China’s Domestic Economy.

Chongqing Tree Economic Growth
I know this is going to sound a bit repetitive to the few who have read most of this blog, but China’s domestic growth and economic strengthening is the key to its future viability as a world economic power.

Macro-economic studies, to me, are fascinating in that while the answers to a country’s problems are not always simple, the actions that need to be taken to solve potential challenges to growth are usually quite common and should not be theoretically difficult to implement.

China has boomed since about 1993 or 1994 as a direct result of initiatives implemented by the government to attract foreign direct investment and create jobs through an economy focused on becoming the world’s manufacturer. One of the truly amazing aspects of China’s growth is the speed with which it has accomplished this goal.

All economies, from the world’s largest by population to the world’s smallest, go through stages. China cannot continually grow its GDP at 8-12% annually by simply being the world’s manufacturer. There is a point at which export-focused manufacturing will slow. Once a country is making a large percentage of the world’s mid- to lower-value goods, it will need to have other parts of its economy growing in order to have any hope of sustaining GDP growth at a pace sufficient to continue employing its workforce.

I’m not pretending to tackle all of China’s challenges in one blog. I should probably change the title of this entry to something a little more pin-pointed, like “The role of Chongqing in China’s domestic growth strategy”. I posted about a year ago that China needs to create an environment highly conducive to entrepreneurial start-ups and small businesses. I still believe this to be true. It is one of the main drivers of domestic growth in all developed countries.

Chongqing, and the rest of China, need to create two main things:

1. A stable social support network (health care, social security programs) so that its people will not hoard all of their savings for retirement at a point in their lives when their spending should be supporting the domestic economy.

2. An open economy where people with dreams of starting a small business have access to financial products so they can succeed or fail at their endeavors. This would mean modeling domestic economic policy after the most successful models out there and tailoring them to China’s specific growth needs. A great way to do this is to analyze the IMF’s annual report on ease of doing business in countries across the globe. Where is China ranked low in comparison to the rest of the world’s growing economies? How can it revise its policies so that those rankings increase? This is just one example of how China can really benefit from macro-economic policy.

In the 1980s, according to Huang, Ya Sheng (Capitalism with Chinese Characteristics), China allowed small credit cooperatives in an effort to provide financing for rural start-ups. It needs, in my opinion, to allow for this again. Either that or the big banks in China might want to start focusing a portion of their available funds on start-ups. At the same time China’s central government should direct the local governments to crack down more on intellectual property enforcement. Because of its entry into the WTO, China already has IP regulations in place. It’s part of the requirements for joining the organization. But it hasn’t been enforcing them. This puts a damper on Chinese ingenuity and new technological advancements.

There are a lot of other factors, I know, but that’s my point about macro-economics. In my opinion the answers to any country’s growth challenges, especially if it’s not currently in trouble, are fairly simple. It is the implementation of these changes that can potentially dampen fast-growing economies.

Please feel free to comment on any of my postings. I learn a lot from the feedback.

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