China’s Economic Conditions
Wayne M. Morrison
Specialist in Asian Trade and Finance
December 11, 2009June 26, 2012
Congressional Research Service
7-5700
www.crs.gov
RL33534
CRS Report for Congress
Prepared for Members and Committees of Congress
China’s Economic Conditions
Summary
SincePrior to the initiation of economic reforms and trade liberalization 30 years ago, China has been one
of the world’s fastest-growing economies and has emerged as a major economic and trade power.
China’s rapid economic growth has sharply improved Chinese living standards and helped raise
hundreds of millions of people out of extreme poverty. Trade and foreign investment flows have
been major factors in China’s booming economy. In 2008 China, was the world’s second largest
merchandise exporter and third largest importer. Over half of China’s trade is conducted by
foreign-invested firms in China. In 2008, foreign direct investment (FDI) in China totaled $92
billion, making it the destination for FDI among developing economies. The combination of large
trade surpluses, FDI flows, and large-scale purchases of foreign currency (especially dollars) has
helped make China the world’s largest holder of foreign exchange reserves at $2.3 trillion.
The global economic crisis began to impact China’s economy in late 2008. After growing by 13%
in 2007, China’s real GDP slowed to 9.0% in 2008 and to 7.1% in the first half of 2009 (year-onyear basis). China’s trade and inflows of FDI diminished sharply, and millions of workers
reportedly lost their jobs. The Chinese government has sought to boost the economy by
implementing a $586 billion economic stimulus package (largely aimed at infrastructure
projects), establishing easy money policies to boost banking lending, and providing assistance to
various industries. Such policies have helped stabilize China’s economy; real GDP is expected to
grow by over 8% in 2009—far higher than the expected growth of any other major economy.
Despite the relatively positive outlook for its economy, China faces a number of difficult
challenges that, if not addressed, could undermine its future economic growth and stability. These
include pervasive government corruption, an inefficient banking system, over-dependence on
exports and fixed investment for growth, the lack of rule of law, severe pollution, and widening
income disparities. The Chinese government has indicated that it intends to create a “harmonious
society” over the coming years that would promote more balanced economic growth and address
a number of economic and social ills.
China’s economy and economic policies are of major concern to many U.S. policymakers. On the
one hand, U.S. consumers, exporters, and investors have generally benefitted from China’s rapid
economic and trade growth. China’s large holdings of U.S. securities have helped keep U.S.
interest rates relatively low. Some contend that China has a large stake in ensuring the
continuance of a liberalized global trading system. On the other hand, the surge in U.S. imports of
Chinese products has put competitive pressures on various U.S. industries. Many U.S.
policymakers have argued that China maintains a number of economic policies that violate its
commitments in the World Trade Organization (WTO) and/or are harmful to U.S. economic
interests, such as its currency policy. Concerns have also been raised over China’s rising demand
for energy and raw materials in terms of the impact that demand may have on world prices,
Chinese efforts to purchase energy and raw materials assets around the world, and the growing
level of pollution and greenhouse gases that has resulted from China’s growing energy needs.
China has been pursuing free trade agreements around the world, especially in Asia. This has
raised concerns that China might try to promote a greater Asian trading area that would exclude
the United States, and thus possibly diminish U.S. economic power and influence in the region.
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Contents
Most Recent Developments.........................................................................................................2
An Overview of China’s Economic Development........................................................................3
China’s Economy Prior to Reforms .......................................................................................3
The Introduction of Economic Reforms.................................................................................4
China’s Economic Growth Since Reforms: 1979-2008 ..........................................................4
Causes of China’s Economic Growth ....................................................................................5
Measuring the Size of China’s Economy .....................................................................................6
Foreign Direct Investment in China.............................................................................................9
China’s Trade Patterns............................................................................................................... 10
China’s Major Trading Partners........................................................................................... 13
Major Chinese Trade Commodities ..................................................................................... 14
China’s Growing Appetite for Imported Oil......................................................................... 16
China’s Regional and Bilateral Free Trade Agreements........................................................ 16
China’s Growing Overseas Direct Investment............................................................................ 18
Major Long-Term Challenges Facing the Chinese Economy...................................................... 20
Fallout From the Current Global Financial Crisis ...................................................................... 23
Figures
Figure 1. GDP on a PPP Basis for China and the United States, 2000-2008 and
Projections Through 2030 ........................................................................................................8
Figure 2. Per Capita GDP on a PPP Basis for China and the United States: 2000-2008 and
Projections Through 2030 ........................................................................................................8
Figure 3. Annual U.S. FDI Flows to China: 1998-2008.............................................................. 10
Figure 4. China’s Merchandise Trade: 1990-2008...................................................................... 11
Figure 5. Merchandise Exports by China, Germany and the United States: 1990-2008............... 12
Figure 6. Merchandise Imports by China, Germany, and the United States: 1990-2008 .............. 12
Figure 7. China’s Net Oil Imports: 1997-2008 ........................................................................... 16
Figure 8. Monthly Percentage Change in China’s Trade and FDI:
April 2008-October 2009 ....................................................................................................... 24
Figure 9. Change in China’s Trade With its Major Trading Partner: January-September
2009 Over the Same Period in 2008 ....................................................................................... 24
Figure 10. Change in China’s Quarterly Real GDP Growth: Second Quarter 2008 to Third
