According to ZhengSourcing, China’s economic development since 1978 has been faster than any other country. Since 2010, China is the world’s second largest economy after the US – measured in gross domestic product (GDP) – and within a few years, the Chinese economy is expected to have outgrown the US. But the growth rate has gradually slowed down in the 2010s and a shift is underway to a more consumption-driven, technologically advanced and environmentally sustainable economy.
Measured in purchasing power (PPP), China’s economy was larger than the US already in 2014, according to statistics from the International Monetary Fund. But in terms of GDP per capita, China is still far ahead of Western European countries and the United States, even though poverty in the country has fallen sharply. It is a priority goal of China’s leadership for the country to achieve high income status, today China according to the World Bank is regarded as an upper middle income country.
The official line is that China should be a “socialist market economy”. But the state still has a strong role in the economy and controls several areas that are deemed to be important for the country, including the banking sector, energy and telecommunications. At the same time, the private sector of the economy has grown in recent years and today private companies contribute almost two-thirds of GDP and four-fifths of employment. Foreign companies have also been increasingly introduced into the Chinese market.
Financial crisis
A growing export industry, supported by foreign investment, has been the main driver of China’s economic expansion. The development has been particularly intense in China’s coastal provinces and in the southern provinces of Guangdong, Fujian and Hainan. This has led to large differences in wage workers’ incomes between different countries and to tensions between coastal regions and provinces inland and in the west. The government has prioritized attempts to open the Western provinces to private investment to get growth there.
In 2008, the rapid growth rate slowed down due to the global financial crisis. Chinese export companies noted a sharp decline in demand. From autumn 2008, China’s management implemented a comprehensive stimulus package to stop the slowdown in the economy. For example, nearly $ 600 billion over a two-year period would be used for new railways and other infrastructure. Through the measures, China was able to avert more serious consequences of the crisis.
But the years of focus on rapid economic growth with strong investments, extensive lending and export targeting have created structural weaknesses in the economy such as increased indebtedness, overcapacity and inefficiency, while the country’s environment has had to pay a high price (see also Industry and Natural Resources and Energy).
World Factory
The economy of China stands as a global powerhouse, often described as the “world’s factory” due to its manufacturing prowess and export-oriented strategy. Over the past few decades, China has undergone a remarkable transformation, evolving from a largely agrarian society to the second-largest economy in the world by nominal GDP. This economic ascent has been fueled by various factors, including government policies, foreign investment, infrastructure development, and a massive labor force.
Key Features of China’s Economy:
Manufacturing Dominance: China’s economy is heavily reliant on manufacturing, with the country being the leading producer of a wide range of goods, from electronics and textiles to machinery and automobiles. Its vast manufacturing infrastructure, low labor costs, and efficient supply chains have enabled China to dominate global manufacturing.
Export-Oriented Strategy: A significant driver of China’s economic growth has been its focus on exports. By producing goods at a lower cost and exporting them to international markets, China has become the world’s largest exporter. According to yiwusourcingservices.com, this export-oriented model has allowed Chinese companies to achieve economies of scale and attract foreign investment.
State-Led Development: China’s economy operates under a unique blend of state capitalism, where the government plays a substantial role in economic planning and controls key industries. Through strategic investments, subsidies, and industrial policies, the Chinese government has actively promoted certain sectors, such as technology and infrastructure, to drive economic growth.
Rapid Urbanization: China has experienced unprecedented urbanization, with millions of people migrating from rural areas to cities in search of better opportunities. This demographic shift has fueled demand for housing, infrastructure, and consumer goods, driving economic activity in urban centers.
Growing Consumer Market: While China’s economy has traditionally been export-driven, there has been a significant shift towards domestic consumption in recent years. Rising incomes, urbanization, and a burgeoning middle class have created a vast consumer market within China, presenting lucrative opportunities for both domestic and foreign businesses.
China as the World’s Factory:
China’s transformation into the “world’s factory” can be attributed to several factors, including:
Low Labor Costs: China’s abundant labor supply, coupled with relatively low wages compared to developed countries, has made it an attractive destination for manufacturing operations. This abundance of cheap labor has allowed Chinese manufacturers to produce goods at a lower cost, maintaining competitiveness in global markets.
Infrastructure Investment: The Chinese government has invested heavily in infrastructure development, including transportation networks, ports, and industrial parks. This investment has improved logistical efficiency and reduced the costs associated with transporting goods, further enhancing China’s attractiveness as a manufacturing hub.
