Explain the causes of Chinas recent economic growth and

assess how likely China will continue to grow so quickly

Economic growth is defined as the increase in market value of the goods and services
produced by an economy over time, and over the past 30 or so years, China has
experienced unprecedented economic growth, with real GDP growing at an annual
average of 9.6%. China went from relative economic hibernation, to becoming a globaleconomic powerhouse, all in what seems a blink of an eye. But behind this vast growth
lay initial ingenious economic reforms instigated and implemented by the Great
Reformer, Deng Xiaoping as well as important economic relations with the US. But in
order to fully grasp the significance and importance of these reforms, we must first
understand contextually the economic and social conditions of a pre-Xiaoping China.
Before Xiaopings government, China was led by Mao Zedong, the dictator of a
communist state, who ran a centrally planned command economy, whereby all of the
countrys economic output was centrally directed by the state and almost all industry
and agriculture was nationalized. During the late 1950s, farms were collectivised into
large rural communes. To support the industrialization of the country, Mao implemented
his five-year economic plane, the Great Leap Forward. Maos main objective was to
create a self-sufficient state whereby rapid industrialization was supported by mass
agricultural production. As a result of this, privatized firms and foreign investment were
virtually non-existent, and foreign trade was limited to that which could not be
domestically produced in China. Under such a centrally planned economy, economic
growth was left stagnant due to the lack of personal profit incentives for farmers. This
stemmed from the concept of the communes, whereby personal agricultural output was
collectivized, with the subsequent income being redistributed back to the farmers. The
government made little to no effort to provide economic incentives for farmers, and
when they did offer to buy surplus crops, it was at such a discounted price, that it
wasnt seen as worthwhile to the farmers. This backfired, and consequently led to
subsistence farming, and therefore a distinct lack of surplus crops to re-distribute across
an already starving nation. There was a lack of competition within certain domestic
industries, which coupled with the poor living and working standards experienced by
peasants, resulted in a resentful population of peasants and farmers.
With this economic and social landscape taken into context, we can understand the
importance of Xiaopings reforms, and to an extent comprehend how they shaped
Chinas economic growth in the ensuing 30 years. Xiaoping introduced various
revolutionary agricultural and economic reforms, which substantially changed the way
China was run. The first of his major forms was an attempt to achieve economic
incentives for the farmers. He understood that the economys performance was reliant
on the productivity of the farmers, and in order for it to prosper and grow; they must be
producing efficiently and effectively without vast amount of government intervention
and regulation. He created these incentives by raising the price the government paid for
crops by nearly a quarter, and the price paid for surplus crops rose by over 40%, which
substantially increased the incentives for farmers to increase productivity and therefore
produce surpluses. Xiaoping also allowed surpluses to be sold onto the free market,
which too created further incentives for increased productivity. And as a result, GDP
grew by over 4% in the first year of this experiment. Xiaopings clear understanding of
the free market led him to understand the benefits it presented to China, and he
subsequently moved China from a command, centralized economy to a more laissaiz
faire, free market economy which allowed for crop prices to be decided by the free
market. Xiaoping also devolved economic control of various enterprises to local
governments and provinces, which allowed them to operate based upon the free market
principles he established, rather than being directly controlled and regulated by the
central state government. Along with these free market principles being implemented,
Xiaoping also decollectivized agriculture, and instead endorsed the household