Quarter 2009 and Projection for Fourth Quarter 2009............................................................. 26
Figure 11. China’s Monthly Trade Data in Dollars: January 2008-October 2009 ........................ 26
Figure 12. Projected Real GDP of Major Economies in 2009..................................................... 27
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Tables
Table 1. China’s Average Annual Real GDP Growth: 1960-2008 .................................................5
Table 2. Comparisons of U.S., Japanese, and Chinese GDP and Per Capita GDP in
Nominal U.S. Dollars and PPP, 2008........................................................................................7
Table 3. Major Foreign Investors in China: 1979-2008 ................................................................9
Table 4. China’s Merchandise World Trade: 1979-2008 ............................................................. 11
Table 5. China’s Major Trading Partners: 2008 .......................................................................... 14
Table 6. Major Chinese Exports: 2008....................................................................................... 15
Table 7. Major Chinese Imports: 2008....................................................................................... 15
Table 8. China’s Free Trade Agreements.................................................................................... 17
Table 9. Top 10 Destinations for China’s Overseas Direct Investment: 2008 .............................. 20
Table A-1. Top Five African Sources of Chinese Imports: 2004-2008 ........................................ 28
Table A-2. Major Chinese Imports from Africa: 2004-2008 ....................................................... 29
Table A-3. Top Five African Suppliers of Mineral Fuel to China: 2008 ...................................... 29
Table A-4. China’s Top Five African Export Markets: 2004-2008 .............................................. 30
Table A-5. Major Chinese Exports to Africa: 2004-2008............................................................ 30
Table A-6. Major Chinese Exports to North Korea: 2004-2008 .................................................. 31
Table A-7. Major Chinese Imports from North Korea: 2004-2008.............................................. 31
Table A-8. China’s Trade With Iran: 2004-2008......................................................................... 32
Appendixes
Appendix. China’s Growing Economic Ties with Africa, North Korea, and Iran ........................ 28
Contacts
Author Contact Information ...................................................................................................... 32
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China’s Economic Conditions
T
he rapid rise of China as a major economic power within a time span of about 30 years is
often described by analysts as one of the greatest economic success stories in modern
times. From 1979 (when economic reforms began) to 2008, China’s real gross domestic
product (GDP) grew at an average annual rate of nearly 10%. From 1980 to 2008, China’s
economy grew14-fold in real terms, real per capita GDP (a common measurement of living
standards) grew over 11-fold, and hundreds of millions of people were raised out of extreme
poverty. By some measurements, China is now the world’s second largest economy and some
analysts predict it could become the largest within a few decades. Yet, on a per capita basis, China
remains a relatively poor country.
China’s economic rise has led to a substantial increase in U.S.-China economic ties. Total trade
between the two countries surged from $5 billion in 1980 to $409 billion in 2008 (U.S. data). In
2008, China was the United States’ second largest trading partner, its third largest export market,
and its largest source of imports. Many U.S. companies have extensive operations in China in
order to sell their products in the booming Chinese market and to take advantage of low-cost
labor for export-oriented manufacturing.1 These operations have helped some U.S. firms to
remain internationally competitive and have supplied U.S. consumers with a variety of low-cost
goods. China’s large-scale purchases of U.S. Treasury securities have enabled the federal
government to fund its budget deficits, which helps to keep U.S. interest rates relatively low.
However, the emergence of China as a major economic superpower has raised concern among
many U.S. policymakers. Some express concern over the large and growing U.S. trade deficits
with China, which rose from $10 billion in 1990 to $266 billion in 2008, and are viewed by many
Members of Congress as an indicator that U.S.-Chinese commercial relations are imbalanced or
unfair. Others claim that China uses unfair trade practices (such as an undervalued currency and
subsidies to domestic producers) to flood U.S. markets with low-cost goods, and that such
practices threaten American jobs, wages, and living standards. Other concerns relating to China’s
economic growth include its growing demand for energy and raw materials, its status as the
world’s largest emitter of greenhouse gasses, its large holdings of U.S. securities, and its growing
economic ties (and hence influence) with numerous countries around the world, including
traditional U.S. allies, as well as countries in which the United States has major foreign policy
concerns (such as North Korea, Sudan, and Iran).
China faces a number of major economic challenges, including the fallout from the global
financial crisis (which has sharply slowed foreign demand for its exports and diminished FDI
flows to China), a weak banking system, widening income gaps, growing pollution, unbalanced
economic growth (through over-reliance on exports and fixed investment), widespread economic
efficiencies resulting from non-market policies, government corruption, and the lack of the rule of
law. The Chinese government views a growing economy as vital to maintaining social stability.
This report provides background on China’s economic rise and current economic structure and
the challenges China faces to keep its economy growing strong, and describes Chinese economic
policies that are of concern to U.S. policymakers.
1
Some companies use China as part of their global supply chain for manufactured parts, which are then exported and
assembled elsewhere. Other firms have shifted the production of finished products from other countries (mainly in
Asia) to China; they import parts and materials into China for final assembly.
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Most Recent Developments
•
On November 9, 2009, China announced that it would provide $10 billion in
concessional loans to African countries, help set up a $1 billion loan program for
African small and medium-sized businesses, and forgive certain African debt due
in 2009. China also pledged to lower tariffs for African products and to boost
cooperation on climate change, science and technology, medical care and health,
agriculture, human resources development and education, and cultural
exchanges.
•
On October 22, 2009, the Chinese government announced that third quarter GDP
had risen by 8.9% on a year-on-year basis.
•
On October 21, 2009, a Chinese banking official warned that easy money
policies could cause property and stock bubbles.
