China's Industrialization

2939 Words Jul 22nd, 2008 12 Pages
The pace of economic change in China has been exceptionally rapid since the start of its economic reform in 1978 under the influence of Deng Xiaoping. Since then its Gross Domestic Product (GDP) has grown at an unprecedented 9.5 percent a year, making China’s the longest and most sustained growth experienced by any country within modern history. Such growth has been a result of various aspects, including a profound change within China’s economic policies, reform of the state-owned sector, and rapid growth of physical and human capitol. China also has the advantage of a good infrastructure, an educated workforce, and most importantly an extremely open economy. However, as the country’s economy rushes forward, so does the pile of social …show more content…
Another problem that arises is the assumption that China has the ability to control its exchange rate simultaneously with its inflation rate. When a country holds down its nominal exchange rate, its real exchange rate tends to rise through the effects of inflation, and this has been true of China as large capitol inflows currently create abundant liquidity and are pushing up the rate of inflation. The past decade has seen considerable unpredictability in the inflation rate: almost eight times as much as that in the United States and four times that of Western Europe. The annual rate of inflation, when measured by the GDP deflator, has moved from 6 percent in 1996, to slight deflation in 2002, before rebounding again in 2003-2004 and still registered a rate of 4.5 percent in early 2005. The consumer price index, however, has slowed to a greater extent at the beginning of 2005 due to high food content. Such fluctuations suggest that China’s domestic monetary policy has not always been successful in maintaining low and stable inflation. Rather, the existence of a relatively fixed rate of exchange against the dollar exposes the economy to inflationary or deflationary impulses stemming from fluctuations in the effective exchange rate of the dollar. A third problem that rises is the fact that unlike in the past, where there was no real alternative to the dollar as a reserve currency, Asians can now branch out to the Euro instead of holding dollars.
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