Chinese Macroeconomics and Policies in 2012

Executive summary

The economic condition of a country refers to an assessment of a country’s attainment of the objectives of key governmental policies. There are various reasons for policy formulations. Policy formulation in a country is aimed at improving the living standards of its citizens. It is the real living standards that governments are interested in for their citizens. Thus the real variables, used to measure the economic growth of the country, are used as the basis of policy formulation.¹ The goals of any nation’s macroeconomic conditions are:

• Full employment. This implies the number of people who can find employment at the current economic conditions. Full employment is the ideal situation.
• Price stability. This refers to the stability of prices with positive inflation that ranges 1-3%. Low prices for goods are also preferred.
• Economic growth. This refers to the growth of a country’s economy in the short run and where such growth is sustainable in the long run, even with the changing economic environments.
• Favourable international trade.
• Efficient use of factors of production in the aim of producing and selling goods at low prices.²

In the analysis of the macroeconomic performance of a country, the following indicators are used to project the direction of the country’s performance.

• The short-run and long-run gross domestic product (GDP),
• the employment or unemployment levels,³
• price stability which is a measure of the annual variation of the (CPI) consumer price index,
• the balance of trade and commodity competitiveness in the global arena,
• labour and capital productivity
• per capita income and
• Quality public service delivery.⁴

This report will delve in the analysis of the Chinese macroeconomic performance for the year 2012 and provide an overview of the country’s recommended fiscal and monetary policies. It will also analyse some of the economic concepts that the country could apply and the possible outcomes.

The most important macroeconomic concepts are output and income, inflation and unemployment.⁵ A country’s output refers to the sum total of goods produced and sold in a country. Output and income are usually equivalent. The output is calculated by adding the values of all the goods produced in the country or by aggregating all the value-added on goods and services. This gives the gross domestic product of a country. A greater value of GDP is ideal for any country; thus, governments and monetary authorities strive to formulate policies that result in increased production and consequently, economic growth.⁶ The second concept, unemployment, refers to the level of a country’s workforce who cannot, find placement in jobs at the current wage rates. Such situations occur as a result of a country not participating in projects aimed at creating a high number of jobs for a growing population. There are various forms of unemployment. A certain percentage of unemployment should always exist in any economy as unemployment and inflation have an inverse relationship. There is no point at which the government can avail enough jobs for the whole of its populace. The third concept, inflation, refers to the general rise in the prices of goods. This concept is measured using various price indexes such as the consumer price index and the producer price index. A country’s monetary policy system is responsible for the maintenance stable prices.⁷

There exist two major schools of thought that have put forward various theories the governments and monetary authorities can use to remedy the different situations that affect their economies. They are the Keynesians and the classical economists. The classical theorists say that the markets should be left to clear by themselves. The quantity theory of money, which postulates that money stock has a direct influence on the prices of goods. The Keynesians explain why people tend to hold money in difficult economic times (liquidity preference). They also explain the multiplier effect on consumption and investment. These theories are used by monetary and government agents in formulating both monetary and fiscal policies.⁸

An analysis of the macroeconomic indicators of China shows that the economy is slowing down. Industrial productions and investment on fixed assets have become the key concerns of the economy as opposed to inflation. The country’s GDP grew by 8.1%, The consumer price index for April had dropped from 3.6 in the previous month to 3.4%. The prices of food increased by 7% though the inflationary pressure is expected to decline slightly. The growth of industrial production was recorded at 9.3%, which was the country’s lowest in a period of three years. The growth in retail sales dropped to from 15.2% to 14.1% in April. The growth of electricity production was at a mere 0.7%. International trade for the country slowed down, with imports growing at a mere 0.3% while exports by 4.9% for the month of April.⁹ China’s macroeconomic indicators show of the country’s poor quarterly performance ended April. The propensity to invest has declined with the government officials encouraging its investors to invest in the international arena. Most citizens are seeking investment opportunities outside the country. Analysts have attributed this decline of economic performance to the happenings of the country’s major trade partners such as the credit crunch in the euro zone and the United States, the political elections in France. Analysts also propose that China’s persistence to maintain a contractionary monetary policy is likely to make matters worse. Only a total of $108 billion was extended in the form of loans in April as opposed to $159 billion in March.¹⁰

