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The materials that make up the IPhone | tutor2u Economics

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The value of all raw materials in an iPhone 6 (16GB) is just $1.03. These materials range from aluminium (31.1g) to hydrogen (5.5g) and chrome (4.9g).

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Key Macroeconomic Indicators for China

China has achieved an average growth rate of over 9% pa since 1978 - the year that effectively was the start of the market based reforms in the Chinese economy

Rapid, sustained growth in China has lifted over 700 million people (or one-tenth of the world's population) out of extreme poverty

All of the Millennium Development Goals have been reached or are within reach

Growth in China is now slowing down and a lower target rate of growth of 7% has been set

Capital investment (I) and exports (X) have been the foundations for Chinese growth and development but the Chinese economy has now reached an important turning point.

For growth to be sustained China needs to achieve a re-balancing of her economy

Relying less on exports of low to medium value manufactured products and moving up value chains to produce and sell products with a high-knowledge and high-technology component

Driving more growth from household spending (consumption) on goods and services

Sustainability has become an essential part of China's development strategy

Addressing the pressures that come from rising inequalities of income and wealth.

Success in improving sustainability through low carbon innovation and other technological breakthroughs can provide China with new sources of external demand as Chinese businesses export products and licence technology in green industries

China remains a Communist state dominated by the Chinese Communist Party but it is also an increasingly open economy where trade accounts for over seventy per cent of GDP

In 2000, China's accounted for 7.1% of the world's total GDP (in PPP terms)

By 2015 China will have a 19% share of global GDP - higher than any of the other BRIC nations

Per capita incomes are rising though still low by advanced-nation levels

The share of GDP (by valued-added) from Chinese industry has been close to 50% for more than 30 years, but since 1980 the share contributed by service industries grown from 30% to 43%. This is below the norm in advanced countries where services account for more than 70% of GDP.

Agriculture's share of Chinese GDP has fallen from 30% of GDP in 1980 to less than 10% in 2009. There has also been a mass movement of millions of people away from rural areas into urban centres of population but agriculture still accounts for around 40% of total employment

The latest Economic Plan is centred on developing the services sector, increasing urbanization and improving incomes - there are big opportunities here for UK service multinationals

Progressing towards 2030

China should complete its transition to a market economy -- through enterprise, land, labor, and financial sector reforms -- strengthen its private sector, open its markets to greater competition and innovation, and ensure equality of opportunity to help achieve its goal of a new structure for economic growth.

These are some of the key findings of a joint research report by a team from the World Bank and the Development Research Center of China's State Council, which lays out the case for a new development strategy for China to rebalance the role of government and market, private sector and society, to reach the goal of a high income country by 2030
Source: World Bank Report 2012

Chinese Development Strategies

China is a unique blend of market and command economy, but the market is gaining importance

For many years China has practiced export-led growth with exports exceeding 40% of GDP

Investment has been a huge growth driver - it was 46% of GDP in 2010. By comparison, Japan in its 1970s boom topped out at 36%, while Korea's share peaked at 39% in the 1990s.

The surplus on the balance of payments current account has fallen from over 10% of GDP in 2007 to less than 6% in 2011

Korea, Japan, Germany and Switzerland run trade surpluses with China because they are able to export the high-value manufactured items, particularly investment goods, China needs

The emphasis of China's growth policy is changing. A quote from Premier Wen Jiabao is central to this - 'China's economy needs to be put on the path of endogenous growth driven by innovation'

Foreign Direct Investment and Chinese Growth
Outward FDI from China

Partly because of trade surpluses, China has accumulated foreign-exchange reserves in excess of $3 trillion. These surpluses allow for outward overseas direct investment - much of the current focus is on China's investments in many African and Latin American countries.

