The Challenges Facing Chinas Economy Today Economics Essay

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“ By following a free market economic system since the 1970s, China ‘s economic system has grown to be one of the largest in the universe today. This proves that a free market economic system is better for China comparison to a centrally planned system ” .

Critically analyze this position and explicate the challenges confronting China ‘s economic system today.


For the past 5000 old ages, China had been utilizing a centrally planned system to pull off her resources & A ; development, and remained self-sustainable by largely its domestic economic system. The Chinese authorities owns the state ‘s resources and production systems, which allows them to find what to bring forth, how and for whom. Therefore, tonss of information is required for be aftering. They have ever seek to foretell forms of consumer demand ; estimate technological possibilities & A ; production potencies and the chance cost of resources in alternate utilizations. In China, the theory of “ Big Pot Rice ” : one large resource pool to feed everyone every bit irrespective of work done, discouraged manufacturers to increase their capableness. This shortly worsen and forms the state of affairs whereby the hardworking people did non acquire much benefit, while the lazy 1s were good fed, and it consequences in slow or about zero economic system growing.

Late China political leader, Deng Xiaoping ( 1903-1997 ) one time mentioned, “ A cat, which manages to catch rats, is a good one whether it is black or white. ” Under his leading, the Third Plenum of the Eleventh ( CCPCC ) held on 18 December 1978, the minute when China decides to reform its economic system as a foundation for urban development ( Guo et al, 2005 ) . Since so, China has become one of the universe ‘s fastest-growing economic systems ( Mcmillan, 1996 ) ( Men, 2005 ) , which has lifted the Chinese out of absolute poorness and greatly improved their criterions of life.

This paved the path for China to fall in WTO, which successfully resulted in Beijing Olympics 2008 and the recent Shanghai World Expo. Foreign direct investing ( FDI ) in China totaled $ 92 billion in 2008 ( Hill, 2010, pg 235 ) , doing it the most outstanding economic mark for other developing economic systems ( McMillan, 1996 ) . This has helped do China go the universe ‘s largest holder of foreign exchange militias at $ 2.3 trillion ( Morrison, 2009 ) . Harmonizing to the World Bank ‘s estimations of buying power para ( PPP ) , China has become the 2nd largest economic system in the universe, after the United States. Despite the comparatively positive mentality for its economic system, China faces a figure of hard economic & A ; societal challenges.

Free Market Economy versus Centrally Planned Economy

Peiris ( 2008 ) provinces in her economic article that in a free market economic system the market forces of supply and demand, and the workings of the monetary value mechanism, makes effectual determinations on resource allotment. Price, which accurately demoing the costs and benefits of ingestion and production, will move as a good “ signal ” of information available to both manufacturers and consumers. The net income motivation in topographic point, is a great inducement for manufacturers, and forces them to cut down costs and be advanced.

A ‘pure ‘ capitalist free market economic system is wholly opposite to that of centrally planned economic system ( Peiris, 2008 ) . Did China ‘s current political establishments manage to suit the alteration? Obviously they did. The Chinese reforms such as the late 1950 ‘s ‘Great Leap Forward ‘ , 1966 to 1976 ‘s ‘Great Cultural Revolution ‘ defies “ predicted ” accounts. All these motions resulted in loss of many lives and serious harm to China ‘s civilization and economic system. This posts a inquiry: Why has Chinese-style reform worked during the past decennaries? ( Guo et al, 2005 )

There are besides disadvantages for China to open up for free market: political instability, market failure, monopolies: the natural end of all houses is to achieve monopoly, as this eliminates competition, extinguishing the associated costs and therefore maximising net income. Therefore, Torahs have been set up to restricting societal forces, fiscal forces to derive monopoly in the market. This system increases the opportunity for pollution and is unable to incorporate it. Sustainable growing has become a uncertainty. Make it truly assist China in this mode?

Fortunately, China, which has been through a changeless rhythm of reformation, has managed to follow a assorted economic system: an economic system consisting of both free market and centrally planned market economic systems: it removes the disadvantages of both market economic systems and maximizes the advantages. Market forces make some determinations while their cardinal authorities makes others ( Peiris, 2008 ) . Significant authorities intercession is required to get by with income redistribution jobs. The authorities will be able to forestall the production of socially unwanted goods. Russia and China experience higher growing rates during the initial phase, which would propose that as a system of forming economic activity, cardinal planning is successful in the early phases of economic development.

