The Economy of China: A Case Study on the Second-largest Economy in the World

Harshit Verma Harshit Verma
Dec 2, 2021 12 min read
The Economy of China: A Case Study on the Second-largest Economy in the World

The world has about 775 crore people living on its surface. If you look at the population graph, you will notice a straight line facing the sky. The rate at which the population is growing makes a steep graph.

The world is divided into continents and countries. Most people live in china. China is the most populous country in the world. In fact, China has been the most populous for a long time now. When we write ‘for a long time, it means centuries. The first census showed the Chinese population at 583 million and by the fifth census, it had risen to double at 1.2 billion. The Chinese population now has crossed a mark of 1.4 billion people. It also covers most geographical time zones after that of Russia. This means that the country is not just big in population but also huge in the area.

A big country like that of China needs a lot of products and services. They need a lot of goods to meet the needs of people residing in that country. Some of the goods can be imported and the rest have to be produced in the home country. In fact, most goods that they can’t import or the goods that are not economical to import, they have to manufacture by themselves.

Not to mention that China is one of the cheapest labour countries out there. In this article, we are gonna cover the economy of this country. We will discuss what comprises the most in this economy and what are its driving factors. Read on to know more about the second-biggest economy in the world.

China: The Most Populous Country
China: The Culture
China: The Economy
The Reasons for Economic Growth in China
What can go wrong with China?

China: The Most Populous Country

China or the Republic of China (official name) is a country in East Asia. As we mentioned earlier it is the biggest, in terms of population. It contains the largest number of people than any country. This country also spans and covers most geographical time zones after Russia.

The country has 23 provinces, 4 municipalities, 5 autonomous regions and 2 SARs (Special administrative regions). The capital of China is Beijing. The largest city in China, which is also the financial centre, is Shanghai. In terms of technological and innovative approaches, the city of Shenzhen tops the chart in this country.

China at its inception emerged as one of the very first civilisations. It was the fertile land basin of a river named Yellow that marked its beginning. After the civilization boom, China also emerged as one of the first economically strong countries. Their time as a strong economic power also remained for almost most of the two millennia (thousand years).

Also, the political system of this country is based on monarchies. It has been this way for almost a thousand years (Millenia). This means that for those many years, China’s political system was controlled by rulers and then their heirs and then their heirs. This is what we call an absolute hereditary monarchy. This system of political control began from the ‘Xia dynasty in about the 21st Century BCE. Moreover, since then the country of China has seen multiple expansions, fractions and re-unities.

China: The Culture

The culture of such a big country is expected to be special and unique. Since very ancient times, the culture has been heavily influenced by the philosophy of Confucianism. Which is a tenet in philosophy. This is also known as a truism and inspires people to live a humanistic, rationalistic and very simple life.

The culture there in the past also offered examinations, tests. Those exams were to be passed by a person to get a highly prestigious and better status in society. This is one of the reasons why China has a long history of writing and calligraphy. In fact, calligraphy, writing poetry and painting are more celebrated than other forms of art like dancing or dramatics. Its culture also inspires people to be diving deep into the lanes of history to know about their past. This also invokes the trait of an inward-looking behaviour of Chinese people in the past, this ran at a national level of thought process.

China: The Economy

It is an aforementioned fact that China is big and has a lot of people. It has to cater to about 1.4 billion people for its sustenance. This really marks that the economy must be big and effective. However, this is not as easy as it seems.

Even though China is the largest in terms of population, we cannot really say that it is the biggest when it comes to the economy. It is second in terms of magnitude just after the United States. It is important to note that economies are weighed in terms of GDPs. GDP stands for the gross domestic product. That is in simpler terms, the sum total of all the valuable products or services that a country produces in a financial year.

According to the GDPs, in the pandemic year 2020, China is seen to have the second-largest GDP in the world. Here are the top five countries according to the GDP ranks.

Highest-ranking countries in the world in nominal GDP
Highest-ranking countries in the world in nominal GDP

When we talk in terms of GDP, we measure it in dollars. We can also notice that China may be the second largest in GDP but it is the largest in terms of PPP.