•
On October 15, 2009, the Chinese government announced that FDI in China in
September had risen by 18.9% year-on-year, the second straight month of FDI
growth. The government also reported that foreign exchange reserves had risen to
$2.27 trillion as of September 2009, up $358 billion since February 2009.
•
On October 15, 2009, the U.S. Treasury Department released its semi-annual
report on exchange rates. The report stated that “although China’s overall policies
played an important role in anchoring the global economy in 2009 and promoting
a reduction in its current account surplus, the recent lack of flexibility of the
renminbi exchange rate and China’s renewed accumulation of foreign exchange
reserves risk unwinding some of the progress made in reducing imbalances as
stimulus policies are eventually withdrawn and demand by China’s trading
partners recovers.”
•
On October 13, 2009, China and Russia reportedly signed 40 trade deals worth
an estimated at $3.5 billion. On the same day, the New York Times reported that
government officials in Guinea had announced that a Chinese company had
agreed to invest up to $7 billion in the country’s electricity and aviation
infrastructure in return for certain mining and oil rights.
•
A report by Hurun Research issued on October 13, 2009, estimated that China
had 130 billionaires (U.S. dollars).
•
China’s Xinhua News Agency report on October 13, 2009, that 968 children
living near three smelters in Jiyuan City (in Henan province), were found to have
excessive amounts of lead in their blood. China Daily reported on August 25,
2009, that more than 1,350 children in Wenping (Hunan province) and 851
children in Fengxiang (Shaanxi province) had also tested positive for excessive
lead. The government stated that it would close down a number of lead plants.
•
On August 19, 2009, China reached an agreement with Australia to purchase
$41billion worth of Australian natural gas.
•
On June 29, 2009, a Chinese government agency estimated that 20% of new bank
credit was going into China’s stock markets.
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•
At a press conference during her visit to China on February 21, 2009, Secretary
of State Hillary Rodham Clinton stated that she appreciated “greatly the Chinese
government’s continuing confidence in the United States treasuries.”
•
On February 1, 2009, the Chinese government announced that 20 million migrant
workers (15.4% out of an estimated 130 million migrants) had lost their jobs due
to the global financial crisis.
•
On November 15, 2008, Chinese President Hu Jintao attended the summit
meeting of the Group of 20 (G-20) countries in Washington, D.C. to discuss the
current global financial crisis. Hu stated that “steady and relatively fast growth in
China is in itself an important contribution to international financial stability and
world economic growth.”
•
On November 9, 2008, the Chinese government announced it would implement a
two-year, $586 billion stimulus package, mainly dedicated to infrastructure
projects.
•
On June 13, 2008, the Netherlands Environmental Assessment Agency
announced that, according to its estimates, China in 2007 became the world’s
largest emitter of CO2, surpassing the United States by 14%, and accounting for
two-thirds of last year’s global carbon dioxide increase.
An Overview33 years ago, China
maintained policies that kept the economy very poor, stagnant, centrally controlled, vastly
inefficient, and relatively isolated from the global economy. Since opening up to foreign trade and
investment and implementing free market reforms in 1979, China has been among the world’s
fastest growing economies, with real annual gross domestic product (GDP) averaging nearly10%
through 2011. In recent years, China has emerged as a major global economic and trade power. It
is currently the world’s second largest economy, largest merchandise exporter, second largest
merchandise importer, second largest destination of foreign direct investment (FDI), largest
manufacturer, largest holder of foreign exchange reserves, and largest creditor nation.
The global economic crisis that began in 2008 significantly affected China’s economy. China’s
exports, imports, and FDI inflows declined, GDP growth slowed, and millions of Chinese
workers reportedly lost their jobs. The Chinese government responded by implementing a $586
billion economic stimulus package, loosening monetary policies to increase bank lending, and
providing various incentives to boost domestic consumption. Such policies enabled China to
effectively weather the effects of the sharp global fall in demand for Chinese products, while
several of the world’s leading economies experienced negative or stagnant economic growth.
From 2008 to 2011, China’s real GDP growth averaged 9.6%.
Some economic forecasters project that China will overtake the United States as the world’s
largest economy within a few years, although U.S. per capita GDP levels are expected to remain
much larger than that of China for many years to come. However, the ability of China to maintain
a rapidly growing economy in the long run will depend largely on the ability of the Chinese
government to implement comprehensive economic reforms that more quickly hasten China’s
transition to a free market economy; rebalance the Chinese economy by making consumer
demand, rather than exporting and fixed investment, the main engine of economic growth; and
boosting productivity and innovation. China faces numerous other challenges as well that could
affect its future economic growth, such as widespread pollution, growing income disparities, an
undeveloped social safety net, and extensive involvement of the state in the economy. The
Chinese government has acknowledged that its current economic growth model needs to be
altered. In October 2006, the Chinese government formally outlined a goal of building a
“harmonious socialist society” by taking steps (by 2020) to lessen income inequality, improve the
rule of law, enhance environmental protection, reduce corruption, and improve the country’s
social safety net (such as expanding health care and pension coverage to rural areas). In addition,
the government announced plans to rebalance the economy and boost innovation.