Challenges confronting China ‘s economic system today

Morrison ( 2009 ) emphasized that if China do non turn to its economic challenges today, it could weaken its future economic growing and stableness. These include the deficiency of jurisprudence ordinances: authorities corruptness, an inefficient banking system, uneven economic growing: over-dependence on exports, public agitation: immense income spreads and environmental issues: pollution.

The inadequacy in modulating China ‘s Law causes terrible authorities corruptness, inaccurate allotment of investing financess and fiscal guess. In many instances, the important portion to a successful concern depends on connexions with the authorities, and non market forces. As the regulations and ordinances are inconsistent or non-transparent, it was non easy for many Western companies to run in China. unprotected rational belongings ( IP ) rights ( due to the deficiency of an independent judicial system ) , and contracts are hard to implement. Competition reduces and hence economic growing slows down. As a consequence, China, remains weak with its decentralised authorities construction to pull off its economic system. As Torahs and ordinances are frequently non enforced by local authorities functionaries, many companies take the hazard of trading and exporting nutrient & A ; consumer merchandises that are non safe, in the hope of harvesting the best net income. For illustration, the universe was shocked by the intelligence study in 2008 when melamine-tainted baby milk expression killed at least four kids and caused 53,000 others to fall ill. China instantly recalled all merchandises of this milk expression. Safety of Chinese merchandises are being questioned in United States and many are acquiring concerned over the wellness issue. This reduces the credibleness of Chinese merchandises and exporting might be greatly reduced. It will take even greater attempt for Chinese trade names to be internationally recognized and developed farther.

Uneven economic growing: The Chinese authorities had relied excessively to a great extent on foreign trade and investing for economic growing. Due to that dependence, China ‘s economic system is easy affected by the universe economic downswing.

Another job of China ‘s Banking system is corruptness, as loans are frequently approved due to some connexions to the political relations. “ China ‘s province bank system is well-known for the high per centum of non-performing loans ” ( Mar, 2003 ) . This causes the economic system to be more and more inefficiency. When there are nest eggs non allocated based on acquiring the greatest possible returns, it will be hard for for many private companies to borrow from province Bankss.

Public unrest due to income disparities: The Chinese authorities acknowledged that there were more than 87,000 protests, many of which were violent, in 2005. This is a immense leap in Numberss as compared with 53,000 protests in 2003. The Chinese protested over issues such as pollution, authorities corruptness, and forced land ictuss. A figure of protests among many frustrated Chinese ( particularly provincials ) that they did non profit from China ‘s economic reforms and rapid growing, and there are perceptual experiences that those who are acquiring rich are making so because they have connexions with authorities functionaries. This is due to perceptual experiences that these actions benefitted a choice group with “ connexions ” . A 2005 United Nations study stated that the income spread between the urban and rural countries was among the highest in the universe and warned that this spread threatens societal stableness. This issue is non how to do a authorities “ income policy ” in order to contract the spread, but to take greater safeguards to better conditions for the rural hapless, and long pillow instruction, wellness attention, and the societal safety cyberspace ( Mar, 2003 ) . About 300 million people in China ( chiefly in rural countries ) lack wellness insurance, and many have to pay a important sum of medical disbursals out of their ain pocket for basic insurance.

The degree of pollution in China rises to new highs, presenting serious wellness issues to the Chinese population. China ‘s cardinal authorities found it tough to teach local authoritiess to obey and implement the environmental Torahs. They frequently ignored the ordinances in order to advance rapid economic growing. “ World Bank records show that 20 out of 30 of the universe ‘s most contaminated metropoliss are in China, doing wellness issues, harvest failures and checkerss. Harmonizing to one authorities estimation, environmental harm costs the state $ 226 billion, or 10 % of the state ‘s GDP, each twelvemonth ” ( Morrison, 2003 ) . Toxic spills in 2005 and 2006 threatened the H2O supply of 1000000s of people, the Chinese authorities estimations that there are over 300 million people populating in rural countries affected. China is the largest manufacturer and consumer of coal and 70 % of China ‘s energy usage comes from it. In October 2009, China ‘s media reported that 1000s of kids populating near smelters were diagnosed to hold inordinate sums of lead in their blood.

