II- China’s overview:

In the modern era, China's influence in the world economy was minimal until the
late 1980s. At that time, economic reforms initiated after 1978 began to generate
significant and steady growth in investment, consumption and standards of living.
China now participates extensively in the world market and private sector
companies play a major role in the economy. Since 1978 hundreds of millions have
been lifted out of poverty: According to China's official statistics, the poverty rate
fell from 53% in 1981[8] to 2.5% in 2005. However, 10.8% of people still live on
less than $1 a day (PPP-adjusted).[9] The infant mortality rate fell by 39.5%
between 1990 and 2005,[10] and maternal mortality by 41.1%.[11] Access to
telephones during the period rose more than 94-fold, to 57.1%.[12]

China has generally implemented reforms in a gradualist fashion. As its role in

world trade has steadily grown, its importance to the international economy has
also increased apace. China's foreign trade has grown faster than its GDP for the
past 25 years.[13] China's growth comes both from huge state investment in
infrastructure and heavy industry and from private sector expansion in light
industry instead of just exports, whose role in the economy appears to have been
significantly overestimated.[14] The smaller but highly concentrated public sector,
dominated by 159 large SOEs, provided key inputs from utilities, heavy industries,
and energy resources that facilitated private sector growth and drove investment,
the foundation of national growth. In 2008 thousands of private companies closed
down and the government announced plans to expand the public sector to take up
the slack caused by the global financial crisis.[15]

The PRC government's decision to permit China to be used by multinational

corporations as an export platform has made the country a major competitor to
other Asian export-led economies, such as South Korea, Singapore, and
Malaysia.[16] China has emphasized raising personal income and consumption and
introducing new management systems to help increase productivity. The
government has also focused on foreign trade as a major vehicle for economic
growth. The restructuring of the economy and resulting efficiency gains have
contributed to a more than tenfold increase in GDP since 1978. Some economists
believe that Chinese economic growth has been in fact understated during much of
the 1990s and early 2000s, failing to fully factor in the growth driven by the
private sector and that the extent at which China is dependent on exports is
exaggerated.[17] Nevertheless, key bottlenecks continue to constrain growth.
Available energy is insufficient to run at fully installed industrial capacity, [18] and
the transport system is inadequate to move sufficient quantities of such critical
items as coal.[19]

The two most important sectors of the economy have traditionally been agriculture
and industry, which together employ more than 70 percent of the labor force and
produce more than 60 percent of GDP. The two sectors have differed in many
respects. Technology, labor productivity, and incomes have advanced much more
rapidly in industry than in agriculture. Agricultural output has been vulnerable to
the effects of weather, while industry has been more directly influenced by the
government. The disparities between the two sectors have combined to form an
economic-cultural-social gap between the rural and urban areas, which is a major
division in Chinese society. China is the world's largest producer of rice and is
among the principal sources of wheat, corn (maize), tobacco, soybeans, peanuts
(groundnuts), and cotton. The country is one of the world's largest producers of a
number of industrial and mineral products, including cotton cloth, tungsten, and
antimony, and is an important producer of cotton yarn, coal, crude oil, and a
number of other products. Its mineral resources are probably among the richest in
the world but are only partially developed.

China has acquired some highly sophisticated production facilities through trade
and also has built a number of advanced engineering plants capable of
manufacturing an increasing range of sophisticated equipment, including nuclear
weapons and satellites, but most of its industrial output still comes from relatively
ill-equipped factories. The technological level and quality standards of its industry
as a whole are still fairly low,[20] notwithstanding a marked change since 2000,
spurred in part by foreign investment. A report by UBS in 2009 concluded that
China has experienced total factor productivity growth of 4 per cent per year since
1990, one of the fastest improvements in world economic history.[21]

China's increasing integration with the international economy and its growing
efforts to use market forces to govern the domestic allocation of goods have
exacerbated this problem. Over the years, large subsidies were built into the price
structure, and these subsidies grew substantially in the late 1970s and 1980s.[22] 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. China's
ongoing economic transformation has had a profound impact not only on China but
on the world. The market-oriented reforms China has implemented over the past
two decades have unleashed individual initiative and entrepreneurship, whilst
retaining state domination of the economy.

