Topic 4: China and the World Economy

Question 1

a) Where growth is expected to come from to 2030

Answer 1

2/3rds from emerging economies, 22% from China

Question 2

b) China’s historical context

Answer 2

2000 years ago and 1820: China accounted for 33% of world output
1978: only 1%
Now: 12%

Question 3

b) China’s economic composition against UK’s

Answer 3

Much more agriculture and industry (9 vs 0.5% and 40 vs 20%)

Question 4

b) How china maintained inward orientation

Answer 4

• China’s nominal tariffs on imports averaged over 40% in 1992
• It made extensive use of non-tariff barriers (licences, quotas and state trading restrictions)
• Capital controls were pervasive

Question 5

c) 5 characteristics of China’s economy

Answer 5

• ‘Managed Capitalism’ model
• Pivotal role of State Owned Enterprises (SOEs) to deploy physical capital
• Remarkably high domestic savings ratio (50%)
  (High dependency ratio; high precautionary savings; corporate savings; financial underdevelopment)
• Abundant agricultural labour
• Managed exchange rate

Question 6

c) overall growth stats

Answer 6

Double digit growth delivered in 1990s and 2000s

Eightfold increase in GDP per capita since beginning of ‘reform and opening up’

Question 7

c) sustained growth grounded in…

Answer 7

Robust capital accumulation
Rapid increase in labour productivity
Growth in total factor productivity
Rapid growth in exports

Question 8

c) China’s imports and exports

Answer 8

• World’s largest exporter (overtook Germnay in 2010)
• World’s 2nd importer of merchandise
• World’s 4th importer of services

Question 9

c) impact of 2008 financial crisis (6)

Answer 9

- Fall in exports
(especially dramatic in 2008-09) 
- Slowdown in growth
(From 10%+ to 7%, so still growing rapidly by OECD standards)
- Impact of stimulus packages
(especially marked in 2009-10)
- Pressures for internal reform
(On labour markets, State Owned Enterprises, banking sector in particular)
- Global pressures for adjustment
(Savings and consumption balance
Revaluation of exchange rate)
- Fears of protectionism
(Direct trade barriers
Anti-dumping actions)

Question 10

d) external challenges

Answer 10

1) current account surplus
2) Accummulation of FX reserves
(distorts global economy, entails OC to Chinese economy)
3) Exchange rate misalignment
(needs to be more flexible, hinders monetary policy independence)
4) Capitals controls
(hinder competition and prevent deepening of domestic financial markets)

Question 11

d) domestic challenges

Answer 11

1) asset and real estate inflation
(have often risen above sustainable levels)
2) Fiscal sustainability 
(very loose credit standards)
3) Income inequality
(Stagnant wages in rural, urban rich)
4) social safety nets

Question 12

d) how to avoid ‘middle income trap’

Answer 12

• Curtail lending which caused debt to balloon (280% GDP), instead deploy capital more efficiently to private sector
• Promote services sector to transition to hihg value-added market
• Enforce IP laws more strignently to create more entrepreneurship