China’s economic rise has significant implications for the United States and hence is of major
interest to Congress. On the one hand, China is a large (and potentially huge) export market for
the United States. Many U.S. firms use China as the final point of assembly in their global supply
chain networks. China’s large holdings of U.S. Treasury securities help the federal government
finance its budget deficits and keep U.S. interest rates low. However, some analysts contend that
China maintains a number of distortive economic policies (such as an undervalued currency and
protectionist industrial policies) that undermine U.S. economic interests. They warn that efforts
by the Chinese government to promote innovation could mean that Chinese firms will
increasingly pose a “competitive challenge” to many leading U.S. industries. This report surveys
the rise of China’s economy, describes major economic challenges facing China, and discusses
the challenges, opportunities, and implications of China’s economic rise for the United States.
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Contents
The History of China’s Economic Development ............................................................................. 2
China’s Economy Prior to Reforms........................................................................................... 2
The Introduction of Economic Reforms.................................................................................... 2
China’s Economic Growth Since Reforms: 1979-2012............................................................. 3
Causes of China’s Economic Growth........................................................................................ 5
Measuring the Size of China’s Economy......................................................................................... 8
Foreign Direct Investment (FDI) in China..................................................................................... 10
China’s Growing FDI Outflows..................................................................................................... 15
China’s Merchandise Trade Patterns.............................................................................................. 17
China’s Major Trading Partners............................................................................................... 21
Major Chinese Trade Commodities......................................................................................... 22
China’s Growing Appetite for Energy ..................................................................................... 24
China’s Regional and Bilateral Free Trade Agreements.......................................................... 25
Major Long-Term Challenges Facing the Chinese Economy........................................................ 26
China’s Incomplete Transition to a Market Economy ............................................................. 26
Industrial Policies and SOEs ............................................................................................. 26
The Banking System ......................................................................................................... 27
An Undervalued Currency ................................................................................................ 27
Implications of China’s “Unbalanced” Economic Growth Model .......................................... 28
Overdependence on Exporting and Fixed Investment....................................................... 28
Growing Pollution............................................................................................................. 30
Other Challenges............................................................................................................... 31
Plans Announced by the Chinese Government to Reform and Restructure the Economy ............ 32
The Central Government Five-Year Plans............................................................................... 32
The Drive for “Indigenous Innovation”................................................................................... 33
Challenges to U.S. Policy of China’s Economic Rise ................................................................... 34
Figures
Figure 1. Average Real GDP Growth Among Major Global Economies: 2008-2011 ..................... 5
Figure 2. Comparison of Annual Changes in Total Factor Productivity in China and the
United States: 2000-2011.............................................................................................................. 7
Figure 3. Projections of U.S. and Chinese Annual Real GDP Growth: 2012-2030......................... 8
Figure 4. Chinese and U.S. GDP as a Percent of Global Total: 1990-2011 and Projections
through 2016............................................................................................................................... 10
Figure 5. Industrial Output by Foreign-Invested Firms in China as a Share of National
Total: 1990-2010......................................................................................................................... 11
Figure 6. Share of China’s Exports and Imports Attributed to Foreign-Invested
Enterprises in China: 1990-2012* .............................................................................................. 12
Figure 7. Annual FDI Flows to China: 1985-2011 ........................................................................ 13
Figure 8. Major Recipients of Global FDI Inflows in 2011........................................................... 13
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Figure 9. Annual U.S. FDI Flows to China: 1985-2011 ................................................................ 14
Figure 10. China’s Annual FDI Outflows: 2002-2011................................................................... 16
Figure 11. Major Sources of Global FDI Outflows in 2011 .......................................................... 17
Figure 12. China’s Merchandise Trade: 2000-2011....................................................................... 19
Figure 13. Annual Change in China’s Merchandise Exports and Imports: 1990-2011.................. 19
Figure 14. Merchandise Exports by China, Germany and the United States: 1990-2011 ............. 20
Figure 15. Merchandise Imports by China, Germany, and the United States: 1990-2011............. 20
Figure 16. China’s Global Share of Merchandise Exports: 1990-2011 ......................................... 21
Figure 17. China’s Net Oil Imports: 1997-2011 ............................................................................ 25
Figure 18. Chinese Gross Savings, Gross Fixed Investment, and Private Consumption as
a Percent of GDP: 1990-2011..................................................................................................... 29
Figure 19. Chinese Disposable Personal Income as a Percent of GDP: 2000-2011 ...................... 30
Figure 20. Current Account Balances as a Percent of GDP for China and the United
States: 2000-2011 ....................................................................................................................... 35
Figure 21. Sources of China’s GDP Growth: 2007-2011............................................................... 36
Tables
Table 1. China’s Average Annual Real GDP Growth: 1979-2012 ................................................... 4
Table 2. Comparisons of Chinese, Japanese, and U.S. GDP and Per Capita GDP in
Nominal U.S. Dollars and a Purchasing Power Parity Basis: 2011............................................ 10
Table 3. Major Sources of FDI in China: 1979-2011..................................................................... 14
Table 4. China’s Merchandise World Trade: 1979-2011................................................................ 18
Table 5. China’s Major Trading Partners in 2011 .......................................................................... 22
Table 6. Major Chinese Exports: 2011........................................................................................... 23
Table 7. Major Chinese Imports: 2011........................................................................................... 23
Contacts
Author Contact Information........................................................................................................... 37
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T
he rapid rise of China as a major economic power within a time span of about three
decades is often described by analysts as one of the greatest economic success stories in
modern times. From 1979 (when economic reforms began) to 2011, China’s real gross
domestic product (GDP) grew at an average annual rate of nearly 10%.1 From 1980 to 2011, real
GDP grew 19-fold in real terms, real per capita GDP increased 14-fold, and an estimated 500
million of people were raised out of extreme poverty. China is now the world’s second largest
economy and some analysts predict it could become the largest within a few years. Yet, on a per
capita basis, China remains a relatively poor country.
