The ever increasing speed and strength of China’s economical transformation has no historical precedent. As the dawn of the 21st century begins to unfold, the global economic and political playing field begins to form; it has become clear that China and its economy will play a major role in affecting the development of the pan-European and American markets. The objectives of this article are to evaluate and predict the future of the Chinese economy while scrutinizing its strengths as well as its weaknesses. An assessment of the Chinese economy reveals that it is likely to experience a decline in growth in the short term future but will enjoy continued sustained economic prosperity in the long run as it, re-invents its real estate market; becomes less reliant on foreign commerce by focusing on domestic demands; altering relations with the U.S.; and addressing the issue of labour while providing sufficient job opportunities for the growing middle class.
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| China’s Economy |
In order to better understand the direction China’s economy is headed it is important to understand where it has come from. Given China’s enormously high rates of savings and investments it is evident that their recent growth was driven by productivity rather than capital investment.
China commenced its industrialization process, following the erection of the People’s Republic of China at the end of 1949, According to Xiaodong Zhu, some of the most drastic changes ever to occur, where the 1978 reforms initiated by Deng Xiaoping, these changes included: the de-collectivization of agriculture, opening the country to foreign investment, and granting permission for entrepreneurs to start up private enterprises. An example of the effects of these reforms can be seen post 1978, as China’s economic growth accelerated to over 8% compared to the previous 3%. Although the privatization of several key industries, the lifting of price controls and the de-regulation of markets helped kick start the economy, in cannot be ignored that the continued dominance of state monopolies in sectors such as banking and petroleum remain pressing issues.
Housing
One current problem that the Chinese market faces is in its volatile real estate sector. The value of residential sales fell a full 10% during the beginning of the year. The reason for this can easily be explained using the laws of supply and demand. The rapid expansion of real estate in recent years has resulted in the mass construction of private property, average housing prices surged between 2005 and 2009 (graph below). However it is important to consider that a vast majority of the population live in poverty and the gap between the richest and poorest is ever growing, recent statistics revealed that 71.6% of the population live on less the 5$ a day. Since the majority of the people cannot even fathom affording houses like the ones currently being constructed many are left un-inhabited. Without decisive intervention by the government aimed at providing job opportunities to middle class, China’s economy will face severe problems. “This is clearly the beginning of a downturn, the third in eight years, but it is not a bubble bursting,” insists Michael Spencer of Deutsche Bank.
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