China is estimated to earn around $1bn per day interest income from their FX reserves

In recent years China has given more loans to poor countries than the World Bank. In African countries such as Nigeria and Zambia, amounts from China of over US$100 million per year have been common. In Zambia, for instance, this has represented 1-1½ percent of GDP

Chinese companies are preparing for investments in Western and Eastern Europe in engineering and technology as part of an effort to find new markets and gain greater control of global supply chains. In 2010 Geely (a Chinese car maker) purchased Volvo (Sweden). Lenovo (the world's largest manufacturer of personal computers) bought IBM's PC business

Large scale investments by China in mining capacity is helping propel Peru into the world's second largest copper mining nation

FDI into China

China continues to attract high levels of inward foreign direct investment

China aims to lure more FDI in advanced manufacturing, as well as services including logistics, research and development, higher education and vocational training. This part of her aim to boost the service-side of the economy and to lift per capita incomes.

The Changing Pattern of Chinese Exports

For much of the last twenty years China's export industries have been dominated by manufacturing and selling consumer goods to rich advanced countries

But now China is shifting the emphasis of exports towards selling heavy industry products to developed and developing countries - for example overseas sales of giant earth movers, telecoms network gear and construction materials. Many of these are high-value and higher profit products which will make it easier for Chinese companies to pay higher wages to their employees.

Much low-valued added production such as cheap textiles and household goods is shifting to countries such as Vietnam and Bangladesh.

The other big change in the pattern of Chinese exports is a shift away from selling to rich, advanced, developed country markets towards fast-growing developing nations including Africa

Sovereign Wealth Funds:

China has a sovereign wealth fund known as the China Investment Corp (CIC) charged with making portfolio investment overseas

In 2011, Cheung Kong Infrastructure Holdings Ltd bought Northumbrian Water Group and the CIC acquired an 8.68% stake in Thames Water Utilities

China has encouraged many businesses to make big capital investments in other emerging countries many on an African continent rich in natural resources.

Domestic investment and rural development and green technologies

The Chinese government has used some of the currency reserves to fund increased investment in rural areas of China to support living standards and development in some of the poorest parts of this vast country. Chinese farm subsidies have grown, as a share of total farm incomes, subsidies in China have jumped from 6% in 1995 to 17% in 2010

The 12th Five Year Plan allocates more resources to green investments in traditional sectors, for example infrastructure spending and innovation to improve water and energy efficiency in farming in a bid to lift agricultural productivity and profits.

Key Growth and Development Challenges for China

Enormous attention is paid to economic, social and political developments in China

Sustained growth and development is not inevitable even if the key macro indicators suggest that China is on a firm path towards becoming the world's biggest economy.

There are numerous challenges to overcome in the near and medium term.

The key point is that China is switching to a less capital-intensive development model.

Key challenges include the following:

Environmental challenges

Growing inequality of income & wealth

Threat from high inflation

Global trade tensions

Demographic challenges

Lowering reliance on exports and trade surpluses

Re-balancing away from huge investment towards consumption

Wage Inflation in the Chinese Economy
Wages are rising fast in China - many economists believe that China has hit a stage in its development at which demand for labour starts to grow faster than supply, creating labour shortages and pushing up salaries. This is known as a Lewis Turning Point.
Why are wages rising so quickly?
The main reason for the acceleration in wages is that China is ceasing to be a labour surplus country - here are some explanations for the pick-up in wages. Keep in mind however that wages in China remain low compared to richer advanced countries and many other emerging nations. Recent data suggests they are typically around $300 a month in the manufacturing heartlands, lower in rural areas.

1.Demographics:

a.The median age in China's 35.2 years and it is rising

b.To some commentators, China is getting older before she has got rich. Life expectancy has soared, while fertility has plummeted due to strict birth control policies.

c.In 2009 there were 167 million over-60s in China, about an eighth of the population. By 2050 there will be 480 million, while the number of young people will have fallen. In 2000 there were six workers for every over-60. By 2030, there will be barely two.

d.Under the "one child policy" the fertility rate dropped to between 1.5 and 1.8, well below the 2.1 figure required to keep the population stable. This policy has now been changed

e.The old age dependency ratio will double in the next two decades, and the size of China's labour force is projected to start shrinking as soon as 2015.