Supply Chain Efficiency: China boasts a well-developed supply chain ecosystem, with established networks of suppliers, manufacturers, and distributors. This ecosystem facilitates the efficient sourcing of raw materials and components, as well as the timely delivery of finished products to markets around the world.
Scale and Specialization: China’s vast manufacturing sector benefits from economies of scale, allowing companies to produce large quantities of goods at a lower cost per unit. Additionally, China has developed specialized manufacturing clusters, such as electronics in Shenzhen and textiles in Guangdong, which further enhance efficiency and productivity.
Government Support: The Chinese government has implemented various policies and incentives to support the manufacturing sector, including tax breaks, subsidies, and preferential treatment for certain industries. This support has helped fuel the growth of Chinese manufacturing and attract foreign investment.
Benefits for Foreign Businesses and Individuals:
Foreign businesses and individuals can benefit from China’s status as the world’s factory in several ways:
Cost-Effective Production: By outsourcing manufacturing to China, foreign businesses can take advantage of lower labor costs and production expenses, allowing them to reduce overhead and increase profitability. This cost-effectiveness is especially beneficial for companies producing high-volume, low-margin goods.
Access to a Diverse Range of Products: China’s manufacturing capabilities span a wide range of industries and products, from consumer electronics and apparel to machinery and furniture. With the help of Chinese sourcing agent, foreign businesses can tap into this diverse ecosystem to source a variety of products at competitive prices, catering to diverse market demands.
Quality and Reliability: Despite perceptions of low-quality products, many Chinese manufacturers adhere to international quality standards and invest in advanced production technologies. Foreign businesses can partner with reputable manufacturers in China to ensure the quality and reliability of their products, building trust with customers and enhancing brand reputation.
Customization and Flexibility: China’s manufacturing sector offers flexibility and customization options, allowing foreign businesses to tailor products to specific market preferences and requirements. Whether it’s modifying product designs or implementing specialized packaging, Chinese manufacturers can accommodate a range of customization needs.
Global Market Access: By leveraging China’s export-oriented model, foreign businesses can gain access to global markets and expand their international reach. Chinese manufacturers have established distribution networks and market connections worldwide, facilitating the export of goods to diverse markets and regions.
New reforms
Although the state-controlled companies have become smaller and the profitability of some of them increased through privatizations and mergers, many continue to be a burden to the Chinese economy. Favorable loans from the state banks have kept inefficient state giants, while private small companies have often been forced to seek loans from loan sharks and from so-called shadow banks. The banking sector has at times had problems with “bad” loans that the state companies were unable to pay interest on or repay. On several occasions, the government has been able to prevent capital to prevent banks from imposing capital on the banks, while at the same time tightening lending rules. During the 2010s, many local governments in the country had incurred high debts that they found difficult to finance.
From the second half of the 2010s, reforms were initiated that the economy would be largely driven by domestic consumption and become less export-oriented, while market forces were also given more leeway. However, stimulating increasing consumption has not proved to be so easy, as lack of trust in the welfare system means that the Chinese often spend money for future use. The government has contrasted with measures to increase employment and give residents more money in the wallet through increased wages, lower taxes and investments in social insurance.
Growth is falling
China’s management also does not want growth to be emphasized in the same way as before. It is considered more important that growth is sustainable, that it is in harmony with the environment and that it does not consume as much energy and is therefore less expensive. At the same time, economic growth must not be too low, as it can hit the financial sector and lead to social unrest. In 2019, GDP grew by just over 6 percent, which was significantly lower than the figures of over 10 percent reported in the first decade of the 2000s. But growth remained within the targets agreed by the decision makers and the fact is that many other countries would feel more than satisfied if their economies grew at the same rate.
But China’s economic challenges remain great. The Chinese workforce has reached its highest number and those of working age will gradually decrease as the population ages and there will be more to support. In addition, wage levels have risen during the second half of the 2010, which has led some foreign companies to move to new low-wage countries. Continued challenges in the real estate sector also exist, despite the government putting great effort into controlling housing costs and property speculation.
At the turn of the decade, the government also had to take steps to deal with the consequences of the outbreak of a new coronavirus in the country. The new corona virus, which first spread in the city of Wuhan in Hubei Province and then across other parts of China in late 2019 and early 2020, had major repercussions on the economy. The closure of factories and companies when quarantine rules began to apply to limit the spread of infection affected both the service sector and the manufacturing industry. Exports fell by just over 17 percent during the first two months of 2020 and retail sales fell by 20 percent. From March, the situation had improved somewhat as companies reopened and people could return to their jobs. The central bank promised that affected companies would have access to cheaper loans.