Wayne M. Morrison of the Congressional Research Service wrote in 2009 that

"Despite the relatively positive outlook for its economy, China faces a number of
difficult challenges that, if not addressed, could undermine its future economic
growth and stability. These include pervasive government corruption, an inefficient
banking system, over-dependence on exports and fixed investment for growth, the
lack of rule of law, severe pollution, and widening income disparities."[23]
Economic consultant David Smick adds that the recent actions by the Chinese
government to stimulate their economy have only added to a huge industrial
overcapacity and commercial real estate vacancy problems.[24]

I- The situation of export-led growth policy of China:

 Source: World Bank

If you look at the above chart you will see two interesting things. One, China's
economic growth has been spectacular. Their economy has been growing at an
average annual rate of almost 9% since 1996. Yet, notice that the rate of growth
has been relatively stable. But also notice how the export of goods and services has
become larger and larger as a percentage of China's GDP. From 1996 to 1999
exports accounted for about 20% of China's economy. By 2004 (latest available
data) exports accounted for 34% of GDP. I wonder who is buying all that stuff that
China makes? Notice that China's exports are growing at almost 30% per year, and
have been for the past three years (2002, 2003 and 2004).

A simple calculation will tell you that if China's exports are growing at 30%, and
exports account for 30% of GDP, then the growth in exports alone will increase
GDP by 9%.

So, you can see that the Chinese government is encouraging the export-led growth
policy, according to the figure.
However, in order to maintain the policy, Central Bank in China has to keep weak
RMB in comparison with USD. Because this makes China’s goods cheaper with
the purpose of increasing ability to fight foreign competitors.
As can be seen, the rate between RMB and USD decreased gradually from just
over 8 in Jul-05 to nearly 7 in Jul-08, and then this trend has remained relatively
stable until now. Therefore, the United States’ government especially feels
aggressive with the policy, and through many president terms, the government
found ways to force China to increase RMB.

But, to keep RMB lower, especially compare with USD relatively, China has to
impact on the foreign exchange market, and buys dollars to keep in its foreign
reserve.
This is suitable with the data of China’s foreign reserve, which increased rapidly
from approximately 200 billion USD in 2000 to just over 1400 billion USD in
2007. This caused China become the largest creditor of the U.S government.

It is clear that when China buys dollars significantly, the money supply in the
Chinese economy will increase sharply.

China’s M2 has enjoyed a constant rate of acceleration as shown in the chart below
(in semi log scale). But in late 2008 the rate of acceleration suddenly increased
dramatically. This possibly increase China’s inflation rate.

However, there is a special thing:

China’s inflation rates were considerably lower from 2000 to 2008 than before.
Why were these quite low in the period? - This is a big question.

This leads a question whether PBoC increases interest rates or not? Because, this
solution can withstand inflation.

However, in the next step, you will feel extremely surprise:

Both nominal and real interest rates in China were slightly low, about from 4 to 8
% over the period. Consequently, Chinese government used a special policy to deal
inflation. What is the policy?

The answer could be the labor policy. China has to create conditions for poor
farmers in rural and coastal areas to work in factories producing goods for export.
It is important that these workers are paid very low wages and there are no policies
of social insurance and union protection. Business owners have great power in the
hiring and dismissal of laborers, so they can pay low wages and staff can change
very quickly if the situation changes in production. Flexible primary levels make
production costs lower, therefore these goods are competitive on international
markets.
As can be seen, the percentage of Chinese labor income decreased from 52.3% in
1981-85 to 38% in 2001-06. Likewise, this of the household consumption declined
from 51.8 % to 40.7% over the period. By way of contrast, the investment
increased gradually in the period of 15 years. This can be explained that employers
exploited workers easily, so the statistics show that the income of workers
decreased in recent years. This leaded the domestic demand go down, and then
reduced pressure on inflation.
From the bar charts, it can be seen obviously that Chinese consumer spending
decreased sharply, while the Gross National Savings increased significantly over
the 15 years. Thus, according to the national accounting, if Chinese citizens reduce
the private consumption, this could promote the net export because of an increase
of domestic saving.

Therefore, Chinese government used the export-led growth extremely effectively.

This not only made Chinese economy grow significantly, but also withstood
inflation. So, many people will agree that Chinese policy makers are very excellent
in measures to handle the two obstacle.

Should Vietnam learn this experience?