms were among the initiatives. Furthermore, China began to participate in the global economy in 1980, when it became a member of the International Monetary Fund (IMF) and the World Bank.

Jiang Zemin, the third generation of Chinese presidents, became the country’s new paramount leader in the early 1990s, and his administration enacted significant economic changes. Most state-owned firms, except big monopolies, were privatized or liquidated during his tenure, strengthening the importance of the private sector in the economy at the expense of millions of jobless people.

Chinese Economy in Y2K

President Jiang and Premier Zhu Rongji removed trade barriers, eliminated state planning, introduced competition, deregulation, and new taxes, overhauled and bailed out the banking sector, and drove the military out of the economy during the same period. Jiang also steered China’s membership in the World Trade Organization (WTO) in December 2001, which bolstered the country’s trade.

Jiang Zemin resigned as General Secretary of the Communist Party in 2002, kicking off the transition to the fourth generation of leadership, which includes President Hu Jintao and Premier Wen Jiabao. The Hu-Wen administration attempted to close the income gap between coastal cities and rural areas, as China’s rapid growth benefited only a small portion of the people. The enhanced subsidies eliminated agricultural taxes, halted public asset privatization, and supported social welfare.

Despite the government’s best attempts to keep the country from overheating, the economy grew at an unparalleled rate by the mid-2000s, owing to surging exports, strong private consumption, soaring manufacturing, and tremendous investment. However, the global financial crisis of 2008 compelled the Chinese government to implement an ambitious stimulus plan.

Chinese Economy After 2010

When President Xi Jinping and Premier Li Keqiang took over the country in 2012, the fifth-generation came to power. In an attempt to overhaul the country’s economic fundamentals and secure a sustainable growth model, the new Xi-Li administration launched an ambitious reform plan.

Authorities have declared their willingness to accept lower growth rates as a condition for advancing economic changes in this area. As part of the Communist Party of China’s guiding ideology, Xi coined the term “Chinese Dream.” The “Chinese dream,” albeit nebulous, emphasizes people’s pleasure and the concept of a strong China.

The Chinese dream has had its ups and downs. Economic growth has slowed, albeit it is still strong. The Chinese economy missed its 7.0 percent growth target for the year by 0.1 percentage points in 2015, the first time growth has been below target in two decades. As the country transitions from an investment-driven economic model to one that is more focused on consumer demand, investment in manufacturing and infrastructure is declining.

Balance of Payments in China

The Chinese economy has a very strong and huge external position in the economic world. Since 1994, the current account has been in excess every year. Following suit, the capital account has only had two deficits in the last 20 years. This condition of current and capital surpluses put pressure on the national currency, prompting the Central Bank to sterilize the majority of foreign cash entering the country. China’s foreign exchange reserves soared to about USD 4.0 trillion as a result in 2014. In 2007, the current account surplus was at its highest, accounting for 10.1 percent of GDP. However, as the currency has strengthened and domestic demand has surged, the surplus has reduced.

China’s capital account is heavily regulated, implying that the government is unable to convert domestic financial assets into foreign financial assets at a market-determined exchange rate and vice versa. The People’s Bank of China and the new Xi-Li administration have pledged to speed up interest rate liberalization and capital account convertibility. In this regard, the Chinese government has begun to take steps, such as lifting a restriction on foreign-currency deposit rates in Shanghai and loosening currency controls.

Strong inflows of foreign direct investment benefitted the capital account (FDI). In the recent decade, FDI has done well, with record inflows of USD 118 billion in 2013, making it the second-largest beneficiary of foreign investment. Hong Kong, Singapore, Japan, Taiwan, and the United States are among the countries that invest more in China. Furthermore, China’s outside investment has skyrocketed in recent years, and some analysts believe the country will become a net capital exporter in the coming years.

The Trade Structure of China

Since 1993, China has had uninterrupted trade surpluses. In barely three decades, total commerce increased by about 100 percent to USD 4.2 trillion, and China surpassed the United States as the world’s largest trading nation in 2013.