China’s economic rise has led to a substantial increase in U.S.-China economic ties. According to
U.S. trade data, total trade between the two countries surged from $5 billion in 1980 to $503
billion in 2011. China is currently the United States’ second largest trading partner, its third
largest export market, and its largest source of imports. Many U.S. companies have extensive
operations in China in order to sell their products in the booming Chinese market and to take
advantage of lower-cost labor for export-oriented manufacturing.2 These operations have helped
some U.S. firms to remain internationally competitive and have supplied U.S. consumers with a
variety of low-cost goods. China’s large-scale purchases of U.S. Treasury securities (which
totaled nearly $1.2 trillion at the end of 2011) have enabled the federal government to fund its
budget deficits, which help keep U.S. interest rates relatively low.
However, the emergence of China as a major economic superpower has raised concern among
many U.S. policymakers. Some claim that China uses unfair trade practices (such as an
undervalued currency and subsidies given to domestic producers) to flood U.S. markets with lowcost goods, and that such practices threaten American jobs, wages, and living standards. Others
contend that China’s growing use of industrial policies to promote and protect certain domestic
Chinese industries firms favored by the government, and its failure to take effective action against
widespread infringement of U.S. intellectual property rights (IPR) in China, threaten to
undermine the competitiveness of U.S. IP-intensive industries. In addition, while China has
become a large and growing market for U.S. exports, critics contend that numerous trade and
investment barriers limit opportunities for U.S. firms to sell in China, or force them to set up
production facilities in China as the price of doing business there. Other concerns relating to
China’s economic growth include its growing demand for energy and raw materials and its
emergence as the world’s largest emitter of greenhouse gasses.
The Chinese government views a growing economy as vital to maintaining social stability.
However, China faces a number of major economic challenges which could undermine future
growth, including distortive economic policies that have resulted in over-reliance on fixed
investment and exports for economic growth (rather than on consumer demand), government
support for state-owned firms, a weak banking system, widening income gaps, growing pollution,
and the relative lack of the rule of law in China. Many economists warn that such problems could
undermine China’s future economic growth. The Chinese government has acknowledged these
problems and has pledged to address them by implementing policies to boost consumer spending,
expand social safety net coverage, and encourage the development of less-polluting industries.
1
The beginning of China’s economic reform process began in December 1978 when the Third Plenum of the Eleventh
Central Committee of the Communist Party adopted Deng Xiaoping’s economic proposals. Implementation of the
reforms began in 1979.
2
Some companies use China as part of their global supply chain for manufactured parts, which are then exported and
assembled elsewhere. Other firms have shifted the production of finished products from other countries (mainly in
Asia) to China; they import parts and materials into China for final assembly.
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This report provides background on China’s economic rise, describes its current economic
structure, identifies the challenges China faces to keep its economy growing strong, and discusses
the challenges, opportunities, and implications of China’s economic rise for the United States.
The History of China’s Economic Development
China’s Economy Prior to Reforms
Prior to 1979, China, under the leadership of Chairman Mao Zedong, maintained a centrally
planned, or command, economy. A large share of the country’s economic output was directed and
controlled by the state, which set production goals, controlled prices, and allocated resources
throughout most of the economy. During the 1950s, all of China’s individual household farms
were collectivized into large communes. To support rapid industrialization, the central
government undertook large-scale investments in physical and human capital during the 1960s
and 1970s. As a result, by 1978 nearly three-fourths of industrial production was produced by
centrally controlled, state-owned enterprises (SOEs), according to centrally planned output
targets. Private
enterprises and foreign-invested firms were nearly nonexistentgenerally barred. A central goal of the Chinese
Chinese government was to make China’s economy relatively self-sufficient. Foreign trade was generally
generally limited to obtaining only those goods that could not be made or obtained in China.
Government policies kept the Chinese economy relatively stagnant and inefficient, mainly
because most aspects of the economy were managed and run by the central government (and thus
there were few profit incentives for firms, workers, and farmers), competition was virtually
nonexistent, foreign trade and investment flows were mainly limited to Soviet bloc countries, and
price and production controls caused widespread distortions in the economy. Chinese living
standards were substantially lower than those of many other developing countries. The Chinese
government in 1978 (shortly after the death of Chairman Mao in 1976) decided to break with its
Soviet-style economic policies by gradually reforming the economy according to free market
principles and opening up trade and investment with the West, in the hope that this would
significantly increase economic growth and raise living standards. As Chinese leader Deng
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Xioping
Xiaoping, the architect of China’s economic reforms, put it: “Black cat, white cat, what does it
matter what color the cat is as long as it catches mice?”3
The Introduction of Economic Reforms
Beginning in 1979, China launched several economic reforms. The central government initiated
price and ownership incentives for farmers, which enabled them to sell a portion of their crops on
the free market. In addition, the government established four special economic zones along the
coast for the purpose of attracting foreign investment, boosting exports, and importing high
technology products into China. Additional reforms, which followed in stages, sought to
decentralize economic policymaking in several sectors, especially trade. Economic control of
various enterprises was given to provincial and local governments, which were generally allowed
to operate and compete on free market principles, rather than under the direction and guidance of
3
This reference appears to have meant that it did not matter whether an economic policy was considered to be capitalist
or socialist, what really mattered was whether that policy boosted the economy.
