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A PROJECT REPORT IN MACROECONOMICS & BUSINESS ENVIRONMENT ON TRENDS IN GDP & GNP IN CHINA DURING THE PAST 30 YEARS

Submitted by: 1. Neethu U (seat no: 01)

Guided by: Prof. Poulomi Bhattacharya SECTION C (2012-14 SEM II) MBA IBS HYDERABAD
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ACKNOWLEDGEMENT

I would like to take this opportunity to thank all those who helped me directly or indirectly during the completion of this interim report. My heartfelt gratitude to my project guide Prof. Poulomi Bhattacharya, Professor Department of Economics. Her support, advice and encouragement were very vital for this project. Last but not the least I thank my family and friends who gave me direction and moral support towards completion of this project.

Yours Sincerely, Neethu U

1.0) INTRODUCTION ECONOMY OF PEOPLES REPUBLIC OF CHINA-OVERVIEW The People's Republic of China (PRC) is the world's second largest economy by nominal GDP and by purchasing power parity after the United States. It is the world's fastest-growing major economy, with growth rates averaging 10% over the past 30 years. China is also the largest exporter and second largest importer of goods in the world. On a per capita income basis, China ranked 90th by nominal GDP and 91st by GDP (PPP) in 2011, according to the International Monetary Fund (IMF). The provinces in the coastal regions of China tend to be more industrialized, while regions in the hinterland are less developed. As China's economic importance has grown, so has attention to the structure and health of the economy. As the Chinese economy is internationalized, so does the standardized economic forecast officially launched in China by Purchasing Managers Index in 2005. Most economic growth of China is created from Special Economic Zones of the People's Republic of China. The construction of the road system of BeijingShanghai Expressway was completed and opened to public usage in early 2000 for access of transportation on logistics, travel and tourism around the most populous and densely economic active areas of Chinese Mainland. 2.0) OBJECTIVE Trends in GDP and GNP in China during the past 30 years: an Empirical Analysis GROSS DOMESTIC PRODUCT Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time. GDP per capita is often considered an indicator of a country's standard of living; GDP per capita is not a measure of personal income. Under economic theory, GDP per capita exactly equals the gross domestic income (GDI) per capita. GDP is related to national accounts. GROSS NATIONAL PRODUCT Gross national product (GNP) is the market value of all products and services produced in one year by labour and property supplied by the residents of a country. Unlike Gross Domestic Product (GDP), which defines production based on the geographical location of production, GNP allocates production based on ownership. GNP does not distinguish between qualitative improvements in the state of the technical arts (e.g., increasing computer processing speeds), and quantitative increases in goods (e.g., number of computers produced), and considers both to be forms of "economic growth". GNP is the total value of all final goods and services produced within a nation in a particular year, plus income earned by its citizens (including income of those located abroad), minus income of non-residents located in that country. GNP measures the value of goods and services that the country's citizens produced regardless of their location. GNP is one measure of the economic condition of a country, under the assumption that a higher GNP leads to a higher quality of living, all other things being equal.

