China Economy-GDP, CPI, Trade Balance

China Economy Overview

China’s Economy is considered the second-largest economy in the world. China, officially known as the People’s Republic of China (PRC) is an independent nation located in East Asia. With a population of a whopping 1.4 billion, China is considered the world’s most densely populated country. The country has a landmass of 9,596,961 square kilometers which makes it the third-largest country in the world. China spans five different time zones and has land borders with fourteen independent nations.

The country is composed of 23 provinces, four municipalities, five autonomous regions, and two Special Administrative Regions of Hong Kong and Macau. Its national capital is Beijing. China has been through a crushing civil war between republican and communist forces which almost devastated the country. The civil war divided the nation and resulted in the Communist Party of China (CCP) establishing the People’s Republic of China on the mainland while republicans retreated to Taiwan and established their own administration and named it the Republic of China (ROC). The United Nations (UN) ended up recognizing the PRC as the only legitimate representative of China in 1971. While China joined the World Trade Organization (WTO) only in 2001.

Contrary to the countries discussed in our country profile series, the PRC is a one-party state ruled by the Communist Party of China (CPC). The country is considered the second-largest economy in the world by nominal GDP. The country boasts a very fast-growing economy which has made China the earth’s largest manufacturer and exporter. It also has the world’s largest army of military personnel.

China is a permanent member of the United Nations Security Council (UNSC), and a founding member of the Asian Infrastructure Investment Bank (AIIB), the New Development Bank (NDB), the Shanghai Cooperation Organization (SCO), the Regional Comprehensive Economic Partnership (RCEP), the Silk Road Fund. China is also a member of the G8+5, the G20, the Asia-Pacific Economic Cooperation (APEC), and the East Asia Summit.

China Economy Facts and Figures:

China Economy Type and Growth

Currently, China is the second-largest economy in the world. The country surpassed Japan in 2009 to take this position. But this was not the case before. The civil war left China devastated and China remained secluded from the rest of the world for a very long time. After formalizing the national government under the leadership of Deng Xiaoping, the authorities started paying attention to the economy.

As a result, the country started experiencing double-digit economic growth during the 1990s and 2000s. This is what has put the country on the map. Unlike major developed countries, agriculture and industrial sectors account for 60% of the Chinese GDP. Currently, the country hosts three of the top ten largest stock exchanges of the world by both market capitalization and trade volume and those are Shanghai Stock Exchange, Hong Kong Stock Exchange, and Shenzhen Stock Exchange.

Chinese natural resources are worth $23 trillion, and 90% of them are coal and rare earth metals. China also has the world’s largest total banking sector assets of around $45.838 trillion. The China economy is heavily dependent on exports and as a result, the Chinese government along with the central bank keeps the value of the yuan low to boost exports. And for that, the government often intervenes in the market. In recent times, there have been concerns that the national economy is overheating and to tackle this the Chinese administration put into force various monetary measures and fiscal policies to ease the transition to more sustainable growth.

China Economy System: Monetary and Fiscal Policy 

China is faced with maintaining both its monetary and fiscal policies. The central bank of China is called the People’s Bank of China (PBoC) and is located in the national capital Beijing. This bank is legally tasked to issue and control the money and the country’s monetary policy.

PBoC is multiple objectives and those are discussed below:

A very peculiar fact about the Chinese central bank is that they used to base their rate calculating system on the “abacus”, meaning they used to divide the base rate by 9 instead of 25. Because it was set in multiples of 9. Recently, the PBoC has brought a change in their policy and switched from the abacus to the international convention and started raising or cutting the interest rate by 0.25%. However, PBoC has a habit of making abrupt and aggressive interest rate changes which depend on the health of the Chinese economy. Apart from setting the nation’s lending rate, PBoC also has the ability to adjust the reserve ratio requirement (RRR).

RRR refers to the reserve requirements that Chinese commercial banks must keep in their vaults. By altering the ratio, the PBoC is able to control the quantity of money in circulation and keep the inflation rate within the target level.

Important China Economy Indicators for the CNY

The Chinese yuan or CNY is the sole legal tender of China. China’s rapidly growing economy will have severe repercussions on the value of its currency.

However, there are economic indicators that have a bearing on the value of CNY and those are discussed below:

• Gross Domestic Product (GDP)

This is the broadest measure in which the total amount of produced goods and services for a certain period of time is calculated. This report depicts the changes in the economy’s total output from the just concluded period.

• Consumer Price Index (CPI)

Similar to central banks throughout the world, the People’s Bank of China (PBoC) also keeps track of what is happening in the goods and services sectors. Since influencing the lending rate is also an important goal of the PBoC, this institution closely watches this indicator for clues.

• Trade Balance

A huge portion of China’s economy consists of international trade and commerce, which means that the trade balance is typically considered a leading indicator of growth.

• PBoC Interest Rate Decision

As discussed above, the PBoC is known for abruptly intervening in the market to stabilize the exchange rate of CNY. So keeping a watchful eye on PBoC pronouncement will definitely help.

Trading Tactics

You must remember that the Chinese yuan is not a commonly traded currency. Due to the peculiar nature of the Chinese economic and political system, the Chinese government does not allow this currency to be traded the way other major currencies are exchanged throughout the world. Any economic event which affects China will definitely affect those countries which are closely aligned with China in terms of trade. One of these is Australia.

China is Australia’s largest trading partner which makes both nations exchange merely a hundred billion dollars worth of goods and services each year. Better-than-expected economic data from China typically indicates that the Chinese demand for Australian commodities could increase while weak Chinese data could signal a slowdown in trade with Australia.