Why Does China’s Economic System Have to Reform?

Why does China’s economic system have to reform?

Over the past few decades, China has transformed from a poor, central budgetary state into a prosperous economy especially with a nearly 2-digit growth rate of gross domestic product (GDP) since the beginning of 21st century. However, can China remain its economic growth sustainably with the current economic system? China, as the second largest economy in the world, unlike the other western countries, has adopted a very centralized economic system. Most of economic activities are governed or even operated by the state government and its leadership.  This significantly contributed to the economic growth in the early stage of economic liberalization in the 1970s, as it was very effective to carry out any proposals and policies with the effort of the whole state. A number of researches have found that the causes of China’s economic growth are fundamentally large-scale domestic and oversea capital investment and also rapid productivity growth.(Why is China growing so fast, Zuliu Hu, 1997) International investors perceived the idea of “cheap labor” and large amount of fund were injected into it. Meanwhile, the high saving rate of China allowed the government to invest in constructing infrastructure. A huge population and high birth rate also led to a rapid productivity growth. (Rebalancing China’s Economy: what does Growth Theory Tell us, Jahangir, Aziz, 2006) This essay will discuss the necessities to reform the economic system in China.

Firstly, the way that China run its economic model is not efficient any more. There are large internal imbalances of those components of GDP, such as savings, government spending and consumption. (China’s Economic Rise: History, Trend, Challenges, and Implications for the United States, Wayne M. Morrison, 2015) A number of economists have identified high savings and government spending and low private consumption may not be sustainable.  The proportion of savings and government spending are the largest while the proportion of private consumption to GDP is the lowest among other significant countries in the world. This fact indicates that Chinese people have not really been better off from the economic growth of China as other nationals in their states. China’s authority generally set the interest rate of commercial banks lower than the inflation rate and this actually benefits the firms with low interest rates and most of the firms in China are inefficient especially those in the important industries, which are generally monopoly such as rail network. (China’s Economy: Complacency, Crisis & the Challenge of Reform, Barry Naughton, 2014) Furthermore, market-oriented policies, both fiscal and monetary policies are less useful in altering the economy in China. Changes in interest rate and reserve requirement are less important than a direct administrative order from the authority. (China’s Political Economy, Wang Gungwu, 1998). The over controlling system has overcome the market adjusting mechanism. A typical example of this is the China’s stock exchanges. From June 2015 to July 2015, China’s main stock indexes declined more than 30%, which was a loss of $3.6 trillion in terms of capitalization. The authority decided to stop the slide and suspend all the IPO processes. All public listed companies especially those state enterprise were requested to buy back their outstanding shares and selling were strictly prohibited. Meanwhile, a large-scale of investigation was carried out, as a result, certain number of people were arrested for market manipulation and insider trading. All domestic media were required to propagandize that the foreign speculators who short Chinese stocks should be punished for the stock crisis. It roughly cost the authority $235 billion to stop the market from collapsing and re-stabilize. On the opposite, many economists believed the collapse of the stock market was an auto correction. (China’s Economic Rise: History, Trend, Challenges, and Implications for the United States, Wayne M. Morrison, 2015)