CHINAS LOCAL ECONOMY Market liberalization in the Chinese economy has brought its economy forward by leaps and bounds - but rural China remains poor, even as its cities increase in affluence. In 2010, Chinas GDP growth was 10.456 percent, totalling US$ 5,745.13 billion, and is expected to increase 11.79 percent in 2011 to US$ 6,422.28 Billion. Forecasts for 2015 predict Chinas GDP to reach US$ 9,982.08 billion, growing 10-12 percent per year between 2010 and 2015. China's economy is huge and expanding rapidly. In the last 30 years, the rate of Chinese economic growth has been almost miraculous, averaging 8 percent growth in Gross Domestic Product (GDP) per annum. The economy has grown more than 10 times during that period, with Chinese GDP reaching 3.42 trillion US dollars in 2007. China already has the biggest economy after the United States and most analysts predict China will become the largest economy in the world this century. Chinas population in 2010 was 1.341 billion, and its expected to grow to 1.375 billion in 2015. In 2010, Chinas unemployment rate stood at only 4.1 percent, decreasing 4.65 percent from the previous year and expected to decrease further to 4 percent in 2011. Forecasts for 2015 predict Chinas unemployment rate to remain at 4 percent between 2011 to 2015.However, there are still inequalities in the income of the Chinese people. The per capita income of China is only about 2,000 US dollars, which is fairly poor against global standards. Economic reforms started in China in the 70s and 80s with the initial focus on collectivizing agricultural activities in the country. The leaders of the Chinese economy, at that point in time, were trying to change the center of agriculture from farming to household activities. The reforms also extended to the liberalization of prices, in a gradual manner. The process of fiscal decentralization soon followed. As part of the reforms, more independence was granted to business enterprises that were owned by the state government. This meant government officials at local levels and managers of various plants had more authority than before. This led to the creation of a number of various types of privately held enterprises within the services sector, as well as the light manufacturing sectors. The banking system was also diversified, and Chinese stock markets started to develop and grow as economic reforms in China took hold. China grew at a rapid pace as a result of these reforms and opened its economy to the world for trade and direct foreign investment. China has adopted a slow but steady method in implementing economic reforms. It has also sold the equity of some of its major Chinese state banks to overseas companies and bond markets. In recent years, China's role in international trade has also increased. CHINAS GLOBAL ECONOMY The Chinese economy, in a state of autarky since the days of Mao Zedong experienced some radical transformations after Deng Xiaoping took over in 1978. From being an excessively centrally planned economy it matured to a more open economy from his time and is now the
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growth engine for the world economy for the past ten years. Driven by rapid economic growth and rising incomes, the standard of living has risen and consumer goods such as cars and television sets which were once reserved for the elite are now within the grasp of the common man. Between 1978 and 2002, the amount of goods passing through Chinese ports had increased tenfold and the number of foreign visitors to the country had crossed over a million. China, the fourth largest country in terms of size after Russia, Canada and the USA is now the worlds second largest economy after the USA if adjusted for differences in cost of living (purchasing power parity differences) although it is only about 10% of the US economy in dollar terms. Tremendous comparative advantage in terms of cheap labour and low production costs has given Chinese goods an edge over others in the world markets. Data for the past three years reveal that the country has been maintaining a high growth rate in the GDP of around 8% to 10% annually. The upward trend in the countrys GDP, GNI as well as the per capita GDP reaching a high of around $1700 in 2005 has been continually maintained throughout the year 2006. Increase in merchandise trade showed the tremendous growth in the countrys exports in the recent years. China has also been successful in stabilizing inflation rates after it reached a high of around 7% in 2004. The rise in Chinese workers remittances from abroad gas also contributed to a growth in the countrys GNI. One of the defining features for the Chinese economy came on the 11th of December, 2001 when it became a member of the World Trade Organization or WTO. The Chinese accession to the WTO meant that Chinese economy opened up more to the rest of the world and its trade with Japan and the ASEAN nations (Association of South-East Asian Nations) increased rapidly. China drastically reduced its tariff rates from 16.7% in 2001 to 12% in 2002 and significant steps for reducing the number of items on its import license or quota which was 300 in 2002 are presently underway. Notably, Indias exports to China quadrupled from less than 1% in 1995 to more 4.5% in 2003. With more free movement of goods and services in the area, Chinas neighbours were exposed to a much larger market which had a substantial effect on the reduction of production costs. This also resulted in greater flow of foreign investment to China. China had attracted Foreign Direct Investment (FDI) to the tune of US $ 44 billion in 2001 and the corresponding figure for 2002 rose to $52.7 billion. As a measure of its sheer growth in the global economic Diaspora, the contribution of China as a part of the global economy has increased from 11% in 2000 to over13% in 2004 which in turn, dwarfs the share of the economies of Japan, France and the UK. The share of the country in world trade has grown even more rapidly. Chinas share of world exports was at around 6% in 2003 from the level of 4% in 2000 with the corresponding figure for imports rising from 3.6% to 5.7% between 2000 and 2003. The Chinese economy is currently facing one peculiar problem in the decline of its employable workforce in the recent years. With the government able to keep its population growth at 0.6% successfully adopting the 'One Child Plan', the government fears that old age pensions and other benefits will put a severe strain on the countrys growing national output. One of the other emerging problems for the Chinese economy is its continuing reliance towards a largely fixed
