Problems In Chinas Economy

Today, at the turn of the century, the People¡¯s Republic of China who has a history of over 5000 years is facing a very important choice. After the revolution of 1949,new China has devoted himself to improving his peoples¡¯ living condition, and developing the economy. Although we encountered some difficulties on the way of development, we still make a rapid progress in many fields, such as, we have already solve the problems of how to feed a forth of the world population which seems impossible and difficult to the developed countries, our country has already become an important power in the world not only politically but also economically.

After we adopted the policy of reform and opening to the world in the year of 1978, our economy grows steadily and rapidly than ever. And our economy in recent 20 years has become a wonder in the history of the world economy. However, with the undergoing reform, we now face some problems. First, after so many years fear of inflation, our economy has an inclination of deflation. Second, for the agreement with the United States on entry in World Trade Organization (W.T.O.), our State Own Enterprises (S.O.E.) face many problems. Third, we still have some troubles in our policies. In addition, the unstable political environment (such as peaceful evolution from socialism back to capitalism, the threats of imperialism and other enemy countries) force us to develop our national power as fast as we can.

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As we all know, everything has its own shortcomings, but those shortcomings are not important, the important thing is trying to solve the problems you have. This comes out a choice, to solve problems and have a better life or to keep everything going on like it is. We must take our responsibility to make a choice like the former one, for this choice will have a great effect on our country and peoples in the near future.

Now let us talk about the problems faced in front of us and try to figure out their solutions.

It is known that in recent years, while China¡¯s GNP (Gross National Product) grows fast, its economy always suffered with inflation. However, from 1996, our economy encountered the problem that never expects ¡ª deflation. This tendency of deflation actually came after the financial crisis in Asia. Our export decreased abruptly and considerably, our consumer¡¯s purchase power reduced suddenly, and the supply apparently surpassed the demand. Why does it change so quickly? Nowadays our economy is under transformation. During the transformation period, there have many changes taking place. The source of people¡¯s income has changed. First, in order to increase employees¡¯ enthusiasm for work, the portion of allowance, bonus has increased a lot. The portion in 1997 is 37.93%, compared with 2.79% in 1978. For the income of retired workers is determined by their standard wages, when the portion of standard wages decreased, the income of retired people reduced relatively. Second, compared with youth, old people should pay more for health and medical purposes, which makes income of retired people seems relatively low. The other change is retirement period, in which income is relatively lower, has been extended. This has two main causes, too. First, the average lifespan of Chinese extends for the development of public health services. It is estimated that in 2000 the average life expectancy of female and male of 60 years old now will be 85 and 83 years old respectively.¢Ù Although the retired age has not been changed, the extension of life means the extension of retirement period. Second, in order to increase economic benefits, many employees are forced to retire before the retirement age. In fact, this means the extension of retirement period, too. For the relatively reduction of retired workers¡¯ income and the extension of retirement period, more and more people incline to save their money for future use. As they think they must save much as they can to solve future problems in case they do not have enough money at that time. Furthermore, a recent survey in Shanghai shows that about 70% families¢Ú will use their savings for their own living after retirement. As we all know, working people would like to save some money during their working period in order to keep a good living after retirement. Therefore, the higher the proportion of working personnel in an economy, the more inclination people would have to save money. This proportion has increased dramatically since our reform, in 1997 it is 56.9% compared with some 40% in 1978. This increase adds another point to uprising savings deposit.

Compared with planned economy, market economy has many uncertainties. Fluctuation of economy, changes of interest rates exchange rate, unemployment rate and inflation make up risks in market economy. For China is in the period of transition, the old income distribution system is bankrupt gradually, risks of people in cities and towns improve rapidly. Personal risk is the major cause of disparity in income distribution. Now, the weakness of domestic demands, the drop in growth rate of export and the increase of laidout workers make this risk surge. According to the research of Skinner (1998) and Cabalkro (1990)¢Û, strong uncertainty will make people save money for precaution. Therefore, we can conclude that the increase in uncertainty of income is a main cause of the increasing savings deposit.