PPP stands for purchasing power parity. PPP is a popular macroeconomic analysis metric that is used to compare economic productivity and standards of living between countries in purchasing power. The theory follows a theory known as the “Basket of goods” for comparing the purchasing power of different countries.

China tops the list when we see through the lens of purchasing power parity. This shows us the fact that even if the Chinese economy is the second-largest, the citizens of China are better in purchasing power and economic productivity than that most countries. Please note that PPP here does not mean a paycheck protection program, made by the CARES Act.

China’s growth rate (In annual terms) is displacing that of the United States of America. Many think that China’s rate will overtake the United States in terms of Nominal GDP too in the upcoming years. Don’t get scared of the terminology “Nominal GDP”. Nominal GDP is a form of GDP that is in the current rates, without accounting for the effect of inflation on the GDP. So, this is a GDP at the current market price.

There are many reasons for china that made this country get this spot of a top tier pacer in the economic race. We will discuss more in a second. But let us get some overview, China has progressively opened its economy with the whole world, continuously for more than forty years. This reveals a good reason why its economy is on a paced growth and why the standards of people there have been improving vastly.

The Chinese government has gradually phased out collectivised agriculture too. It means the type of agriculture in which multiple farmers can hold land and share workloads of the agriculture activity. Thus, it helps in sharing Profits and losses among farmers and makes farming a little more smooth sailing.

Collectivised farming has also boosted flexibility for market prices and increased the autonomy of businesses. When a country’s agriculture is doing well, it can then pay more attention to the industrial sector and thus China’s domestic and foreign trade magnitudes are also rising at a good rate of growth.

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The Reasons for Economic Growth in China

By far we have discussed China and its economy. We have seen that it is a rapidly growing economy with such a behemoth sort of population. This might interest you in how this big country is fostering growth with such a huge number of people and how it is able to raise citizens' standard of living. This is the part of the article where we discuss the reasons for such growth in China. How it is becoming, what it is becoming and what are the main drivers of growth for this economy.

The Manufacturing Hub of the world

China, if you don’t know, is the manufacturing hub of the world. If you are using a product that is sold by a brand or even a local product then it is a good possibility that the product would be manufactured in China.

Yes, look around yourself. Your favourite Apple products are assembled in china, your favourite Converse or Nike sneakers are made in China, and most things that you can think of are manufactured in China. Do you ask for a reason? The reason is obviously cheap labour.

With such a big population, China has some special benefits over any other country in the world. It can provide a good basis for cheap labour. For that one reason, it has emerged as the global capital of manufacturing items.

Besides its large hands on the textile industry, the economy also is big on machinery, processing of food items, Cement for infrastructure, consumer goods and many many more fields.

Moreover, China is not a huge hub only for domestic manufacturing plants, it also caters to the needs of foreign companies to come and manufacture there or assemble items. Famous examples may include Apple. Apple designs their products in California and they are assembled in China. Adding to this, The Chinese software and IT industry grew by over 14.2% from 2018 to 2019, generating revenue of approximately $940 billion.

Apple Factory in China
Apple Factory in China

Heavy Focus on Industries

Another reason which makes this country a big economy is its industries. As any normal developing country, China knows that for growing its economy, it needs to pay attention to the industries that are set in its territory. So they focus extensively on that.

China is a super friendly nation when it comes to industries wanting to set up manufacturing plants there. Results of which are the fact that China is the world's biggest steel manufacturer. This shows a strong will of steel.

The Chinese government began opening up the economy for the whole world in 1978. Which is also known as globalisation. So it began its reforms for economic development under the leader named Deng Xiaoping. That was a turning point in the history of this big country, after the reforms it went on to become the fastest-growing major country globally.

According to a report, the growth rates were averaging 10% over 30 years. China also has three of the ten largest stock exchanges in India. They are located in prime cities like Shanghai, Hong Kong and Shenzhen. They are big in terms of market capitalisation and trading volume. All these factors establish that China is an industrial hub.

