Since the 2008 financial crisis, and the consequent global recession that followed, Chinese policymakers started to formulate policies designed to shift China's economy away from exports, and focus more domestic consumption and expenditure. Ever since the country opened up to the rest of the world in the 1990s, it has relied on an export-led economic growth model, one that has sustained its double digits' growth rate.
[...] Nevertheless, because Chinese consumers became wealthier, inflationary pressures started to build up, as shown in the real exchange rate index reported below: Graph: Real Exchange Rate Index, RMB - 1994-2019. (2005 = 100) Source: CEIC Data Company - China Real Effective Exchange Rate. RMB revaluation by Chinese authorities The figure above reports the real RMB exchange rate computed against other currencies. An increase in the exchange rate index reports an appreciation of the RMB, thus a loss in competitiveness. Since 2005, Chinese authorities have quietly decided to re-evaluate the nominal exchange rate, which led to the steady appreciation of the RMB against the rest of the world. [...]
[...] 1978-2013 Source: China's Economy, in Six Charts. Harvard Business Review, November 2013. Trade wars The political leadership in China focused heavily on transport and manufacturing infrastructure on China's South-Eastern coast. Investment in shallow water-ports on large rivers were key to shipping manufacturing from industrial centers into deep-water ports, and then export them to the rest of the world. In addition to its labor-intensive and export-oriented production, recent studies have suggested that the so-called Solow Residual - or Total Factor Productivity - accounted for about 40% of GDP growth since market-oriented reforms were implemented in the later 1970. [...]
[...] The same argument can be made as to the Chinese policymakers' designs on infrastructure projects. It is expected that imports of investment goods in China will decline as its currency appreciates, so the central government needs to pick up the slack and sustain investment through capital accumulation. It is particularly crucial to the Chinese authorities that investment expenditure should expand significantly given the counter-intuitive rise in households' savings rate, especially in urban center. Indeed, RMB exchange-rate imbalances can only be corrected if China expands dramatically its aggregate domestic demand - and thus, its demand for imported goods- but also when its aggregate investment overtakes its national, domestic savings. [...]
[...] Finally, China is increasingly taking interest in other countries as sources of raw materials in Africa and Central Asia for instance. Early in 2013, Chinese Premier Xi Jinping advocated for a shift of economic activities and investment away from its South-Eastern coastline to its Western reaches, notably with Central Asia, the Middle-East and from then on, Europe. The Silk Road/Belt initiative aims at establishing the necessary infrastructure in order to sustain trade to the East, and China is expected to spend as much as $900 Bn, $500 Bn of which is expected to be invested on a 5-year timeframe. [...]
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