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exchange rate system. This certainly makes counter-inflationary monetary policies less flexible. So this issue with the possible restructuring and reform of the banking system could make the Chinese economy even stronger. But growth with inequality and questions whether the Chinese economy will be able to sustain this rapid growth seem to be unceasing. With the booming development of the coastal cities coexisting with the hard, poor life still prevalent in the rural areas, the trickledown effect of globalization has been negligible. Between 1988 and 1995, China experienced the highest ever growths in income inequality ever monitored by the World Bank. Per capita urban incomes were 2.2 times higher than in rural households in 1990 which increased to 2.6 in 1999 and further to 2.8 in 2000. This has mainly been ascribed to rural unemployed not being able to find jobs owing to their lack of technical skills and education. With illiteracy falling in the second half of the 1990s, the growth of 'human capital' is set to increase. In the event of a general slowdown of the US economy with a sluggish growth in the Asian powerhouse Japan too, it remains to be seen whether the Chinese economic boom will burst like a bubble in the long run. With the Chinese Stocks facing bullish growth in the event of relative socio-economic stability in the Chinese economy, China is sure to become the investors choice in the next decade. 3.0) OBSERVATIONS There are various factors which affects the GDP and GNP of china. MACROECONOMIC TRENDS OF CHINA In January 1985, the State Council of China approved to establish a SNA (System of National Accounting), use the gross domestic product (GDP) to measure the national economy. China started the study of theoretical foundation, guiding, and accounting model etc., for establishing a new system of national economic accounting. SYSTEMATIC PROBLEMS The government has in recent years struggled to contain the social strife and environmental damage related to the economy's rapid transformation; collect public receipts due from provinces, businesses, and individuals; reduce corruption and other economic crimes; sustain adequate job growth for tens of millions of workers laid off from state-owned enterprises, migrants, and new entrants to the work force; and keep afloat the large state-owned enterprises, most of which had not participated in the vigorous expansion of the economy and many of which had been losing the ability to pay full wages and pensions. From 50 to 100 million surplus rural workers were adrift between the villages and the cities, many subsisting through part-time lowpaying jobs. Popular resistance, changes in central policy and loss of authority by rural cadres have weakened China's population control program. Another long-term threat to continued rapid economic growth has been the deterioration in the environment, notably air and water pollution, soil erosion, growing desertification and the steady fall of the water table especially in
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the north. China also has continued to lose arable land because of erosion and infrastructure development. Other major problems concern the labour force and the pricing system. There is largescale underemployment in both urban and rural areas, and the fear of the disruptive effects of major, explicit unemployment is strong. The prices of certain key commodities, especially of industrial raw materials and major industrial products, are determined by the state. In most cases, basic price ratios were set in the 1950s and are often irrational in terms of current production capabilities and demands. Over the years, large subsidies were built into the price structure, and these subsidies grew substantially in the late 1970s and 1980s. By the early 1990s these subsidies began to be eliminated, in large part due to China's admission into the World Trade Organization (WTO) in 2001, which carried with it requirements for further economic liberalization and deregulation. By 2010, rapidly rising wages and a general increase in the standard of living had put increased energy use on a collision course with the need to reduce carbon emissions in order to control global warming. There were diligent efforts to increase energy efficiency and increase use of renewable sources; over 1,000 inefficient power plants had been closed, but projections continued to show a dramatic rise in carbon emissions from burning fossil fuels. REGULATORY ENVIRONMENT Though China's economy has expanded rapidly, its regulatory environment has not kept pace. Since Deng Xiaoping's open market reforms, the growth of new businesses has outpaced the government's ability to regulate them. This has created a situation where businesses, faced with mounting competition and poor oversight, take drastic measures to increase profit margins, often at the expense of consumer safety. This issue became more prominent in 2007, with a number of restrictions being placed on problematic Chinese exports by the United States. INFLATION During the winter of 20072008, inflation ran about 