The Medicines industry

Abbreviated as Pharmaceutical industry. China has one of the best, state of the art medical supply chains. The growth trends in this industry copy the whole of China. It grows almost as China grows, which is rapid. China had the second-largest pharmaceutical market in the world as of 2017.

The pharmaceutical industry follows the same structure as most of the world. They have manufacturers at the top and then middlemen or distributors and then retail stores communicate directly to the general public. However, the global share of China's medicines is seen less. With a big population, it is forecasted to grow even more and is still one of the biggest in terms of scale.

The Population’s Demand-pull

As mentioned earlier, China is very populous. Which makes it a generator of huge demands. Brands all over the world try to target this demand to get some share of this market. So this has become one of the most important drivers of economic growth for that country. It is a consumer paradise with all types of demands for goods, be it normal or luxury items.

China has some of the biggest shopping malls in the world. They, not to mention, stimulate growth in a good direction. The retail lines of China contributed about 1.8 trillion dollars to the Gross domestic product.

China Global Center Mall
China Global Center Mall

China is also the home to the E-Commerce giant Alibaba. It is responsible for giving a lasting boost to the already big consumerism in China. A report said that Alibaba on a shopping festival achieved something sort of called a miraculous sale. It touched a sales record of 540.3 billion Yuan (it is about 84.5 billion dollars), which is a huge record for such a huge country. This gave a much-needed boost to the consumer sector. Even today it is one of the benchmarks for sales all over the world.

Alibaba Logo
Alibaba Logo

Tourism and travel is also big sector in China. It reportedly contributed 992 billion dollars to the Chinese GDP in the year 2019. Other sectors that are the prime demand pullers are transportation, construction and estate.

What can go wrong with China?

China, however big it may seem from the outside, can go weak from the inside. There can be many premises on which the country is not doing well. For example, China uses a lot of Non-renewable resources to produce power, electricity. The population needs it and the shift in this sector seems impossible. This marks the country as a huge member of the world's pollution and a big emitter of greenhouse gases.

As we discussed previously, the China government is a monarch at its core. This makes enough space for corruption. The government is however trying to curb corruption and make the country more flexible and friendly for the world’s businesses. This can take time and if not done correctly can leave a bad impression on the image of China. This problem is not just one faced. It is a multifaceted problem, as it can lead to fewer industries in China and thus low employment rates in the country.

Speaking of that, China also faces the problem of unemployment. It needs to place people with enough skillsets for employment. Which is also a big deal in a country as big as China.

In addition to the political and the internal housing issue, one more issue lurks there. The recent downward trend of the labour industry. This means that China is slowly losing the crown of the cheapest labour in the world. The reason for this can be inflation and the digitalised working models and economy. China is losing its position to other cheap labour countries like Pakistan, India etcetera. For India, it is good news but if China has to retain its manufacturing position then it needs to be more ready for this changing technological world.

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As we discussed above, China is a big country with a huge population and big demands. It is important to note that it, obviously, also has some cracks. Some cracks in the economy that are not severe but if not cured could sink a big ship.

The recent Evergrande fail was one such big example of how things can go wrong. China has seen real estate bubbles in its history too. The previous bubble burst and hit the whole world’s market, more recently the Evergrande crisis made the investors scared of investing in China.

It is a good point to say that “With great powers comes great responsibilities”. China has a load of the most people on the globe, which can be overwhelming to the government. In these times of pandemic, the future remains random and uncertain.

The fact that the Covid 19 pandemic originated from the heart of China also is affecting the Chinese economy in the wrong manner. It has defamed China in some sense. This is the reason that some industries are looking to shift base to developing countries like India.

For China, it remains a tough call to tackle a pandemic and the future of its economy. Again, it is not supposed to be easy to handle such a big and populous economy.


Is China a developed country?

Yes, China is one of the largest developing countries in the world.

What is China's GDP?

The gross domestic product (GDP) of China is around 14.87 trillion U.S. dollars as of 2020.

Is China the fastest growing economy?

Yes, China ranks second in the world's fastest-growing economy.

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