Some of the policies adapted by the central bank were the reduction of the minimum reserve ratio down by 50%. This was done in the intent of injecting money stock in the economy with the aim of encouraging economic growth. The liquidity that results from such an injection is intended to stimulate economic growth. The country is also expected to promote its domestic market by stimulating consumption. This is expected to stop its overdependence on the volatile international market.¹¹

To recover from this economic plunge, the country’s central government has promised to take up prudent fiscal and monetary policies that are adjustable with the changes of economic conditions. The government also promised to shield its citizens from the pain of the escalating food prices by improving macroeconomic legislations, maintenance of a balance of trade and sustainable maintenance of the inflation level.¹²

Findings

Various reasons have been put forward to explain the reasons for China’s economic downturn for the quarterly year ended April 2012. The government of China is determined to focus attention on consumption in order to stimulate the need for growth as opposed to laying too much emphasis on investment. According to citi analysts, the easing of policies to give room for growth is expected throughout the year. In monetary policy, the central bank has reduced the minimum requirement ratio by half.¹³ This is expected to increase money supply in the economy, which has the chained effect of increasing consumption and investments. For fiscal policy, the government can influence the growth path through the budget. According to the citi analysts, China has a budget deficit of up to 2.4% as opposed to the proposed 1.5%. This would give the economy a 1.1%fiscal impetus of GDP. In the property market, the government would also strive to ease property policies so as to increase the affordability of mortgages. Easing policies in the product market would have the overall effect of improving standards of the citizens. ¹⁴

Bibliography

BBVA. “China Economic Research.” (2012). Web.

Blanchard, Oliver. Macroeconomics. Englewood cliffs: Prentice hall, 2011.

Citibank. “Market outlook:when is China’s economy likely to bottom?” 2012. Wen.

Chen Jiagui and Li Yang. Economy of China analysis and forecast. New York: Social sciences academic press, 2012.

Chen Jia and Fu Jing. Chinese economy continues slowing in April. 2012. Web.

Dwivedi, David Macroeconomics: theory and policy. New Delhi: Tata McGraw-Hill, 2001.

Footnotes

1. Blanchard, Oliver. Macroeconomics. Englewood Cliffs: Prentice-Hall, 2011.
2. See Blanchard 2011.
3. Dwivedi, David Macroeconomics: theory and policy. New Delhi: Tata McGraw-Hill, 2001.
4. Dwivedi, David Macroeconomics: theory and policy. New Delhi: Tata McGraw-Hill,2001.
5. Dwivedi, David Macroeconomics: theory and policy. New Delhi: Tata McGraw-Hill, 2001.
6. Blanchard, Oliver. Macroeconomics. Englewood Cliffs: Prentice Hall, 2011.
7. Blanchard, Oliver. Macroeconomics. Englewood cliffs: Prentice hall, 2011.
8. Blanchard, Oliver. Macroeconomics. Englewood cliffs: Prentice hall, 2011.
9. Chen Jia and Fu Jing. Chinese economy continues slowing in April. 2012.
10. Chen Jiagui and Li Yang. Economy oof china analysis and forecast. New York: Social sciences academic press, 2012.
11. Chen Jiagui and Li Yang. Economy oof china analysis and forecast. New York: Social sciences academic press, 2012.
12. Chen Jiagui and Li Yang. Economy of China analysis and forecast. New York: Social sciences academic press, 2012.
13. Citibank. “Market outlook:when is china’s economy likely to bottom?”
14. Citibank. “Market outlook:when is china’s economy likely to bottom?”