China's Economy

September 07, 2010
John B. D. Potter '11

Dr. ZhaoOn Wednesday, September 1st, Dr. Jinzhuo Zhao, a member of the Economics Department at Hampden-Sydney, gave a talk at the Wilson Center.  Professor Zhao, who teaches classes on finance and macroeconomics, discussed the history and future of the Chinese economy.  This topic is particularly timely given that China recently surpassed Japan becoming the second largest economy in the world.

Over the course of an hour, Professor Zhao elaborated on how the Chinese economy has risen to prominence in the past three decades.  Thirty years ago, China had a fledgling economy; the state controlled production and international trade was virtually nonexistent.  But in 1979, Deng Xiaoping, leader of Communist Party of China, proposed and implemented reforms that introduced free-market principles into the management of the Chinese economy.  For instance, four experimental economic zones such as Hong Kong were established, zones with capitalist policies.

Professor Zhao stressed that the success of these measures vindicated Deng's reforms.  By the mid-90s, after years of growth and successful foreign investment, China's economy was expanding and diversifying.  Indeed, China's GDP was increasing, on average, at a rate of ten percent per year.  This breakneck economic expansion was due in large part to the increased amount of capital flow, as well as increased productivity due to foreign, direct investment.   As foreign companies built factories and acquired companies in China, large sectors of the Chinese economy shifted their focus to the exportation of goods.  Moreover, China's large, cheap labor force was able to keep pace with the increasing demand for cheap exports.  By 2008, exports accounted for 1,428.9 billion dollars of the Chinese economy.  This figure was a far cry from 13.7 billion dollars worth of exports that China had in 1979.

Thanks in part to its large exports, China was able to build a trade surplus with the United States.  This surplus allowed China to increase its holdings of U.S. Securities.  In 2002, China had 188 billion dollars worth of securities; by 2009, that figure had ballooned to 1,464 billion.  Furthermore, since 2005, the Chinese have enacted reforms that appreciate their currency, the Yuan. Professor Zhao pointed out that these reforms have driven up the price of Chinese goods, and allowed the Yuan to gain ground on the dollar. One dollar was worth about eight Yuan in 1995; now, that same dollar is worth just over six Yuan.

Despite the unrivaled growth of the Chinese economy, there are numerous challenges for the Chinese to overcome.  China's economic growth has been hugely uneven, as evidenced by China's low per capita GDP of $3,200.  This figure seems trivial when compared to America's per capita GDP of $46,000.  In addition, lax rule of law and poor government regulation of the environment have lead to public unrest and immense pollution.  Nevertheless, Professor Zhao made it clear that if China is able to mitigate these problems, the Chinese economy will continue to strengthen on a global scale.

 Everything depends on how transparent the Chinese government is willing to be.  If the government allows the economy to become more open, and more like the economies of Western nations, China will more than likely prosper.  But if the government refuses to loosen its grip, the Chinese economy will no doubt suffer, but only time will tell.