Assignment (MBA 1-A) Question: 06

Subject: Accounting for Management

Topic: Without Chinese economic reform, global recovery may be doomed. China needs to boost domestic consumption rather than relying on exports or the world.

Submitted to : Mr. Gurdeepak Singh

Submitted by : Amarjeet Singh (MBA 1 A)

Introduction:

There is a lot of confusion over China’s contribution to global growth. Because China is currently the largest component of global growth—i.e. its GDP growth rate times its share of global GDP exceeds that of any other country—many analysts conclude that China is also the biggest contributor to global growth. so global recovery to some extend depend on china.

Discussion:

China had one of the world's largest and most advanced economies prior to the nineteenth century, while its wealth remained average in global terms.The economy stagnated since the 16th century and even declined in absolute terms in the nineteenth and much of the twentieth century, with a brief recovery in the 1930s. Economic reforms of a capitalist type began in 1978 and occurred in two stages. The first stage, in the late 1970s and early 1980s, involved the decollectivization of agriculture, the opening up of the country to foreign investment, and permission for entrepreneurs to start up businesses. However, most industry remained state-owned. The second stage of reform, in the late 1980s and 1990s, involved the privatization and contracting out of much state-owned industry and the lifting of price controls, protectionist policies, and regulations, although state monopolies in sectors such as banking and petroleum remained. The private sector grew remarkably, accounting for as much as 70 percent of China GDP by 2005, a figure larger in comparison to many Western nations. From 1978 to 2010, unprecedented growth occurred, with the economy increasing by 9.5% a year. China's economy became the second largest after the United States.

China had huge residential and commercial real estate bubbles, just like most of the rest of the world (housing bubbles have also collapsed in France, Spain, Ireland, the United Kingdom, Eastern Europe, and many other regions).

Moreover, everyone knows that China's economy is based on exports and that - with the current economic downturn - Americans are spending less.

You might assume that means that China's position in the world economy is threatened. In other words, you might assume that the downturn hits China's export-centered economy harder than other economies.

But as the New York Times points out, China's share of global exports has soared, out-competing Germany, Japan and everyone else, and that China's higher share might become permanent:

With the global recession making consumers and businesses more price-conscious, China is grabbing market share from its export competitors, solidifying dominance in world trade that many economists say could last long after any economic recovery.

China’s exports this year have already vaulted it past Germany to become the world’s biggest exporter...

The country’s factories are aggressively reducing prices — allowing China to gain ground in old markets and make inroads in new ones...

One reason is the ability of Chinese manufacturers to quickly slash prices by reducing wages and other costs in production zones that often rely on migrant workers...

”China has a huge advantage,” says Nicholas R. Lardy, an economist at the Peterson Institute for International Economics in Washington. “They can adjust to market changes very rapidly. They have flexibility in their labour markets. And as consumers trade down the quality ladder, China can benefit.”

Though that represented a 22 percent decrease from the first half of 2008, it compares favorably to other major exporters. German exports, for example, have fallen 34 percent over the same period. Japanese exports were down 37 percent and American exports 24 percent, according to Global Trade Information Services..

After letting its currency rise against the dollar, beginning in July 2005, China is once again pegging it closely to the dollar. As the dollar has fallen against other major currencies like the euro — about 15 percent since a year ago — Chinese imports have become more and more competitive.

Conclusion:

China is mainly focusing in export so it should also focus on domestic market China should give opportunity to other country to export its product in a international market. A decrease in China's GDP rate was also noticed in 2010, it was 10.5 and in 2011 it is 8.7. Due to low consumption of domestic product GDP falls. So, It is eager to boost domestic household consumption, but this will require a slow and difficult transformation of the country’s growth model. Over the next few years if China can rebalance its economy, and reduce its trade surplus, it will contribute real growth and employment to the rest of the world. For now, however, it is hard to argue that the global economy depends too much on China’s economic growth .so , according to me china should also boost up the domestic market to reduce over flow of product in international market.

Regards,

Amarjeet (MBA 1 A)