Keynes, an American Economist, established a famous psychological theory, which says consumption inclination goes down with the growth of income. And researches of Carroll and Kimball (1996) also proved this theory. According to all these researches, in China the consumption inclination of low-income people is more than high-income ones. As I state before, our country has a considerable disparity in income distribution. Although it¡¯s not as great as some capitalist countries, we must pay more concern on it for its unexpected increase. With ¡°the cake of disparity¡± becomes bigger, the consumption inclination decrease in turn. In 1985, the average consumption inclination rate of Chinese is 0.94, and that of high-income people is 0.84, this difference makes us know how Keynes¡¯ theory works. In 1977, with the increase of income to all people, the average inclination rate is 0.71. From this, we can see to what extent the change of income affects the consumption inclination.

After twenty years reform, Chinese people¡¯s living condition has been improved a lot, the saturation of residents¡¯ possession of electronic appliances shows that there will be a great change in consumption structure. Housings and mobiles will become a main part of people¡¯s consumption. But apart from unfinished lodging distribution reform, the restriction of mobility also makes people to save more money to achieve their dreams of possessing big houses and cars in near future. People with average income are affected a lot by mobility restriction. To them, it would take their whole life¡¯s effort to possess their own houses, so they must try to spend less and save more to accomplish their future¡¯s goal. Furthermore, with the reform of education system, more and more people have to save their earnings for their children¡¯s education. All these issues make people¡¯s consumption inclination reduced.

Well, we have got a lot of problems in domestic demands and deflation. Now, let¡¯s find out some solutions. As we realize, today¡¯s weakness of domesric demands hinders the growth of our economy a lot, we must figure out some efficient policies. As I think, we¡¯d better adopt the following four policies at least. In the first place, to improve the social security system, make people believe this system, in order to reduce people¡¯s investment in precautionary savings. This needs us to spread propaganda among the masses about our policy.

Second, try to finish reforms of the housing system, endowment insurance, health care, employment and education, which we call ¡°the five main reforms¡±. As to reform means reallocation, more and more people realize their uncertain life in near future. On the other hand, more thoroughly we accomplish reforms, less risk people would have in the future, and the less precautionary savings.

Third, to adopt efficient measures to reduce the growing disparity between the rich and the poor. Chinese consumption inclination goes down with the growth of their incomes, so only if we reduce the income disparity, the general consumption standard will increase expectantly. To intensify tax revenue reform, use progressive tax to help our social security reform, therefore risks of people¡¯s future income will be reduced, at the same time, the disparity of people¡¯s income will become less, too.

Last but not the least, perfect consumption credit system, raise the amount of consumption credit. As I point out ahead, the restriction of mobility registers a vital score on deflation and the weakness of domestic demands. So regulate consumption credit system will do a favor to relax this restriction and improve the consumption standard at large.

Now, let¡¯s find out other problems in our economic system. As we all know, China has already finished bilateral negotiations with many WTO (World Trade Organization) members, especially the United States of America, the largest member, on China¡¯s entry into WTO. So it is expected that we will become a WTO member later this year. But what does it affects our life, we have not thought about this question carefully although we have used all our efforts to achieve this goal.

It¡¯s a matter of fact that all things have good effects and bad ones. For good effects, first, after entry into WTO, our economy will blend with international trade system, which will make our economy more normally and systematically. Second, entry will help us to eliminate other countries¡¯ trade barriers. And it do good for to export our products and attract foreign investment. On the other hand, we will also get some serious and challenging troubles in return after the entry. Because we must lower our tariff level in almost every aspects, foreign commodities will pour into our near-saturated market, and the great challenges from foreign companies will cause some SOEs (State Owned Enterprise) near the edge of bankruptcy. Here are some necessary concessions we have to make for the entry. In agricultural industry, according to the agreement between the United States and us, by the year of 2004 we must reduce our import tariff on main agricultural products to 14.5% or 15%. Therefore, more and more foreign agricultural products will enter out market more conveniently. In telecommunication field, six years after the entry, we must open nearly 50% market shares for investment. In automobile industry, according to the agreement, by the year of 2006, the import tariff on automobiles should be reduced from today¡¯s 100% to 25%. In banking system, foreign banks will provide RMB service to domestic enterprises after two years, and same service to civilians after five years, in addition we have to get rid off restriction of regions on foreign banks.