7% on an annual basis, rising to 8.7% in statistics for February 2008, released in March 2008. Shortages of gasoline and diesel fuel developed in the fall of 2007 due to reluctance of refineries to produce fuel at low prices set by the state. These prices were slightly increased in November 2007 with fuel selling for $2.65 a gallon, still slightly below world prices. Price controls were in effect on numerous basic products and services, but were ineffective with food, prices of which were rising at an annual rate of 18.2% in November 2007. The problem of inflation has caused concern at the highest levels of the Chinese government. Pork is an important part of the Chinese economy with a per capita consumption of a fifth of a pound per day. The worldwide rise in the price of animal feed associated with increased production of ethanol from corn resulted in steep rises in pork prices in China in 2007. Increased cost of production interacted badly with increased demand resulting from rapidly rising wages. The state responded by subsidizing pork prices for students and the urban poor and called for increased production. Release of pork from the nation's strategic pork reserve was considered.
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By January 2008, the inflation rate rose to 7.1%, which BBC News described as the highest inflation rate since 1997, due to the winter storms that month. China's inflation rate jumped to a new decade high of 8.7 percent in February 2008 after severe winter storms disrupted the economy and worsened food shortages, the government said March 11, 2008. Throughout the summer and fall, however, inflation fell again to a low of 6.6% in October 2008. By November 2010, the inflation rate rose up to 5.1%, driven by a 11.7% increase in food prices year on year. According to the bureau, industrial output went up 13.3 percent. As supplies have run short, prices for fuel and other commodities have risen. INVESTMENT CYCLE Chinese investment has always been highly cyclical. Ever since the 1958 Great Leap Forward, growth in fixed capital formation has typically peaked about every five years. Recent peaks occurred in 1978, 1984, 1988, 1993, 2003, and 2009. The corresponding troughs were in 1981, 1986, 1989, 1997, and 2005. In China, the majority of investment is carried out by entities that are at least partially stateowned. Most of these are under the control of local governments. Thus booms are primarily the result of perverse incentives at the local-government level. Unlike entrepreneurs in a free-enterprise economy, Chinese local officials are motivated primarily by political considerations. As their performance evaluations are based, to a large extent, on GDP growth within their jurisdictions, they have a strong incentive to promote largescale investment projects. They also dont face any real bankruptcy risk. When localities get into trouble, they are invariably bailed out by state-owned banks. Under these circumstances, overinvestment is inevitable. A typical cycle begins with a relaxation of central government credit and industrial policy. This allows local governments to push investment aggressively, both through state-sector entities they control directly and by offering investment-promotion incentives to private investors and enterprises outside their jurisdictions. The resulting boom puts upward pressure on prices and may also result in shortages of key inputs such as coal and electricity (as was the case in 2003). Once inflation has risen to a level at which it begins to threaten social stability, the central government will intervene by tightening enforcement of industrial and credit policy. Projects that went ahead without required approvals will be halted. Bank lending to particular types of investors will be restricted. Credit then becomes tight and investment growth begins to decline. Eventually such centrally-imposed busts alleviate shortages and bring inflation down to acceptable levels. At that point, the central government yields to local-government demands for looser policy and the cycle begins again. 4.0) ANALYSIS OF GDP AND GNP OF CHINA FOR PAST 30 YEARS CHINAS GDP ANNUAL GROWTH RATE
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The Gross Domestic Product (GDP) in China expanded 7.90 percent in the fourth quarter of 2012 over the same quarter of the previous year. Historically, from 1989 until 2012, China GDP Annual Growth Rate averaged 9.23 Percent reaching an all time high of 14.20 Percent in December of 1992 and a record low of 3.80 Percent in December of 1990. In China, Gross Domestic Product is divided by three sectors: Primary, Secondary and Tertiary. The Primary Industry includes Farming, Forestry, Animal Husbandry, and Fishery and accounts for around 9 percent of GDP. The Secondary sector, which includes Industry (40 percent of GDP) and Construction (9 percent of GDP) is the most important. The Tertiary sector accounts for the remaining 44 percent of total output and consist of Wholesale and Retail Trades; Transport, Storage, and Post; Financial Intermediation; Real Estate; Hotel and Catering Services and Others. CHINAS GDP PER CAPITA (PPP) The Gross Domestic Product per capita in China was last recorded at 8442.23 US dollars in 2011, when adjusted by purchasing power parity (PPP). The GDP per Capita, in China, when adjusted by Purchasing Power Parity is equivalent to 38 percent of the world's average. GDP. Historically, from 1980 until 2011, China GDP per capita PPP averaged 2413.9 USD reaching an all time high of 8442.2 USD in December of 2011 and a record low of 250.2 USD in December of 1980. The GDP per capita PPP is obtained by dividing the countrys gross domestic product, adjusted by purchasing power parity, by the total population.
2015 2010 2005 2000 1995 1990 1985 1980 1975 1970 1965 1960 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 Percent Change Year

