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The Rise of The Chinese Economy

China has a long and rich history during which it has seen many dynasties rise and fall. After its last dynasty it experimented with communism and in the more recent history, while still officially a communist country, it has opened up its economy and society quite a lot. For many westerners who have been accustomed to see the western world as the dominant part of the world, it might be a small surprise to realize that China has been one of the richest countries in the world from where many of the technological innovations have come from historically. Then from the 1800s to the early 1900s China largely lost its power while Europe gained theirs. This weakening started when the Qing dynasty became weak and soon the British and other European colonialists took advantage of the country economically. After the colonisation, China became the people’s republic of China in the mid 20th century and the country has gone from being known for poverty and insignificance to one of wealth and prosperity. Today the country is on the track of becoming again the world’s leading country in many of the key metrics like trade, technology and wealth.


Looking at the Chinese economy from the beginning of the People’s Republic of China in 1949 to the present day, there have been enormous changes. In the beginning, Mao Zedong was in power and communism was pursued with its five-year plans and great leaps forward. Despite the famines and other issues it had, the economy grew at around 6% per year until Mao’s death. Soon after Mao’s death, Deng Xiaoping came to power at which point the system started to reform and open up. Essentially it started getting more capitalistic or “state capitalistic”. Deng Xiaoping had ambitious goals and he set out three steps in his 70-year economic strategy which included to double the GNP and to make sure that everyone had enough food and clothing by the end of the 1980s, quadruple GDP per capita by the end of the 20th century and to increase per capita GDP to the levels of medium-level developed countries by 2050. The first two of these goals have already been attained and the last one is not much out of reach anymore. Then in 2012 Xi Jinping came to power with his new administration and plans. Under his government, China has continued with its usual five-year plans where it has been emphasizing, besides economic growth, innovation, equality between rural and urban population and environmental sustainability. In these plans, there have been large infrastructure development strategies such as the Belt and Road Initiative and a strategic plan called Made in China 2025 where they aim to develop themselves from being merely “the world’s factory” to a more high technology producer. At the moment the 14th five-year plan for the years 2021-2025 is about to be finished. It has gained a lot of attention as the plan is the first one since China has achieved its goal of becoming a moderately prosperous society. In fact, in 2018 China’s share of the world GDP was 22%. If allowed to grow into its full potential Chinese economy could grow into twice the size of the US economy based on the fact that its population is four times bigger and it takes an income of half as much per capita to have twice as much.


International trade has been important for China’s economic growth ever since China started opening up. It didn’t open up its economy overnight and still hasn’t done it completely but it has gradually been increasing its trade with other nations. In the year 2001, China joined the World Trade Organization which led to massive increases in its exports. After ten years it became the world’s largest manufacturer after the US had held that position for 110 years. Then in the year 2013, China became the largest trading nation in the world, taking the top place away from the US. During the same year, China launched its Belt and Road Initiative. The initiative is the largest infrastructure plan since the marshall plan and is estimated to cost over 1 trillion dollars and impact around 70 countries. In total it would include 65% of the world population and 40% of global GDP. The project is set to be finished in 2049. If this project is to be successful then it would be one the largest trading routes which have the potential to spur economic growth in all the encompassing countries while Beijing would be in the centre of it. Besides increasing trade and sale of Chinese products, the Belt and Road Initiative aims also to increase the international use of the Renminbi, increase diplomatic relations between Asian countries while reducing dependency on the US and integrating commodities rich countries more closely to China. Not surprisingly, some countries have voiced their worries due to the increasing Chinese influence but some have also seen the potential of economic growth and cooperation. The belt and Road Initiative is largely financed by the Asian Infrastructure Investment Bank (AIIB). It is a multilateral development bank operating in Asia founded by China. It has been seen as a rival for the World Bank and the IMF and therefore the US and Japan are the only major countries that haven’t joined it. Their absence has led to China having excessive amounts of votes in the institution because it is a founding member and a major economy.


The Made in China 2025 plan aims to make the country more self-sufficient in many of the areas where China now has to rely on imports and to make it a world leader in many of the emerging high-tech fields. These high-tech fields include artificial intelligence, robotics, semiconductors, pharmaceuticals, aerospace and automotive. In fact, in some of these fields, China is already the world largest manufacturer such as electric vehicles where it produced about 1.3 million cars in 2018. It plans to invest 300 billion dollars to achieve the plan. The plan puts China into direct competition with the United States and the Council of Foreign Relations stated that the plan is an existential threat to US technological leadership. As the US-China trade war has been going on president Trump has put tariffs mainly on products that belong to the Made in China Plan 2025.


One of the goals of the Belt and Road Initiative is to increase the international use of the Renminbi. This is not an accident as the Chinese government has been pushing to internationalize its currency since the late 2000s. Their possible goal is to make the Renminbi a reserve currency. At the moment it looks like it is on the trajectory of possibly becoming one. In 2016 the IMF included the Renminbi into the basket of special drawing rights which reflects its increasing use in global trade. At the moment the Renminbi accounts for 2% of world trade financing compared to the US which accounts for over 50%, Euro 20%, Yen 6% and the Pound Sterling 5%. Out of these, the Renminbi would be the best competitor for a reserve currency as China has the largest share of world trade and has been able to keep the currency stable. On top of this, it has launched its own clearing and settlements system called the China International Payments System (CIPS) which is an alternative for the current SWIFT system. The Swift system has been criticized because of excess US government involvement where it has been able to restrict countries from making any financial transaction. An example of this is Iran which banks were disconnected from the SWIFT network due to US sanctions. Therefore it is no surprise that China wanted to create its own network to free itself from possible US influence.


When analyzing the growth of the Chinese economy one has to be amazed by the milestones that it has achieved. Back in 2016, it was the largest economy in terms of GDP adjusted for PPP and that was 15% higher than that of the US. Many of the other aspects also seem to be going in their way like improvements in technology, investments in infrastructure and improved financial conditions. However, it’s growth hasn’t progressed without challenges. Issues that have risen from Chinese foreign investments are the so-called “debt traps”. In these, the Chinese government has lent excessive amounts of money to poor developing countries where it allegedly has known that the countries can never pay back. When the countries have failed to make the payments the Chinese government has simply acquired a part of the country for a specified time. For example, the Hambantota port in Sri Lanka is now leased to the Chinese for the next 99 years. Also, Tajikistan had to give land to the Chinese because they weren’t able to pay their debts. Besides acquiring ownership through debt traps, China has also bought major ports such as the Greek port of Piraeus and stakes in 13 other European ports. Examples like these have increased anti-Chinese investment sentiment which could have effects on its expansion plans. Another thing that could halt the Chinese expansion is the actions of other countries especially the US. The US has already started a trade war between the countries and as further negative sentiment has been increasing around Chinese espionage, intellectual property theft and technology such as TikTok and Wechat then there could potentially be even more obstacles for their economic expansion. If the relations between China and the US keep on deteriorating then there could be a possibility for another cold war or an actual war. This is presumably not in the interest of any of the two parties but it can be a hard pill to swallow for the United States, being the second-best country in the world. This has spurred questions if China and the US can escape the Thucydides trap. One of the coming next obstacles is the reunification of Taiwan. This could turn out to be a major geopolitical issue due to the history of Taiwan and because it is a producer of semiconductors.

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