South-Western College Publishing - Economics  
Non-breakable China
Subject Fiscal Policy
Topic Developing and Transitional Economies
Key Words International Finance, Economic Growth, Gross Domestic Product, Exports, Investment
News Story

When the Asian financial crisis spread from Thailand to Singapore to Malaysia to Korea, many economists speculated that China would next be on the list, especially considering the state of the Chinese banking system. The growth rate in China in 1999 was 7.1 percent and gross domestic product (GDP) climbed 8.1 percent in the first quarter of 2000. The increase in the country's rate of growth suggest that China's chief economic planner, Prime Minister Zhu Rongji, has managed to avoid the malady that plagued the rest of Southeast Asia.

The increase in China's GDP should not suggest that the country is not beset with economic problems. Most economic activity is concentrated in a handful of coastal cities. Other regions are suffering from a recession and it has been suggested that further declines in economic activity in the industrial northeast could lead to protests. The unemployment rate in this region is over 30 percent in some places. China has tried to improve economic conditions in this area by spending on huge public works projects. It has also increased government workers' salaries, increased vacation time and cut bank-deposit rates in an effort to encourage consumer spending. Price controls have been imposed to curb deflationary pressures. The country's national pension system is not fully funded and millions of workers fail to receive adequate retirement benefits.

Exports and foreign investment are the driving forces behind economic growth. Exports increased by 30 percent in the first quarter giving China a $5.2 billion trade surplus for the quarter. Foreign investment rose 10 percent in March 2000 compared with a year ago. The value of contracts for future foreign investment rose 27 percent in the first quarter. The growth in export revenue is expected to quiet fears that China will devalue the yuan, its national currency, to stimulate increased exports.

(Updated May 1, 2000)

Questions
1. In certain regions of China aggregate demand has fallen sufficiently to bring about a decrease in the aggregate price level. Using an aggregate demand/aggregate supply diagram, illustrate the impact of decreased aggregate demand on the country's real GDP and price level.
2. One of the measures that China undertook to avoid recession is to stimulate the economy by public spending. Using an aggregate demand/aggregate supply diagram, illustrate the impact of the increased government spending on the country's real GDP and price level. Would these measures be successful in curbing deflation?
3. Show on your diagram the impact of increased exports and foreign investment of China's real GDP and price level.
Source Craig S. Smith, "China Makes Gains in Spurring Growth," The New York Times, April 17, 2000.

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