Introduction to Economics                                 Lesson 06 / 08



In area, China, with approximately 9.56 million sq. km. is the world’s third largest country, after Russia and Canada.  Its population of approximately 1.35 billion persons is the world’s greatest, comprising approximately 22% of the world’s population.  Average population density is 138 persons per sq. km., although density is much greater in the more populated eastern third of the country and along the Yangtze River. 

By way of contrast, Australia with an area of approximately 7.68 million, the world’s sixth largest country, after the USA and Brazil, has a population of approximately 21.2 million, and an average population density of 2.6 persons per sq. km.  Again population density is significantly higher within the more populated south-eastern fringe.

In the last 30 years, China has experienced an extremely high rate of economic development. Depending on the measure used, it is today the world’s second, third or fourth largest economy, after the USA and, possibly, Japan and Germany.  There are numerous predictions that within a few years it will become the world’s largest economy.  As the C19 was the century of Europe and the C20 that of America, it is suggested that the C21 will be that of China.  Napoleon Boneparte’s description of China as a sleeping giant that when awoken would astonish the world has seemingly come to pass.  


Recent History

The death of Mao Tse Dong in 1976, and the return to power, for the third time, in 1977, of Deng Xiao Ping was a turning point in China’s recent history.  Deng set about transforming the Chinese economy.  Sweeping changes were made.  Instead of isolationism and total self-sufficiency, China opened itself to the world, particularly the West, and invited trade and co-operation.  Marxist economic ideology was largely abandoned and significant steps taken towards creating a market economy.  The rural commune system was abandoned.  Stock markets were established.  Private property and enterprises were permitted and encouraged.  Affluence ceased to be officially regarded as necessarily sinful and there was widespread acceptance of the proposition that letting individuals run their own lives was conducive of prosperity.  The system was said to be a Socialist Market Economy.

Between 1979 and 2005 China’s average annual increase in GDP was 9.6%, the highest in the world, and this figure has continued to rise.  The value of exports in that period rose from US $14 to US $762 billion and imports from US $16 to US $660 billion.  Even allowing for potentially dubious statistics, China’s recent economic growth has been undoubtedly astounding.  In 2001, China joined the WTO.  This year it is showcasing the Olympic Games in Beijing. 


Excluding Taiwan, HK and Macau, China comprises 22 provinces, 5 autonomous regions and 4 autonomous municipalities.  From west to east the countryside descends in seeming steps, with mountain ranges, including the Himalayas, in the west and flatlands along the coast. There are 3 major river systems; the Yellow in the north, the Yangtse in the centre and the Pearl in the south. The country generally is richly endowed with natural resources, but for a variety of reasons, less than 20% of its area is considered arable.

Approximately 93% of the population is Han or ethnic Chinese, a people imbued with a culture that encourages and respects learning, hard work, saving and responsibility.  These are characteristics conducive of economic development and prosperity.  The remaining 7% comprise the 50 odd officially recognized minority nationalities within the country, such as Tibetans, Uighurs, and Mongols, who typically reside in the large, sparsely populated border regions.  Nor are the Han completely homogenous, there exists significant regional differences among them in language, customs and characteristics, particularly between north and south.

Through much of the C20, a series of events combined to constrain China’s economic development.  They included Western imperialism, civil war, the Japanese invasion, and economic mismanagement under Mao.  Deng’s reforms, which coincided with significant worldwide technological advances in transport and communications, meant that China then had a crucial comparative advantage vis-a-vi most advanced manufacturing nations, particularly the USA, namely extremely cheap labour.  As a result, China has become manufacturer for the world.  In this they were aided by the Chinese diaspora, an estimated 40 million overseas ethnic Chinese, who live in communities scattered throughout the world.

 It is at least arguable that in becoming manufacturer for the world, and continuing to do so, China has, at least until now, saved the West from the worst of its own folly, where otherwise the price of manufactured goods would have risen alongside those of property and shares.  China’s voracious appetite for raw materials to feed its burgeoning manufacturing and construction industries has also caused it to become a major export market for many countries, including in particular Australia.

The problem with the comparative advantage of cheap labour is that it tends to disappear as a consequence of its own success; development leads to prosperity and higher wages.

China however has maintained its advantage in this regard, at considerable cost to its own people, partly by pegging its currency to the US dollar, thus preventing the US dollar devaluing as against the Chinese yuan and American-priced goods and services becoming relatively cheaper.  As a consequence, China has amassed a huge US dollar surplus, on which it faces a major loss if the US dollar were to suffer a significant fall in value.   China now seems intent on spending at least some of this surplus buying up real property and enterprises around the world.


Potential Pitfalls

Extrapolation of recent figures suggests that China will indeed become the world’s major economic power within a short period.  There are however a number of potential pitfalls;


  • State-Owned Enterprises [“SOEs”];    Perhaps a third of Chinese enterprises are state owned, mostly left over from the time of Mao.  Many are inefficient and unprofitable, requiring continual subsidizing, but are politically difficult to close down
  • Suspect Banks;  Much of the assets of many banks are loans to SOEs, which continue to be made but in many instances will never be repaid.  Many banks, if called on to repay all depositors probably could not do so.
  • Uneven Development; Development has occurred geographically disproportionally, in particular in the eastern third of the country.  It is estimated that at least 300 million people, mostly in rural areas in the center and west of the country, presently exist on less than US$1 per day.
  • Minority Unrest;  As heir to the former emperors, the Chinese government rules an area, perhaps 40% of the country, largely inhabited by minority peoples.
  • An Aging, Excessively Male, Population;  Due largely to its ‘One Child Policy’ China’s population is rapidly aging, resulting in less productivity and higher care costs.  There are also less female children due to a cultural preference for males. It is estimated that presently 70 million adult males will not find brides.
  • Communist Party Dominance;  China’s estimated 70 million strong Communist Party forms an elite class with considerable power, fuelling resentment and allegations of corruption and unequal treatment.
  • Pollution and Degradation;  The rush to develop means much of China, particularly the cities, is extremely polluted, largely due to the ongoing reliance on coal for energy, and much of the countryside is degraded.
  • Taiwan;  Ongoing tensions between the mainland and China’s 23rd province, Taiwan, continue and could conceivably, albeit unlikely, result in a major war.


                                                            David Sharp

                                                                  12 May 2008



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