China essay
The Chinese economy is one of the fastest growing economies in the world. In this regard, the competitive position of the Chinese economy depends on multiple factors, while its stable development and steady growth is very important for the enhancement of the competitive position of the Chinese economy in the global market. In this respect, the accounting balance of China and the national currency exchange rate affect consistently the economic development of China and the stability of the national financial markets and economy at large. At the moment, the Chinese economy keeps growing, in spite of negative effects of the global financial crisis which stroke in 2008. At this point, it is worth mentioning the fact that the global financial crisis has had a negative impact on the Chinese economy too but still the crisis has never stopped the growth of the economy of China. Instead, the Chinese economy still keeps growing, while the rest of the world struggles for the stabilization of their economies and accelerated recovery after the economic downturn in 2008. The positive accounting payment balance is still positive for the development of the Chinese economy and China keeps growing taking ever stronger position in the global market. the accounting payment balance allow China to maintain the surplus of export over import so far and the national currency, Chinese Yuan, responds to the economic development and payment balance of China enhancing its position along with the enhancement of the accounting payment balance of the Chinese economy.
The accounting payment balance of China mirrors the development of Chinese economy and its structure. At this point, it is worth mentioning the fact that the development of Chinese economy was characterized by the fast growth in the early 2000s, when the growth of the Chinese economy was high and China increased its export substantially. At this point, it is possible to refer to the following graph which mirrors the development of the accounting payment balance of China in 2005-2012.
China’s once huge, but declining surplus on goods dominates the current account. Services trade has been regularly in a small deficit and flows of income swing between deficit and surplus over time. All of these surpluses and deficits must have counterparts in the rest of the world. China’s surplus on goods trade means an equally sized deficit among its trading partners, particularly the US (Park, 2009).
At this point, it is worth mentioning the fact that the growth of the Chinese economy was driven by the growth of the goods’ production mainly. The increase of the goods’ production contributed to the substantial growth of the export of Chinese companies and laid the foundation to the stable economic growth of China within the last decade. At the same time, it is possible to trace certain changes in the accounting payment balance of China. To put it more precisely, the goods’ production comprised the large share in the total economic development of China but, in recent years, the production of goods has decreased its share in the total accounting balance compared to previous years.
At the same time, the share of services in the total production and in the accounting balance of China has increased by the early 2010s. Such a change was determined by the increased role of services in the contemporary economic development. In such a situation, China increased the production and export of services that compensated the decreased share of the goods’ production and export. On the other hand, it is worth mentioning the fact that the rise of the service production in China and the increase of services share in the account balance of China was the result of the abundant investments and development of high tech industries in China (Wei, 2009). China invested substantial funds into the research and development and encouraged local companies as well as foreign direct investors to develop the highly technological production. The progress of technology and the development of the highly technological production contributed to the creation of the larger share of services production in the account balance of the country.
Furthermore, another important trend is the drop of the net transfers in the current account share of China by the early 2010. In this regard, the situation was quite different in the mid-2000s, when the net transfers comprised a large share of the account balance of China ranked second largest after the goods production. Currently, the net transfers have dropped their share in the current account balance of China being outpaced by the services production. In such a way, today, services play increasingly more important part in the economic development of China, while net transfers start losing their position. On the other hand, the goods’ production still comprises the core of the Chinese economy and lays the foundation to the steady growth of China in economic terms.
Also, it is worth mentioning the income balance of China which was unstable during the last decade. Today, the income balance has become relatively stable and foreseeable. At any rate, experts (Rodrick, 2012) believe in the stable and steady growth of the Chinese economy and its accounting balance. Therefore, China has a considerable potential taking into consideration its current economic development and the steady economic growth, whereas other countries of the world suffer from the steady or steep economic decline depending on the impact of the global financial crisis of 2008 on their economies (Wu, 2013).
The following graph shows the balance of payment current account and capital and financial accounts.
The sum of the vertical bars is the total surplus of supply of foreign exchange over demand. Left to the market, that would have pushed up the renminbi, possibly 20-30% on some estimates, choking off Chinese exporters’ competitiveness and pushing down the trade balance. This is what critics abroad, notably in the US, mean by currency manipulation, implying that China has rigged the trade market in its favor by keeping its currency at an unfairly low level.
The chart shows that the current account surplus has been falling but so has the capital account surplus. The State Administration of Foreign Exchange recently revised down its estimate of the capital account deficit for the second quarter but the downward trend is still marked. If China’s trade surplus keeps shrinking, because of weak demand in rich countries suffering recession or slow growth, and capital is now flowing out of China, then the net balance could become sharply negative (Gao, 2012).
Then the central bank, the People’s Bank of China, would have to choose either to use its reserves to fill the gap, keeping the renminbi up, or to let market forces push the currency down. Slowing growth in China is likely to cut its imports, so that the trade surplus may grow again. But the days of dramatically rising foreign exchange reserves are over for the moment (Rolf, 2012).
The capital account is the sum of long term and relatively stable flows such as foreign direct investment, (FDI, foreign companies buying assets in China and building new factories), and more short term, volatile flows known as “hot money”. Although China restricts such flows it is very hard to block them completely. FDI remains strongly positive into China. It is widely suspected that the reversal in the capital account reflects the movement abroad of money by the Chinese rich, ahead of the change in government next month and the associated uncertainty. If the new regime appears stable and calm, perhaps some of this money will return. But if not, the outflow could accelerate, which will put pressure on the renminbi exchange rate. At least that would stop the Americans complaining about unfair trade (So, Lin, & Poston, 2012).
At this point, the widening gap between the accounting balance and capital and financial account balance is quite disturbing because hypothetically there is a risk of the further ungrounded growth of Chinese financial markets based on great positive expectations which are not backed up by the capital that is available or invested into the Chinese economy. The persisting disparity between the account balance and the capital and financial account balance threaten to create the bubble in the Chinese economy which was similar to the housing bubble in the housing market of the US in 2007-2008, when the US faced a severe economic crisis and the steep decline of the domestic economy comparable to the Great Depression of the 1930s.
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