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state planning. In addition, citizens were encouraged to start their own businesses. Additional
coastal regions and cities were designated as open cities and development zones, which allowed
them to experiment with free market reforms and to offer tax and trade incentives to attract
foreign investment. In addition, state price controls on a wide range of products were gradually
eliminated. Trade liberalization was also a major key to China’s economic success. Removing
trade barriers encouraged greater competition and boostedattracted foreign direct investment (FDI) flows.2
China’s Economic Growth Since Reforms: 1979-2008
inflows.4 China’s gradual implementation of economic reforms sought to identify which policies
produced favorable economic outcomes (and which did not) so that they could be implemented in
other parts of the country, a process Deng Xiaoping reportedly referred to as “crossing the river
by touching the stones.”5
China’s Economic Growth Since Reforms: 1979-2012
Since the introduction of economic reforms, China’s economy has grown substantially faster than
during the pre-reform period (see Table 1). From 1960 to According to the Chinese government, from 1953 to
1978, real annual GDP growth was
estimated at 5.3% (a figure many analysts claim is overestimated, based on several economic
disasters that befell the country during this time, such as the Great Leap Forward from 1958-1960
and the Cultural Revolution from 1966-1976). During the reform period (1979-present), China’s
average annual real GDP grew by nearly 9.90%; it grew by 13.0% in 2007, but slowed to 9.0% in
2008. Since 1980, economic reforms helped to produce a 14-fold increase in the size of the
economy in real terms and a 11-fold increase in real per capita GDP (a common measurement of
living standards). The impact of the current global economic crisis on China’s economy is
discussed later in this report.
2
For example, China’s accession to the World Trade Organization in December 2001, which required it to reduce a
wide range of trade and investment barriers, helped to accelerate GDP growth and led to a sharp increase in FDI flows
to China.
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Table 1. China’s Average Annual Real GDP Growth: 1960-2008
Time
Period
Average Annual
Growth (%)
1960-1978 (pre-reform)
5.3
1979-2008 (post-reform)
9.9
1990
3.8
1991
9.3
1992
14.2
1993
14.0
1994
13.1
1995
10.9
1996
10.0
1997
9.3
1998
7.8
1999
7.6
2000
8.4
2001
8.3
2002
9.1
2003
10.0
2004
10.1
2005
9.9
2006
11.1
2007
13.0
2008
9.0
Source: Official Chinese government data and the Economist Intelligence Unit estimated at 6.7%,6 although many analysts claim that
Chinese economic data during this period are highly questionable because government officials
often exaggerated production levels for a variety of political reasons.7 Agnus Maddison estimates
China’s average annual real GDP during this period at 4.4%.8
China’s economy suffered economic downturns during the leadership of Chairman Mao Zedong,
including during the Great Leap Forward from 1958-1960 (which led to a massive famine and
reportedly the death of tens of millions of people) and the Cultural Revolution from 1966-1976
(which caused political chaos and greatly disrupted the economy). During the reform period
(1979-2011), China’s average annual real GDP grew by 9.9%. This essentially has meant that, on
average China has been able to double the size of its economy in real terms every eight years.
The global economic slowdown, which began in 2008, impacted the Chinese economy (especially
the export sector). China’s real GDP growth fell from 14.2% in 2007 to 9.6% in 2008 to 9.2% in
2009. In response, the Chinese government implemented a large economic stimulus package and
an expansive monetary policy. These measures boosted domestic investment and consumption
and helped prevent a sharp economic slowdown in China. In 2010, China’s real GDP grew by
10.4%, and in 2011 it rose by 9.2%. During the first quarter of 2012, real GDP growth was 8.1%
on a year-on-year basis.
4
For example, China’s accession to the World Trade Organization in December 2001, which required it to reduce a
wide range of trade and investment barriers, helped to accelerate GDP growth and led to a sharp increase in FDI flows
to China.
5
Many analysts contend that Deng’s push to implement economic reforms was largely motivated by a belief that the
resulting economic growth would ensure that the Communist Party stayed in power.
6
Chinability, GDP Growth in China, 1952-2011, at http://www.chinability.com/GDP.htm.
7
During the Great Leap Forward, local Chinese officials are believed to have often exaggerated agricultural production
to prove their ability to implement Mao’s economic policies in order to advance their careers or to avoid getting into
political trouble with Beijing. Central government officials may have also exaggerated China’s economic statistics in
order to illustrate the “success” of the government’s economic policies.
8
The Organization for Economic Cooperation and Development, Chinese Economic Performance in the Long Run,
960-2030, by Angus Maddison, 2007.
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Table 1. China’s Average Annual Real GDP Growth: 1979-2012
Year
Real Growth Rate (%)
1979
7.6
1980
7.9
1981
5.3
1982
9.0
1983
10.9
1984
15.2
1985
13.5
1986
8.9
1987
11.6
1988
11.3
1989
4.1
1990
3.8
1991
9.2
1992
14.2
1993
13.9
1994
13.1
1995
10.9
1996
10.0
1997
9.3
1998
7.8
1999
7.6
2000
8.4
2001
8.3
2002
9.1
2003
10.0
2004
10.1
2005
11.3
2006
12.7
2007
14.2
2008
9.6
2009
9.2
2010
10.4
2011
9.2
2012 First Quarter
8.1
Source: Economist Intelligence Unit, based on official Chinese government data.
Note: Data for 2012 are year-on-year.