The government’s large investment initiatives and the country’s opening have encouraged it to become a significant manufacturing base. This created favourable conditions for trade, especially after China joined the World Trade Organization in 2001. The country has benefited from a continuous improvement in its terms of trade since 2000 as a highly connected economy in the global trading system. However, China’s manufacturing output was reduced as a result of the global economic slowdown in 2008-2009, dragging on the country’s trading industry.

Furthermore, the government has entered into several bilateral and multilateral trade agreements, opening new markets for its goods. China and Hong Kong and Macau signed the Closer Economic Partnership Agreement in 2003. In January 2010, China and the ASEAN states signed a Free Trade Agreement (FTA), creating the world’s third-largest free trade area in terms of nominal GDP.

China also concluded free trade agreements with Australia, Chile, Costa Rica, Korea, Pakistan, Peru, New Zealand, and Singapore, among others. In addition, FTAs with the Gulf Cooperation Council, Japan, Norway, and Sri Lanka is being negotiated which is a huge milestone in the Chinese economy.

China’s merchandise exports

Electronics and machinery contribute for roughly 55% of overall exports, while clothes account for 13% and construction materials and equipment account for 7%. Sales to Asia account for more than 40% of overall shipments, while exports to North America and Europe account for 24% and 23%, respectively. Although exports to Africa and South America have grown quickly, they still account for only 8% of overall shipments.

During the years 2002-2008, China’s real goods and services exports increased by 26.9% yearly, thanks to favourable global trade circumstances and the country’s admission to the World Trade Organization in December 2001.

China’s imports

China’s imports are dominated by intermediate goods and a wide range of commodities. The oil, iron ore, copper, and cereals, supply industries and support the Chinese Huge economy and its e. The rising demand for raw materials in China pushed global commodity prices higher in the run-up to 2015, boosting the coffers of many developing countries and commodity-exporting economies.

However, following the end of the commodities supercycle in late 2014, global commodity prices have plummeted, owing in part to a drop in Chinese demand. Since the end of 2015, the acceleration enjoyed by many of those same developing and commodity-exporting economies has substantially reduced.

With a combined share of roughly 30% of total imports, Asian countries dominate the supply of imports into China. Europe and the United States contribute 12 percent and 8% of total purchases, respectively. Imports from Africa, Australia, the Middle East, and South America, as significant worldwide buyers of commodities, have expanded dramatically in the recent decade, with a combined share of over 50%.

As China’s construction boom fades, demand for natural resources decreases. Base metals, energy goods, and other resources have all suffered as a result of this. As the Chinese economy adjusted to its new growth characteristics, imports fell by 14.3 percent in 2015.

The Imports of real goods and services increased at a faster rate than exports between 2002 and 2008, with an annual average increase of 24.4 percent. Imports fell in 2009 as a result of the global financial crisis, but swiftly recovered in 2010 and 2011. Imports increased by 7.2 percent in the two years 2012-2013.

Economic Policy in China

The growth of the Chinese economy has been huge in recent decades, owing to the country’s growing integration into the global economy and the government’s aggressive backing for economic activity. However, the effective economic model that has lifted hundreds of millions of people out of poverty and fuelled the country’s remarkable economic and social development has also brought with it a slew of problems.

Severe economic imbalances, escalating environmental difficulties, expanding economic inequality, and an aging population are some of the primary issues that President Xi Jinping’s new administration will have to address shortly to secure the country’s long-term viability.

China’s Tax Policy

Before 1978, China’s fiscal system was highly centralized, reflecting the country’s planned economic system. The central government was in charge of collecting all taxes and allocating all administrative and public-sector spending. The government began to decentralize the fiscal system in tandem with the changes conducted in the country for Deng Xiaoping.

In 1994, the government embarked on a dramatic fiscal reform to combat a rapid drop in the tax-to-GDP ratio, which hampered the government’s ability to implement macroeconomic and redistributive measures. The most visible aspect of the reform was the adoption of a new taxation system and the implementation of a tax-sharing scheme, in which the most lucrative sources of tax revenue, such as VAT and EIT, were shared.

As a result of the reform, revenues increased steadily, rising from 10.8% of GDP in 1994 to 22.7 percent of GDP in 2013. While spending grew at a double-digit rate throughout the same period, the fiscal deficit was kept in check. The government’s fiscal deficit averaged 1.4 percent of GDP from 1994 to 2013.