The Chinese authorities has indicated that it intends to make a “ harmonious society ” that would go to to the mentioned challenges and to advance a more balanced economic growing, but there is no indicant of any targeted day of the month.


This statement would be more appropriate, “ a freer market economic system is better for China comparison to a centrally planned system ” . Whenever there is a major reform in any environment, there are bound to be victors and also-rans. Although China lost certain sovereignty on her civilization & A ; political position, they gained far more in footings of in economical & A ; urban development. China adopted a Assorted Economy, which makes her turn quickly on the universe economic system. Most states in the universe besides have moved bit by bit towards such a mixture ; free markets are used to apportion resources to accomplish efficiency, while authorities planning is used where markets fail to run successfully, and to redistribute income to those who are marginalized by the market system.

In drumhead, during most of the past two decennaries, China ‘s reform has achieved two aims at the same time: ( 1 ) to better economic efficiency ; ( 2 ) and to guarantee the reform remains a win-win state of affairs and therefore involvement attuned for those in power on the other ( Qian, 2002 ) . However, it remains unknown whether China could really get the better of her economic challenges.

Appendix I: A List of the Major Reforms ( 1978-2003 )


Organizer ( s )


Outcome ( s )


Third Plenum of the 11th CCPCC

“ Decision of the CCPCC Concerning the Reform of Economic System ”

Get downing of China ‘s economic reforms


Nonproliferation center

‘Law of the People ‘s Republic of China Refering the Joint Ventures with Chinese and Foreign Investment ‘

Promotion of the FDI and international trade


CCPCC and State Council

Guangdong and Fujian states were granted with ‘special policies and flexible steps ‘ in foreign economic personal businesss.

Ibid, particularly in Guangdong and Fujian states


Peoples ‘s Congress of Guangdong state

Shenzhen following to Hong Kong, Zhuhai following to Macau, and Santou were designed as the SEZs, to experiment a market-oriented economic system.

For illustration, they have the authorization to O.K. foreign investing undertakings up to US $ 30 million, while other parts ‘ authorization remained much lower.


State Council

Get downing of the financial contract system

Transformation from ‘having repasts in one pot ‘ to ‘having repasts in different pots ‘ .


Nonproliferation center

Xiamen in Southeast Fujian state vis-a-vis Taiwan became a SEZ

Promotion of the economic tie with Taiwan


CCP and State Council

Household Responsibility System ( HRS )

Agricultural growing in rural country


State Council

“ Probationary Regulations for the Management of ‘Small-volume ‘ Border Trade ”

Promotion of inland boundary line trade of China.


CCPCC and the State Council

‘Design of 14 coastal unfastened metropoliss

Promotion of the FDI inflows into Tianjin, Shanghai, Dalian, Qinhuangdao, Yantai, Qingdao, Lianyungang, Nantong, Ningbo, Wenzhou, Fuzhou, Guangzhou, Ganjiang, and Beihai.


State Council

‘Provisional Regulations on the Enlargement of Autonomy of State-owned Industrial Enterprises ‘



“ Decision of the CCPCC Concerning the Reform of Economic Structure ”

Formal start of economic reform in urban countries and in industrial sector.


State Council

The Yangtze River, Pearl River and South Fujian were approved as coastal economic development zones

Addition of FDI and foreign trade in the related countries.


State Council

Regulations of Issues Refering the Extensive Regional Economic Cooperation

Promotion of interprovincial cooperation.


Nonproliferation center

‘Bankruptcy Law Refering the SOEs ‘

Not applied until 1994 due to frights of unemployment and societal instability


State Council

Promoting the SOEs to follow the contract system.

By the terminal of 1988, most SOEs had adopted assorted signifiers of the contract system.


State Council

Liaodong and Shandong peninsulas and Bohai Basin country were allowed to open up to the outside universe

Addition of FDI in the related countries.