All these are so challenging that we must make a change. To reform the old enterprise system especially the SOEs is an efficient solution. Here are some measures we¡¯d better take. First, to change attitude towards international market, and try to be harmonious with worldwide competition. Second, to adopt a creative view on competition and ¡°find out shortways to the right answers.¡± Maintain and explore market space. Third, to renovate enterprises¡¯ main products and services according to the demands of the market. Market means everything to us around clock. Forth, to establish new structures in enterprise system, use the experience of other countries for reference, and to set up huge groups in order to defend oversea multinational enterprises. Last, but not the least, to build up a complete enterprise training system, make more and more entrepreneurs understand the domestic and international markets and take it easy to compete with foreign enterprises.

Every year high-level officials from all over the world gather in Davos, Switzerland to held Global Economic Forum (GEF). And this year in early February, they met again to exchange their opinions on the growth of the world economy. This year¡¯s topic is ¡°Economic Globalization¡±. All the participants agree that economic globalization is an irreversible historical trend. If a country wants to develop its economy, it is impossible for it to exist without the effects of economic globalization. The concept of ¡°Economic Globalization¡± is a trend of integration, which happens to manufacturing, distribution, and consumption of economies around the world. While the trend goes on, there is a problem faces to us: Is China ready for the inevitable economic globalization? Now, the answer is unfortunately ¡°No!¡±

At first, in the field of foreign trade, because of our unfavorable position on international division of labor and some structural problems in our economic system, the competitiveness of export has an inclination to reduce. Because our industrial structure is in a low standard, our export commodities are mainly focused on labor-intensified products, we would be affected by two problems at least. ¢ÙChallenges from other low-cost countries. If their cost is relatively low, our products would have no advantages at all. ¢ÚAccompanied with the cyclical movement of world economy, the worldwide demands for traditional products dropped gradually. These all make us difficult to get advantage from international trade.

Second, we have two serious problems in utilizing foreign investment. One is the failure on ¡°Market to Technology¡± policy. Although we give a lot of market shares to multinational enterprises and expect to get technologies in return, we still could not get some real advanced ones. Another is the industrial structure of foreign investment is unreasonable to some extent. According to the statistics from National Statistics Bureau (NSB), the amount of foreign investment on high-tech industries is too small to make us enjoy advantages.

Finally, according to nowadays condition of China¡¯s financial market, it could not resist the impact from outside capitals (esp. international capitals). There are two reasons to prove it. First, banks are still enjoying themselves in the past planned economy, and a large amount of bad debts and low profit rate make our banks vulnerable to the market risks. Second, the entry of a huge amount of capitals will fluctuate our market dramatically or even generate a financial turmoil, because of the small capacity of our financial market. Third, our small financial market is not a flawless one, it¡¯s information canals are not so smooth as them should to be, and a little hindrance may make the entire system bankrupt.

To every lock, there must have a key. Although we now have mal-prepared for the economic globalization, we could do something to change the situation. The first we¡¯d better do is structural adjustment. It includes there aspects: ¢ÙAdjustment on product¡¯s structure. Try to make products more intellectualized through the help of information technology. Develop high-tech, high-profit and brand new products. ¢ÚAdjustment on industrial structure. The aim of the adjustment is to raise our country¡¯s strength in the international competition. To make adjustment on industrial structure helps us to achieve our aim.¢ÛAdjustment on economic structure. As a developing country, we must leap over two economic eras, develop the automobile industry as well as the information industry.