responsibility system. This was a system by which farmers rented the land from the
communes, and were allowed to farm as they wished on their personal plot of land. This
allowed for innovation with different methods of farming, and with the ability to keep
the lands output (minus the lands rent), an incentive was created for farmers to raise
productivity, as their personal income would also rise alongside it. This two-sided effect
had obvious benefits for both the farmers, as well as the economic system as a whole,
which subsequently experienced increased competition and therefore increased growth
as different farmers competed against one another to sell the same crops on the free
market. This obvious benefit created by the simple switch to a market economy allowed
Xiaoping to pull millions of peasants out of poverty due to increased government
income coupled with the states ability to redistribute more surplus crops across China.
Alongside these agricultural reforms introduced by Xiaoping, he also made changes to
education. He understood that the nature of the market economy led to increased
productivity with less labour, which ultimately leads to more young people leaving the
communes in the rural regions of China, and heading towards the cities where demand
for human capital naturally increases with the growing economy. In order to foster for
the influx of young men and women moving into the cities, Xiaoping built new schools
and institutions of learning to underpin the sustained growth of the economy, as well as
re-privatizing schools after the restrictive policies of state run education implemented
by Mao. He realized that in order for the economy to achieve sustained growth, he
would have to invest in education and other welfare services, as it indirectly leads to
economic growth in the long run. The significant difference between Mao Zedong and
Deng Xiaoping, to me, was their abilities to use Chinas resources to the economys
advantage. Mao created a working environment by which a lack of incentive and
productivity caused millions of workers to be used ineffectively. I believe this to be
primarily down to his ignorance as a leader and reluctance to accept his five-year
economic plan wasnt working. This led to his fundamental misuse of the vast
population and human capital gifted to him, and resulted in the stagnant growth
experienced under his tenure. This is of stark contrast to the style of Deng Xiaopings
economic leadership, as he understood the basic nature of human beings; that when
given viable incentive whether it be economic or social we will increase our
productivity in order to achieve the benefits offered to us as a reward. And Xiaoping
used this to his advantage, by creating economic incentives based around the free
market economy, he allowed for the farmers to produce at levels that benefitted them,
which ultimately benefitted the country due to increased competition for those
incentives. Xiaoping understood the importance of the labour force, and he realized that
when applied effectively, could underpin substantial economic growth.
Xiaoping also created four economic zones on the coast that were relatively free of the
bureaucratic regulations and restrictions that had previously hampered growth. Without
these regulations, foreign businesses were enticed into investing in China, as the
market-driven capitalist policies such as tax exemptions and limited trade regulations
meant it was more financially worthwhile. This increase in foreign direct investment
(FDI) subsequently was the foundations for further economic growth within China. This
increase in FDI went hand in hand with the open-door policy, whereby before hand
China was a closed economy, Xiaoping gradually reduced trade restrictions and import
tariffs, whilst increasing local province autonomy over their production powers, which
ultimately like many of his other reforms provided more financial incentives for newly
privatized businesses to increase their productivity via a mixture of foreign investment,
unrestricted imports and exports, and cheap labour.
As well as allowed previously state controlled businesses to be privatized, Xiaoping
introduced the price system, with the objective of decentralizing the control of prices,
and handing over the autonomy to market forces. This ultimately led to incentive for
business enterprise to economize on inputs and maximize profits for outputs.

Despite some economists arguing Chinas position as an outdated country acting as a

disadvantage to them, I feel that actually, it worked in their favour. China was
effectively re-starting economic growth many years behind other countries, which acted
as an advantage to them. This is due to the fact that early stage of development and
research were skipped, and instead, China moved straight to current and effective
production methods, as these methods already existed, China just had to learn them.
This lead to sudden growth in capital and infrastructure, which coupled with mass
foreign investment, led to significant growth of over 10%.
Although these factors discussed contributed to Chinas substantial growth, they arent
directly accountable. This is because, I feel in order for them to work effectively and
efficiently, they required stable foundations to build upon. To me, China provided these
foundations in their mass population. Not only did China have a population of just under
a billion by the time Xiaoping came into power; but also these people were unmotivated
and impoverished. Due to high levels of unemployment 22% in 1977 people were
desperate for any sort of work in order to provide for their families. And due to the
relatively unregulated agricultural free market, some farming sectors were beginning to
grasp a larger market share than others, discouraging smaller businesses and therefore
enterprise. This led to further unemployment, and more willingness for any form of
occupation. The now private businesses used this to their advantage, by hiring vast
numbers of workers and treating them with extremely low wages less than $1 per hour
compared to the USAs $12 dollar average and extremely poor living and working
conditions. Although this may seem unethical, and it certainly was, it was irrelevant
when put into context. As people had no other option but to work in the factories, as
demand for jobs was so large, people often took what they could get their hands on and
simply worked with gritted teeth through it, as there were simply no other options. This
vast number of employed factory workers led to what is now known as the China price,
which was effectively Chinese businesses having the ability to charge undercut prices
compared to their western counterparts, due to their reduction in input costs into goods,
as naturally, a large underemployed workforce is willing to work at depreciated wages.
Although this led to some bitterness towards Chinese goods, other businesses simply
couldnt compete with Chinese prices, so China gradually monopolized the exports of
consumer goods, which ultimately leads to vast economic growth.
In spite of Xiaopings reforms and chinas pre-existing human capital being large factors
in their recent economic growth, I also feel their economic and diplomatic relationship
with the USA holds substantial significance. China, as put aptly by Robert Mittelstaedt, is
a huge trading partner with the USAand their economies are incredibly intertwined.
China and USA resumed trade relations in 1972, and there was a vast influx of US
investment in Mainland China, covering a wide range of manufacturing sectors. Since
then, US companies have entered agreements to establish more than 20,000 joint
equity ventures. Cumulatively, US investment in Mainland China is valued at $48 billion,
and the US has a trade deficit exceeding $350 billion. This vast investment is down to
several factors. Firstly, until recently, China had pegged its yuan to the US dollar at
around 8 yuan to the dollar. This undervaluation of the yuan against the dollar has
several effects on Chinese economic growth. It ultimately means that goods and
services are substantially cheaper to buy direct from China due to the purposefully
weakened yuan which coupled with the cheap production costs resulting from cheap
labour, means that china maintains competitiveness. This China price, as it is
described, means that China remains competitive on the world market, as it is the
primary exporter of goods to the world, which ultimately explains a component of
Chinas recent economic growth. Secondly, China buys US debt as part of their trade
agreement, in order to keep both currencies stable, and thus support growth of both
economies. Lastly, the fixed exchange rate supports domestic standard of living as well
as economic growth, as after Chinese manufacturers translate their incomes back into

