China is the world's second largest economy after United States of America which grew at a very slow pace in the last quarter of 2011, slowest pace in the last two years. The rate of growth for the entire economy has fallen from 10.4% in 2010 to 9.2% in 2011. Chinese economy, which has an export led growth, has been deteriorating due to slowdown of demand from both US and European Union. As European Union is one of the largest trading partners of China, a slowdown in the EU has caused a slowdown in the domestic expansion of the economy. But it is expected that the domestic demand may help the economy to rebalance. Most of the growth of the Chinese economy at present is being created by domestic consumption and investment. The slowdown in the economy of China is expected to create a slowdown in the global economy as China's growth is the driving engine for the global economy. On these worries in the economy, even the financial markets are tumbling. China along with Japan is expected to help the Eurozone overcome its sovereign debt crisis through the International Monetary Fund.
The rate of growth of the economy is being affected by the domestic factors as well as the worsening situation in Europe and US. Due to monetary tightening by the Chinese government, the economy is expected to grow at an even slower pace in 2012. Some of the stimulus measures adopted by the Government to bring the economy to a sustainable level include curbing the lending activities to prevent overheating in the property and investment markets and tightening of the monetary policy. One of the problems being faced by the Chinese is that the consumer price inflation is above the targets which were set by the Central Bank. The Government of China has been targeting the country's surging inflation rate and surge in the property and investment prices by tight monetary policy. The interest rates have been increased five times in the previous years by the Central Bank along with rise in the reserve ratio requirement. Deploying some strategies and making them effective, the government has succeeded in controlling the level of inflation but it has curbed the growth rate of the country.
Since long the economy of China has artificially maintained its depreciated currency to maintain its trade surplus and now since 1998, Chinese foreign reserves have witnessed first decline in the last quarter of 2011 and narrowing trade surplus. A decline in the level of exports due to weakening demand from its major trading partners viz EU and United States has been witnessed. Since long the Government of China has kept its currency at artificially low level against the US dollar i.e. at a depreciated level to have current account surplus in the economy. They are manipulating their currency to stay in surplus which is destroying the growth and job prospects in the US. The reserve requirement ratio for the commercial lenders has been increased six times in the previous years to curb the liquidity stance in the economy and curb the increase in rate of inflation. Also, in the past few months, the bank reserve requirement has increased on eight occasions along with three hikes in the interest rates.
The rate of inflation has picked up from average 3.3 percent in 2010 to 4.6 percent in 2011 which was lifted by higher food and commodity prices. With the tightened monetary policy and inflation pressures building up it has been forecasted that China's gross domestic product is expected to grow at the rate of 9.2 percent in 2012 as all the commodity prices are expected to come a level down. Emphasis has been laid on the measures to rebalance the economic growth drivers in the plan (2011-2015). In early 2012, the housing market in the economy was found experiencing bubbles which signify a property slump in the economy. The local government is expected to face fiscal pressures because of investment in the financing of public houses and debt repayment. The economy is expected to cut the reserve requirement of the banks and also to target the growth in the money supply.
China is one of the world's largest economies, a slowdown in which is expected to lead to a global slowdown. It is to the future to revel whether the economy of China will face a slowdown or will again emerge as a strong power. Will China continue to manipulate its currency to gain supremacy and also whether the currency war will have an end to it?