1978-1982 - Smashing the communes and restoring family farming jacked up agricultural (especially grain) output. 1983-1985 - Double-digit real GDP growth accompanied the first wave of foreign investment into China, and non-state enterprises started to develop. 1989-1991 - Growth slowed after the government braked the overheating economy following an aborted effort at wholesale price reform in 1988 which resulted in panic buying and runaway
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inflation. Price stability was achieved by cancelling large fixed investment projects, slowing domestic demand. Foreign investment fell off after the Beijing Massacre of June 1989. 1992 - Deng Xiaoping's Southern Tour at the beginning of the year massively boosted foreign direct investment inflows into coastal areas and started a wave of government investment in Shanghai. Record trade and GDP growth and inflation followed. 1993 - Zhu Rongji appointed to rein in the overheating economy, this time more selectively than in 1989-91. Growth rates subsided gradually in subsequent years, producing a so-called "soft landing". During the 1990s, living standards continued to rise, as evidenced by the proliferation of consumer durables, especially among the urban population. Continuing FDI inflows helped boost foreign exchange reserves to record heights in the late 1990s. 1998 - Especially after the publication of the 1998 GDP figures, economists, both in China and abroad, have raised serious doubts about the quality of China's national accounts, which appeared in the late 1990s to overstate economic growth and are now suspected of understating growth. This may be because the statistical system tends to overestimate output at the trough of the cycle and underestimate output at the peak. 2005 - However, the country's first production census discovered at the end of 2005 that GDP has recently been grossly underestimated as a result of a failure to take into account the rapid growth of the services sector. As a result, growth rates for 2003-2005 are now recorded at around 10% per year in real terms. 2007 - Despite efforts to cool the overheating economy, the officially recorded GDP growth rate was 11.4% in 2007. 2008 - In 2008 the global economic crisis began to reduce China's growth rate. In the face of forecasts that this might drop below the rate at which school leavers can be absorbed by the growing economy (7%-8%) the government decided to pump Rmb 4 trillion into the economy in the form of an economic stimulus package consisting largely of investment in fixed infrastucture and human capital. 2009-2010 - The stimulus succeeded in preventing a dramatic fall in GDP growth in 2009 and in providing a sustained recovery in 2010, when the real annual GDP growth rate rose to 10.4%. 2011 onwards - With stagnation in China's major markets in 2011, GDP growth was expected to subside to around 9.2% by the end of the year. CHINAS GROSS NATIONAL PRODUCT Gross National Product in China increased to 472115 CNY HML in 2011 from 403260 CNY HML in 2010. Historically, from 1952 until 2011, China Gross National Product averaged 65002.08 CNY HML reaching an all time high of 472115 CNY HML in June of 2011 and a record low of 679 CNY HML in June of 1952.

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9.0) CONCLUSION Recent data updates are showing that the Chinese economy may be stabilizing. In the last three months of 2012, GDP expanded 7.9 percent year-on-year, breaking a streak of seven consecutive weaker quarters. Indeed, due to the fiscal and monetary policy easing conducted last year, the infrastructure investments and medium and long term borrowing have increased. Also, exports have been steady since May 2012 and industrial production growth was stronger than expected in the last three months.

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