2.Social pressures:

a.Wages are rising because of growing concerns among the Chinese authorities about the consequences for income inequality of rapid growth. Tens of millions of workers have migrated to the Chinese cities where average wages are higher but creating a deeper imbalance in rural areas which already suffer low incomes and low quality public services.

b.Labour shortages and worker unrest have prompted sizeable increases in the minimum wage in many Chinese regions

c.The government's latest five year plan states that firms must increase wages by at least 13% every year but in certain areas the local authorities mandate much higher rises.

3.Multinationals under the microscope:

a.There has been international pressure on foreign multinationals operating in China to lift wages for their workers. Many media reports have highlighted factories with miserably low wages and appalling working conditions.

b.Organisations such as the Fair Labour Organisation have been active in raising concerns about low wages and possible exploitation by monopsony employers.

c.Foxconn Technology Group (official name: Hon Hai Precision Industry) is a Taiwan-based company and also China's largest private-sector employer and was heavily criticised after fourteen worker suicides at one of its main land Chinese plants over a 10-month period in 2010, prompting local protests.

What might be some of the consequences of a lengthy period of rapid wage inflation in China?

1. Costs and profits: A short-term squeeze on profits for manufacturers such as FoxConn and Nike

2. FDI shift: There might be a shift of FDI away from China to lower-cost countries such as Vietnam and Bangladesh. But many experts argue that the relocation of manufacturing and FDI will be small because of factors unique to China - for example, high manufacturing reliability, close access to growing Chinese domestic markets, excellent supply chains built up over twenty years, the existence of external economies of scale in China and commitments to raising productivity and product quality - which makes the wage rate less important. Relocation of manufacturing is more likely to happen China to lower cost interior regions with excellent transport and communication links.

3. Income and consumption: China is a middle-income country but it is well positioned to join the ranks of the world's high-income countries if growth can be sustained. Rising wages will help to boost demand for consumer durables, leisure activities and housing - providing a new source of demand as China looks to wean itself off resource heavy investment and export-led growth

4. Trade balances: Higher wages and incomes may lead to a rise in demand for imports into China - providing an opportunity for advanced countries - and might stimulate FDI for consumer-facing businesses such as retailers and financial services companies

5. Productivity and innovation: A decade or more of high wage growth will fast-forward the drive by Chinese producers to raise total factor productivity by investing in human capital and technology to lift output per worker. Annual labour productivity growth in China from 2010-2015 is forecast to be 8,3% which means that 10% annual growth in real wages will have little effect on unit labour costs

Demographic challenges: China's declining labour force
This is an important longer-term trend for the Chinese economy

The size of the Chinese population is forecast to peak around 2025-2030 and then start to decline

The labour force may contract by around 20% in the next forty years

During the years 2001-10, China's population rose at just 0.57% annually - half the level of the previous decade

China's working-age population declined by almost 3.5 million people in 2012

Although per capita income is only around 1/5th of incomes in rich nations, the fertility rate in China is on par with those of Russia, South Korea, Japan, Germany and Italy

As China grows old, dependency ratios will rise - this will put upward pressure on government spending and an aging workforce will be less mobile and probably demand higher wages

By 2010, nearly 14% of Chinese citizens were over 60, and nearly one in 10 were over 65 - this will continued to rise in the years ahead

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China - Economic Growth and Development | tutor2u Economics

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Key Macroeconomic Indicators for China China has achieved an average growth rate of over 9% pa since 1978 - the year that effectively was the start of the market based reforms in the Chinese economy Rapid, sustained growth in China has lifted over 700 million people (or one-tenth of the

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Become an FT Subscriber. Gain a global perspective on the US and go beyond with curated news and analysis from 600 journalists in 50+ countries covering politics, business, innovation, trends and more. Choose the subscription that is right for you Not sure which package to choose?