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Figure 1. Average Real GDP Growth Among Major Global Economies: 2008-2011
(percent)
12.0
10.0
China
8.0
India
6.0
4.0
2.0
Brazil
Russia
Germany U.S.
France
0.0
-2.0
UK
Japan
Italy
Source: EIU database.
Causes of China’s Economic Growth
Economists generally attribute much of China’s rapid economic growth to two main factors:
large-scale capital investment (financed by large domestic savings and foreign investment) and
rapid productivity growth. These two factors appear to have gone together hand in hand.
Economic reforms led to higher efficiency in the economy, which boosted output and increased
resources for additional investment in the economy.
China has historically maintained a high rate of savings. When reforms were initiated in 1979,
domestic savings as a percentage of GDP stood at 32%. However, most Chinese savings during
this period were generated by the profits of state-owned enterprises (SOEs)SOEs, which were used by
the central government for
domestic investment. Economic reforms, which included the
decentralization of economic
production, led to substantial growth in Chinese household savings
(these now account for half of Chinese domestic savings). as well as corporate savings.
As a result, China’s gross savings as a
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percentage of GDP has steadily risen, reaching 52% in 200853.9% in
2010 (compared to a U.S. rate of 8%),
among the world’s highest savings rates.39.3%), and is among the highest savings rates in the world.9 The
large level of savings has enabled China to boost domestic investment. In fact, its gross domestic
savings levels far exceed its domestic investment levels, meaning that China is a large net global
lender.
Several economists have concluded that productivity gains (i.e., increases in efficiency in which
inputs are used) were) have
been another major factor in China’s rapid economic growth. The improvements
to productivity
were caused largely by a reallocation of resources to more productive uses,
especially in sectors
that were formerly heavily controlled by the central government, such as
agriculture, trade, and
9
Source: Economist Intelligence Unit Database.
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services. For example, agricultural reforms boosted production, freeing
workers to pursue
employment in the more productive manufacturing sector. China’s
decentralization of the
economy led to the rise of non-state enterprises (such as private firms), which tended to pursue
more productive activities than the centrally controlled SOEs and were more market-oriented, and
hence, more efficient. Additionally, a greater share of the
economy (mainly the export sector) was
exposed to competitive forces. Local and provincial
governments were allowed to establish and
operate various enterprises on market principles,
without interference from the central
government. In addition, foreign direct investment (FDI) in
FDI in China brought with it new technology and processes that boosted efficiency.4
Despite these widespread economic reforms, Chinese officials contend that China is a “socialistmarket economy,” a term that appears to indicate that the government accepts and allows the use
of free market forces in a number of areas to help grow the economy, but where the government
still plays a major role in the country’s economic development. For example, the banking sector
in China is largely state-controlled. In addition, although the number of SOEs has declined
sharply, they continue to dominate a number of sectors (such as petroleum); are shielded from
competition; are generally the only companies that are allowed to invest overseas; and dominate
the listings on China’s two stock indexes. The government continues to issue five-year and tenyear development plans for the of the economy, and also promotes the development of industries
deemed vital for future economic growth. Direct ownership of private property continues to be
prohibited by the government (all land is owned by the State), although the government provides
rights to individuals and firms to lease and transfer property and offers some legal protection
from government seizures.
efficiency. As indicated in Figure 2, China has achieved high rates of total factor productivity
(TFP) growth relative to the United States. TFP represents an estimate of the part of economic
output growth not accounted for by the growth in inputs (such as labor and capital), and is often
attributed to the effects of technological change and efficiency gains. China experiences faster
TFP growth than most developed countries such as the United States because of its ability to
access and utilize existing foreign technology and know-how. High TFP growth rates have been a
major factor behind China’s rapid economic growth rate. However, as China’s technological
development begins to approach that of major developed countries, its level of productivity gains,
and thus, real GDP growth, could slow significantly from its historic 10% average, unless China
becomes a major center for new technology and innovation and/or implements new
comprehensive economic reforms.10 As indicated in Figure 3, the EIU currently projects that
China’s real GDP growth will slow considerably in the years ahead, averaging 7.0% from 2012 to
2020, and falling to 3.7% from 2021 to 2030.11
The Chinese government has indicated its desire to move away from its current economic model
of fast growth at any cost to more “smart” economic growth, which seeks to reduce reliance on
energy-intensive and high-polluting industries and rely more on high technology, green energy,
and services. China also has indicated it wants to obtain more balanced economic growth. (These
issues are discussed in more detail later in the report.)
10
Like China, Japan experienced rapid economic growth during the early stages of its development in the post-WWII
era, with real GDP averaging 11.0% from 1960-1970. However, from 1970-1980 real GDP averaged 5.4%; it was 4.1%
from 1980-1990, 1.1% from 1990-2000. Japan has continued to experience relatively stagnant economic growth, in part
because of its inability to address a number of structural economic problems. See CRS Report RL30176, Japan's
"Economic Miracle": What Happened?, by William H. Cooper
11
Note, long-term economic projections should be viewed with caution.
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Figure 2. Comparison of Annual Changes in Total Factor Productivity in China and
the United States: 2000-2011
(percent)
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
China
United States
Source: Estimated by the Economist Intelligence Unit.
Note: Total factor productivity represents the part of economic output growth not accounted for by the
growth in inputs, such as labor and capital, and is often used to estimate the effects of technological change.
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Figure 3. Projections of U.S. and Chinese Annual Real GDP Growth: 2012-2030
%
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
China
2022
2023
2024
2025
2026
2027
2028
2029
2030
U.S.
