Two hundred years ago, Napoleon Bonaparte described China as that “China is a sleeping giant.” He added: “Let her sleep, for when she wakes she will move the world.” Now we have the unique opportunity to see that China has waked up and is becoming a key player in the world economy. The process of globalization opens new research fields related to internationalization, economic reforms, and eventually changing of economic and political weights in the global economy.
Nowadays, the influence of China and another emerging economics (especially India, Russia and Eastern European countries, and Latin American countries) is growing in all areas – politically, militarily, and economically. In the last 30 to 40 years, China’s astonishing rise serves as an idol for the majority of emerging market countries by letting low income countries dream of annual growth rates between 6-10%. In 1978, a new reform of the economic system built the basis for this success story where a communist political system has been brought together with a capitalist market system to form a socialist market economy. China developed from a backyard of the world economy to the second largest exporter and the second largest economy in the world – this is actually a unique achievement also in a comparison to the earlier success of its geographical neighbors, Japan, Korea, and India. China managed to stabilize initially high inflation. It managed exceptionally well several periods of deflation without negative consequences on its growth dynamics. This could be a lesson which might be interesting also for developed economies since the financial crisis.
Even though China’s economic success serves as an unexampled story of strong economic and political effort, the success story has also a dark side, which creates sources of concern for future developments. The growth is based too strongly on investment growth and exports. China needs a strategy how to rebalance its development strategy, which is one of the topics of the thesis.
However, China, and even more other emerging economies, accumulated significant debt especially in the state sector. There is an urgent need to deleverage. Moreover, China started to struggle in recent years with a decrease of the annual growth rate from 10% to 7%. Many aspects of its institutions are weak, which is visible especially in the current pressure to reduce the degree of corruption. This issue also shows that the changes are not easy and may lead to adverse effects, which hopefully will last only in the short run. However, there is also a discussion that weak institutions, wage growth, and insufficient infrastructure could lead to lowering growth, which is described as the middle-income trap.
Currently, the Chinese economy is continuing the process of liberalization. However, the opening up the economy creates short term adjustment costs and increases its dependency from foreign partners, but also our dependency on a health development in China. Therefore, the decisions about monetary policy liberalization have to be well considered, but not only by China. We have to analyze the Chinese economic and monetary policies because they will be important for us as well.
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