Second, to deepen reform on SOEs. In the middle 80¡¯s, SOEs had been the center of China¡¯s economic reform. Although we adopted many methods, we still could not get any expected good results. In addition, we get a lot of new troubles in return. Why? Actually, our SOEs are still affected by the dying planned economy. Some entrepreneurs transform government capitals to their own property. So we must deepen SOEs reform in two ways respectively. First one is to tighten up the management of SOEs. Second, we could unnationalize those profit-oriented SOEs, make them more competitive in the world market. All these efforts can separate the functions of government from those of enterprises and give them more right to handle their own affairs.

Third, to set up nation-wide uniform market system. Nowadays, our market is separated by some man-made factors. These factors hinder our reform seriously. Through some research, now we realize that this separation in our market is mainly caused by local governments¡¯ excessive interventions to markets and social economic activities. In order to solve this problem, we also have two things to do. One task is to change the function of our government department. With the deepening reform, government departments should act as directors of the social economic activities, but not participants. The other task is to rationalize the relationship between central and local governments. To distinct different functions of these two powers. Things concerned with state sovereignty and security are under central governments¡¯ control. Things related to common public services are business of local governments.

Last, but not the least, to develop higher education system, invest more money on cultural establishments. According to statistics, 16.36% 15 and over 15-year-old people in China is illiterate or semi-illiterate. According to the world standard, when a country¡¯s GDP (General Domestic Products) is $300, $500, and $600 per capita respectively, its average budget on education should be 3.2%, 3.5%, and 4% namely. But when our GDP came to $836 per capita, our budget on education is only 3.4%, apparently under the average level. This causes the shortness of human resources. In addition, this lack affects our efficiency on foreign investment. Meanwhile, the most important one is that the lack of human resources accumulation makes us difficult to develop our economy through technical innovation. In 1997, our investment on R&D (Research and Development) is 3.4 billion dollars, just 1.91% of the United States. It¡¯s an astonishing difference. So, if we want to have a brilliant future in road of economic globalization, focus on R&D and improve our education system are helpful solutions.

Till now, we have looked three big problems: the tendency of deflation, the problems after the entry into WTO, and the outcomes of economic globalization. In fact, we still have many other troubles to solve. I now just point some of them. First I¡¯d like to raise a new concept ¡°Reform Cost¡±, which means the cost of some twenty year¡¯s reform. After many years of reform, we can see that the living condition of our people has increased a lot, but there so many people still live in poverty. Meanwhile, there are several millionaires enjoy their life through drugs and outlaw activities. Is it a fair play? The answer is absolutely not. The rich try to evade taxes and do not like to share a little with their fellows, or even dare to invest any money to help them. Simultaneously the poor experience the torture of reform cost, such as, unemployment, laid out, extremely hard works. It¡¯s the poor and the average people take the responsibilities of reform cost, but not the rich. This makes our economy develops in a lopsided and abnormal way. We must stress more restrictions on the rich and force them to invest their money to help others development. At the same time, we also need set up perfect social security system for the poor.

Another trouble I refer to is the bureaucracy in our economic system. We could find this kind of bureaucratic taps (also called ¡°red taps¡±) everywhere. They hinder our economic growth and the entire country¡¯s development. They set up unfair competitions and make people believe they are the masters, it is impossible to develop yourself without their helps. If we want to compete in just environment, we must set up an impartial and honest government. No justice, no competition.

Because we are now setting up socialist economic system with Chinese characteristics, there have no direct and indirect experiences for us, we must practice with our own experiences, and perfect ourselves through changes and improvements. There has an old saying that ¡°Practice makes perfect.¡± With all these problems I point out ahead, it¡¯s really difficult for us to achieve a promising future. On the other hand, if we deal with these troubles properly, they will give us a kind of power, a kind of responsibility, by which we could get a happier life in near future and accomplish great national rejuvenation of our country.


IMF: World Economic Outlook. October, 1998

Baily, Martin Neil, Macroeconomics, Richard D. Irwin, Inc., Boston, M.A., 1st Edition, 1991.

NSB (National Statistics Bureau): Yearly Report (1978-1999).

Hyman, David N., Microeconomics, Richard D. Irwin, Inc., Boston, M.A., 2nd Edition, 1992.

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