yuan, there is a greater amount of profit made through the exchange rates, maintaining
competitiveness abroad as well as probability at home. Along with these obvious
benefits, the pegged yuan is protected from volatile swings in currency crisis, thus
keeping stability, as shown when China left the 2008 recession relatively unscathed.
Many economists have questioned the sustainability of Chinas economy and have
concluded that due to their reliance on foreign exports as well as their vast debt,
Chinas growth in GDP will continue to fall in the upcoming years. But I feel when
investigating Chinas economic sustainability, it is important to take into account three
factors that are the source of a set of chain reactions, that could have catastrophic
consequences. The first of these are the social problems within China. Within this broad
factor, lay problems such as a rising poverty gap, decreasing workforce and an
imminent elderly population. Chinas one-child policy means that there is a missing
generation in the workforce, and with employment growth slowing annually along with
the capital-labour ration increasing, economic growth is becoming more dependant on
productivity, rather than mass labour as before. But with the rate at which wages are
growing decreasing annually, there is an ever-increasing lack of incentive for workers to
take on employment. This seemingly incomprehensible problem - considering Chinas
vast population has several negative externalities such as lack of economic output and
therefore negative growth. The other main social problem, the poverty gap, is becoming
a serious problem too. Much of Chinas wealth is considered to be with the wealthiest
1%, meaning the rest of the population has a lack of disposable income to inject into
the economy. This, coupled with the current housing bubble, means that low to middle
income families are unable to purchase homes due to the price being heavily driven up
by the wealthy.
This leads onto the second, and perhaps more severe factor, that Chinas economy is far
too dependent on foreign exports as a means of economic growth. This is unsustainable
for various reasons, but namely that, with foreign demand decreasing annually due to
governmental austerity measures, China needs to find another way to sustain its
income. With China producing vast amounts, with little demand for those goods, this
means that those goods are either sold at depreciated prices, or they simply arent sold.
Either way, revenue decreases substantially, and those secondary-sector firms have no
means of paying their workers wages. This, along with many other things, contributed
to the decreasing wage growth. China needs to rebalance its economy, and become
more reliant on internal consumption, which is essence is a competent concept,
whereas in practice, it is inevitably going to decrease economic growth. This is due to
lack of domestic demand for goods as a result of the lack of disposable income within
the middle and lower classes, as all the wealth is concentrated with that 1%. Although
consumption has increased by 12% in the last 2 years, this is not enough to substitute
the foreign exports. This lack of demand also stems from the governments emphasis on
job creation and investment in infrastructure, which led to lack of spending in social
welfare. Ultimately, this led to the majority of the population saving for their retirement,
rather than spending in the economy, which strangles domestic demand. All this leads
to an economic bubble based on foreign exports and vast debt, which inevitably has to
burst, and the implications after this will be catastrophic.
The third and final factor stems from governmental corruption. In a nutshell, banks are
state-owned and controlled, which leads to banks paying low interest rates, and
therefore lending more liberally. As a result, banks have channelled government funds
into a number of unknown projects that may not be profitable. Bank loans make up 30%
of the economy, but nearly a third of these may be off the balance sheet loans that
were unregulated and above the governmental limits. If interest rates rise, this could
lead to these loans defaulting, and with them, the Chinese economy could experience a
crash similar to that of 2008.

Conclusively, despite Chinas recent unprecedented economic growth, without

governmental reforms it is unsustainable. Problems stemming from social, economic
and governmental issues ultimately will have serious implications on the Chinese
economy if left untouched. If the Chinese leaders dont address the issues discussed in
this essay and stimulated economic growth by creating jobs and increasing domestic
consumption, social unrest could unravel itself hand in hand with the impending
economic decline. The Chinese leaders will be all too aware of Maos Cultural
Revolution, and I feel something not too dissimilar is imminent if these issues arent
addressed and reformed. Ultimately, I believe it is not a case of will China continue to
grow, but instead, how much will it slow down, because ultimately, economic decline
is impending, its just its severity we are unsure of.

Word count = 2494

(I thought the limit was 2500, until I
was told otherwise after writing the
essay)