Nonproliferation center

Hainan state was approved as a SEZ with even more flexible policies than other SEZs


State Council

Attempt of extremist monetary value reform

Ended with bankruptcy


CCPCC and the State Council

Shanghai ‘s Pudong country was granted to bask some of the SEZ ‘s mechanisms


Yunnan state

‘Provisional Regulations Refering the Border Trade ‘

Addition of cross-border trade in the related countries.


Tibet independent part

‘Resolutions Refering the Further Reform and Opening up to the Outside World ‘

Addition of cross-border trade in the related countries.


Inner Mongolia independent part

‘Resolution of Some Issues Refering the Extension of Open-door and Promotion of Economic Development ‘

Addition of cross-border trade in the related countries.


State Council

‘Notification Refering the Further Opening up of the Four Frontier Cities of Heihe, Shuifenhe, Hunchun and Manzhouli ‘

Addition of cross-border trade in the related countries.


Office of Custom, PRC

‘Measures Refering the Supervision and Favorable Taxation for the People-to-People Trade in Sino-Myanmar Border ‘

Addition of cross-border trade in the related countries.


Xinjiang independent part

‘Notification of Promoting the Trade and Economic Cooperation with the Neighboring and Eastern European Countries ‘

Addition of cross-border trade in the related countries.


State Commission for Restructuring the Economic Systems

‘Provisional Regulations on Joint-Stock Companies ‘


State Council

‘Notification Refering the Further Opening up of the Five Frontier Cities and Towns of Nanning, Kunming, Pingxiang, Ruili, and Hekou ‘

Addition of cross-border trade in the related countries.


Heilongjiang state

‘Some Favorable Policies and Economic Autonomy Authorized to the Frontier Cities of Heihe and Shuifenhe ‘

Addition of cross-border in the related countries.


State Council

‘Regulations on the Transformation of the Operating Mechanisms of State-owned Industrial Enterprises ‘


Third Plenum of the 14th CCPCC

Constitution of the Modern Enterprise System


Third Plenum of the 14th CCPCC

‘Decision of the CCPCC on Several Issues Refering the Constitution of a Socialistic Market Economic Structure ‘

Ideological triumph of reformers over conservativists


Peoples ‘s Bank of China

Separation of banking of commercial from policy loaning ; reduction of the figure of the cardinal bank ‘s regional braches from 30 or more to merely six.

The riddance of some of the structural inefficiencies of the fiscal system.


State Council

Introduction of ‘tax-sharing system ‘ into all states

The cardinal authorities collects wholly shared as cardinal revenue enhancements, and local authorities collects merely those designated as local revenue enhancements.


Peoples ‘s Bank of China

Constitution of a new unitary and drifting exchange-rate system

Devaluation of the RMB and publicity of export.


Fifth Plenum of the Fourteenth CCPCC

Policy of ‘grasping the big and let go ofing the little ‘

to turn a choice group of 300 out of a list of 1000 already successful big endeavors and endeavor groups into first concerns ; and to privatise or to contract out little SOEs or to allow them travel bankrupt.


The Ninth NPC

Amendment was to Article 6 of the Chinese Fundamental law: “ public, alternatively of province, ownership as the chief signifier of ownership of the agencies of production ”

Individual, private and other signifiers of non-public ownership are ‘important constituents of a socialist economic system ‘ and they ‘supplement the system of socialist public ownership ‘ .


State Council

Debt-equity barter strategy ( zhai zhuan Guam ) in four big state-owned Bankss

The bad loans to SOEs are converted into equity and so sold at a price reduction to investors.


Peoples ‘s Bank of China

Adoption of ‘real name ‘ banking system

All the family bank sedimentations require a depositor ‘s ID.


World trade organization

China ‘s entree to TWO

Increase the possibility for China to incorporate into the universe economic system


State Council

Transformation of Bank of China and China Construction Bank into joint stock ownership

Beginnings: ( 1 ) Bulletins of the State Council, People ‘s Republic of China, assorted issues ; ( 2 ) Bulletins of the National People ‘s Congress, assorted issues.


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