China’s Economy: What Exactly Is It?

Another student guest post, this one on China’s economy.  Seriously, I will get back to posting on Europe at some point…

From Arvind Subramanian’s article, “Learning from Chinese Mercantilism”

Among modern economies, few are more dynamic than China.  Even with recent news about the slowing of the manufacturing sector, three decades of a nearly 10% annual growth rate have made it the envy of many developing economies.  Much of this success owes to the state-run economy, but while the government maintains core elements of communist political control, it may be a misnomer to label their political economic system as communist, despite popular views to the contrary.  However, while their recent economic policies move further away from practices commonly associated with communism, we are left with one major question: what system is China trying to adopt?

While economic liberalism and social democracy can easily be ruled out as an option, mercantilism seems to stick. Mercantilist thinking used to dominate economic policy as countries believed the best way of ensuring a country’s prosperity was to make few imports and many exports, thereby generating a net inflow of foreign exchange and maximizing the country’s gold stocks.  In its core philosophy, mercantilist economics puts the state before individuals in the economy.

China has enacted many policies in the past decade that mirror mercantilist thinking. They have all but forced foreign companies into joint ventures with Chinese firms, transfer intellectual property, and produce in China in order to enter the market. China also has the notorious habit of providing multiple subsidies to domestic firms and manipulating their currency, which along with cheap labor and large inflows of foreign direct investment, has resulted in a large foreign exchange reserve, strengthening China’s success in the market. These policies have resulted in Chinese growth and reduced the vulnerability risk.

Chinese mercantilism has made them very unpopular with many corporations in the market, including Imax, who are tired of the continuing intellectual property theft.

Image from “China reforms boost stocks from baby formula to construction” (CNN)

However, although mercantilism seems to be where China is heading, many policies in their new reform plan that they plan to implement are policies that help the people of the country, a tactic that falls out of the realm of mercantilist economics. The reforms include welfare reformation, a relaxed one-child policy, and greater rights to farmers. Some financial reforms in this plan also include loosening controls on the price of water and natural resources and allowing privately owned companies to play a much bigger role in the economy (Ranasinghe).  This could result in the largest state-owned banks seeing a negative impact on asset quality as they face increased competition in a market-driven economy.

So is China now completely mercantilist?  It’s hard to give a definitive answer. Although many of their policies over the past decade have resembled those of a mercantilist mind-set, the implementation of the new reforms proposed this past year look to bring China more into the free market. The key is to continue to monitor China’s economic growth and consumption and see if they ever fall into a clear category.




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