Local governments, on the other hand, were left with fewer revenue sources under the new arrangement. As a result, they had to finance their activities through land sales and indirect borrowing (mainly “shadow banking”). Furthermore, to raise capital and finance investment projects, local governments established off-budget local government financing vehicles.

Although debt levels are currently manageable, a growth in reliance on shadow banking and the quick accumulation of debt is concerning. The National People’s Congress amended the budget law in August 2014 to allow provincial governments to issue bonds directly and boost transparency, to increase revenue sources for local governments. Local governments will be able to raise debt in the bond market as a result of this change.

China’s government debt is virtually completely held by domestic entities and denominated in local currency. In addition, the government holds cash savings in the People’s Bank of China equal to 6% of GDP. This situation protects the economy from debt crises caused by the government. The national debt was 15.6 percent of GDP in 2015 which is a huge jump in the Chinese Economy.

The Monetary Policy of China

The People’s Bank of China (PBOC) formulates and implements monetary policy, prevents and resolves financial risks, and ensures financial stability under the direction of the State Council. The PBOC’s main goals are to maintain price stability in the domestic market, manage the exchange rate, and promote economic growth. The State Council sets guiding targets for GDP, the Consumer Price Index (CPI), money supply (M2), and credit growth at the start of each year. The one-year lending rate is the PBOC’s policy rate. During the National People’s Congress (NPC) in March 2016, the Central Bank promised to maintain a “prudent” monetary policy while fine-tuning policy at the proper moment.

The Central Bank controls the money supply through Open Market Operations (OMO), which include repo and reverse repo, government securities, and PBOC bills and are done in both local and international currencies. The Reserve Requirement Ratio is also used by the Bank to impact lending and liquidity. Short-term loans, short-term liquidity, and standing lending facility operations are some of the other tools the Central Bank uses to manage and regulate liquidity in the banking sector.

Bold adjustments in the interest rate and monetary policy management are on China’s senior officials’ agenda to move toward a more market-driven approach.

Exchange Rate Policy in China

China’s currency rate regime is described by the IMF as “crawl-like.” Chinese officials determine the crawling peg’s speed and direction according to domestic and international economic circumstances. The PBOC describes its policy as a managed floating exchange rate regime based on market supply and demand and a secret basket of currencies. The US dollar is expected to account for a significant portion of the basket’s value. Around an official midpoint rate, the yuan moves in an intraday trading band. The PBOC increased the trading band from +/-1 to +/-2 on March 15, 2014.

From 1995 to 2005, China’s currency was set at roughly 8.28 CNY per USD against the US dollar. This was the case until 2005 when the currency was moved to a managed float to allow for a controlled appreciation of the CNY. From June 2008 to June 2010, China, in the aftermath of the global financial crisis, pegged its currency to the US dollar at 6.82 CNY per USD. Since then, the PBOC has revalued the currency several times to bring it closer to market value.

In the current account, the Chinese yuan is freely convertible, but in the capital account, it is rigorously regulated. The Chinese government has stated that they are willing to allow the yuan to be completely convertible in the future.

To promote the yuan as a worldwide reserve currency, Chinese authorities are steadily increasing its use in other parts of the world. Even though the process is far from complete, China has already forged trade agreements with several nations and begun a series of currency swap agreements with over 20 central banks. Furthermore, China is quickly growing the yuan’s international market.

China’s Economic Rise Poses Challenges to US Policy

The Chinese huge economic growth and emergence as a significant economic power have instilled greater confidence in its economy among its leaders. Many believe that one of the most difficult challenges facing the US is persuading China that it has a stake in maintaining the international trading system, which is largely responsible for its economic rise, and that it should take a more active leadership role in maintaining that system; and that further economic and trade reforms are the most effective way for China to grow and modernize its economy. Lowering trade and investment barriers in China would improve competition, cut consumer costs, boost economic efficiency, and encourage innovation.

Many US stakeholders, however, are concerned that China’s efforts to promote indigenous innovation and technology may result in further state interference (such as subsidies, trade and investment obstacles, and discriminatory regulations), which might harm IP-intensive enterprises in the United States.