China has become world’s second-largest economy after the United States, it has reached economic growth composing 10.4 percent annually and has helped nearly 800 million people to overcome poverty (The World Bank, 2016). However, in recent years China’s economy started slowing down due to several reasons and currently country needs reforms to boost the economic growth and solve the social challenges. Therefore, China’s government proponents a new reform called “One Belt, One Road” to deal with economic, environmental and strategic challenges. This essay will determine what are the main reasons why China’s economy is slowing and whether the measures taken by the government are effective enough to give a rise to the economic growth.
How to explain China’s slowing economy?
Barry Naughton in his research describes China’s current economy as unsustainable, supporting the strong stance of reformers (2014). According to this paper, there are four major components of “unsustainable economy”.
Firstly, the poor quality of China’s economic institutions will begin to disintegrate the rate of productivity improvement. Although investment percentages are still high, the growth rate is falling down, it actually proves the fault in the system of productivity and it is expected to increase the demand for better reforms (Naughton, 2014).
Secondly, there is no longer benefit from investment-leaded growth. Some unidentified part of the domestic investment was spent on worthless projects. China’s investment level is increasing but other large economy countries such as Japan and South Korea did not exceed their investment rates higher than 40% and it is considered that overdependence on government’s investments will continue deepening the issue of the unstable economy (Naughton, 2014).
Thirdly, the excess investment resulted in bad business projects such as China’s high-speed rail network, which is now facing problems with paying the debts, which sustains 25% of China’s GDP (Naughton, 2014).
The fourth is the manifestation of the Lewis turning point and the borderline of the demographic dividend are happening at the same time. In 2012 China’s demographic policies pushed the workforce age forward to become younger and decline. Korea and Japan’s workforces also diminished at the plateau of the growth, but these changes happened after they became wealthy (Davis, 2014). Karen Eggleston, the health policy expert, presumes that China’s demographic changes can affect the economy by decreasing the growth on a macro-level (Davis, 2014). As the result of China’s one-child policy, the population will age promptly, the percentage of never-married people will increase and the superiority of retired people will face an economic insecurity by the time of 2020 (Davis, 2014). This is causing the number of 4+2+1 families to grow and will create a low quality of life with slowing down the economic growth (Flynt and Wu, 2016).
During the Third Plenary Session, president Xi presented the new policy called “One belt, one road”, which is pointed to address economic, environmental and strategic challenges by expanding China’s influence globally. Hong Kong Trade Development Council define the “New Silk Road” as an action to modernize the consistent stream of the capital, products, and enterprises around the world, by advancing further market reconciliation and producing new ties among different communities. Connecting more than 65 countries, 60% of the world’s population, and $2.1 trillion across the Asia, Europe, and Africa, “Belt and Road” is focused on developing links from Chinese Mainland to expand and improve trade along with investment, which will result in economic growth in the“Belt and Road” area. This will surge infrastructural development, international investment and create jobs (HKTDC, 2015). However, Flynt and Wu claim that it is not only for making China’s influence on global trade stronger but “Belt and Road” is also “a channel” which helps China to resolve its economic and environmental difficulties and to weaken the influence of the United States. “Belt and Road” will breed new spheres for exporting Chinese goods and new sites for the international investment of Chinese capital (Flynt and Wu, 2016).
Along with economic deliberations, “Belt and Road” was established to cope with environmental issues. China is now constructing relationship for energy surplus with former USSR countries, which produce hydrocarbon and Chinese currency “yuan” is used in settling the payment for the oil and gas imported by China and this is the way to globalize the Chinese currency. According to the plan of “Belt and Road”, this initiative will “promote green and low-carbon infrastructure”. Chinese government acknowledges the huge influence of low air quality resulting in thousands of deaths each year. China is now emitting the largest amount of CO2 in the world, therefore China assured to lower carbon emission rates by 2030 (Flynt and Wu, 2016).
The following chapters are about analyzing how efficient is the reform based on Haggai’s research. Infrastructure investment is the key factor in accomplishing fast as well as sustainable economic growth and development. It can give a premise to the extension of the local manufacturing business and expand the market for the profit of these industries. This will fill the gap between supply and demand for infrastructure and will boost the growth in developing provinces of China such as Xinjiang, Guanxi and Yunnan (Haggai, 2016). Aschauer (1990) claims that there is a positive interrelationship between infrastructure development and economic productivity. It will increase the quality of life and lead to higher economic profit and growth not only in China but also in countries across the Belt and Road initiative. However, infrastructural investment is defined as highly risky, for the reason that it may cause the uprising of insufficient projects, which will have low marginal turnovers (Haggai, 2016).
The other main expected goal of One Belt, One Road is to create as many as possible jobs for the citizens because most of the Chinese companies and enterprises are planning to participate in this project. The initiative will ease the access to the market by lowering the transaction costs, which will give an opportunity for the entrepreneurs to hire more people thereby creating an employment and promoting the development of the economy. Moreover, “One Belt, One Road” project will reduce transaction and trade costs, thus moving competitiveness on a higher level and providing employment opportunities for the masses, this is considered as one of the effective economy stimulation activity (Haggai, 2016). Furthermore, as the business will be developed by using local currencies, it will lead to the internalization of “yuan” (Flynt and Wu, 2016).
Thirdly, countries on the “Belt and Road” will benefit from China’s advanced technological sectors as there will be a funding gap between 2010-2026 says the Asian development bank, therefore China will export the technological devices to the developing countries of the project (Haggai, 2016).
Nonetheless, there is a primary risk for the implementation of the “Belt and Road” initiative is the opposing sides of China in the West. Some researchers and politicians hold the view that China is trying to empower Russian position in countries of Central Asia and countries on the maritime route are not in good relationship with China. Therefore, Belt and Road has a risk of being presumed as China’s strategic plan to dominate other regions (Haggai, 2016).
Vanderklippe (2015) says that the main social issue of “demographic dividend” concerning China’s one-child policy was given a solution of abolishing it as it started collapsing under the pressure of economic slowdown. From 2015 Communist party allowed Chinese citizens to have two children, but experts say that this solution will work only for few years by bumping up and younging the population. After two-three years the fertility rate will remain the same because that society has changed and the environment in China became not “child-friendly”. Chinese citizens lost their freedom when one child policy enacted suggests Dr.Cai, by putting lots of boundaries around themselves, they started functioning as machines (Vanderklippe, 2015). Therefore, the Chinese government still needs to address this issue.
To conclude, Chinese economy started experiencing the economic slowdown due to four main reasons: poor economic institutions which do not produce effective systems, investment-leaded growth is no longer beneficial, the use of investments for useless projects and the population is aging. “One Belt, One Road” is an initiative presented by president Xi is effective enough to resolve the economic and environmental problems, although it may cause some misunderstanding regarding its strategic purposes. However, there is still not enough policies implied for the improvement of the demographic condition of China and this issue still needs to be addressed by the government.