Source: Economist Intelligence Unit.
Note: Long-term economic projections should be interpreted with caution
Measuring the Size of China’s Economy
The rapid growth of the Chinese economy has led many analysts to speculate if and when China
will overtake the United States as the “world’s largest economic power.” The “actual” size of
China’s economy has been a subject of extensive debate among economists. Measured in U.S.
dollars using nominal exchange rates, China’s GDP in 20082011 was $47.2 trillion; its per capita GDP
(a commonly used living-standards measurement) was $3,190. Such data would indicate that
China’s economy and living standards are significantly lower than those of the United States and
Japan, respectively considered to be the number-one and number-two largest economies on a
nominal dollar basis (see Table 2).
3
Source: EIU Database.
According to the Economist, China’s total factor productivity (efficiency gains from such factors as capital and labor)
has grown at an average annual rate of about 4% from 1990 to 2008, compared to about 1% growth for the United
States. See, the Economist, “Secret sauce: China’s rapid growth is due not just to heavy investment, but also to the
world’s fastest productivity gains.” November 12, 2009.
4
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Many economists, however, contend that using nominal exchange rates to convert Chinese data
into U.S. dollars substantially underestimates the size of China’s economy. This is because prices
in China for many goods and services are significantly lower than those in the United States and
other developed countries. Economists have attempted to factor in these price differentials by
using a purchasing power parity (PPP) measurement, which attempts to convert foreign
currencies into U.S. dollars on the basis of the actual purchasing power of such currency (based
on surveys of the prices of various goods and services) in each respective country. This PPP
exchange rate is then used to convert foreign economic data in national currencies into U.S.
dollars.
Because prices for many goods and services are significantly lower in China than in the United
States (and other developed countries), the PPP exchange rate nearly doubles the size of the
Chinese economy from $4.4 trillion (nominal dollars) to $8.2 trillion (PPP dollars), significantly
larger than Japan’s GDP in PPPs ($4.3 trillion), and about half the size of the U.S. economy. PPP
data also raise China’s per capita GDP from $3,325 (nominal) to $6,150.5 The PPP figures
indicate that, while the size of China’s economy is substantial, its living standards (though rising)
remain far below those of the United States and Japan. China’s 2008 per capita GDP on a PPP
basis was only 12.9% of U.S. levels.
There are a number of international economic forecasts that project that China’s economy on a
PPP basis will surpass the U.S. economy (although long-term economic projections should be
viewed with caution). The Economist Intelligence Unit projects that China will overtake the U.S.
economy in 10 years (2019), and by the year 2030, China’s economy will be 18.3% larger than
the U.S. economy (see Figure 1). However, on a per capita GDP (PPP) basis, China’s living
standards in 2030 will be less than one-third of U.S. levels (see Figure 2).
Table 2. Comparisons of U.S., Japanese, and Chinese GDP and Per Capita GDP in
Nominal U.S. Dollars and PPP, 2008
Country
United States
Nominal GDP
($ billions)
GDP in PPP
($ billions)
Nominal Per
Capita GDP
Per Capita
GDP in PPP
14,441
14,441
47,496
47,496
Japan
4,909
4,333
38,566
34,040
China
4,416
8,161
3,325
6,150
Source: Economist Intelligence Unit.
5
These figures represent country averages and do not reflect the growing level of income disparity in China, especially
between rural areas and cities along the coast.
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Figure 1. GDP on a PPP Basis for China and the United States, 2000-2008 and
Projections Through 2030
$Billions
Source: Economist Intelligence Unit.
Figure 2. Per Capita GDP on a PPP Basis for China and the United States: 2000-2008
and Projections Through 2030
$Billions
Source: Economist Intelligence Unit.
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Foreign Direct Investment in China
China’s trade and investment reforms and incentives led to a surge in FDI, which has been a
major source of China’s productivity and economic growth. The Chinese government estimates
that as of 2007 there were 286,200 approved foreign-invested companies in China, and that such
firms employed more than 42 million people and accounted for 31.5% of gross industrial output
value. 6 Annual utilized FDI in China grew from $2 billion in 1985 to $92 billion in 2008. The
cumulative level of FDI in China at the end of 2008 is estimated at $883 billion, making China
one of the world’s largest destinations of FDI.
In terms of cumulative FDI in China for 1979-2008, the Chinese government reports that 39.6%
came from Hong Kong, 10.2% from the British Virgin Islands, 7.4% from Japan, and 6.8% from
the United States (see Table 3).7 In terms of annual data, Hong Kong was reported as the largest
investor in China in 2008, while the United States ranked 7th. Annual U.S. FDI flows to China
peaked at $5.4 billion in 2002, declined annually through 2007, before increasing by 12.5% (to
$2.9 billion) in 2008 (see Figure 3). The U.S. share of annual FDI flows to China fell from 10.2%
in 2002 to 3.2% in 2008.8
Table 3. Major Foreign Investors in China: 1979-2008
($ billions and % of total)
Estimated Cumulative Utilized
FDI: 1979-2008
Country
Amount
% of Total
Total
883.1
Hong Kong
Utilized FDI in 2008
Amount
% of Total
% Change over 2007
100.0
92.4
100.0
23.6
349.6
39.6
41.0
44.4
48.1
British Virgin Islands
90.1
10.2
16.0
17.3
-3.6
Japan
65.4
7.4
3.7
4.0
1.8
United States
59.7
6.8
2.9
3.2
12.5
Taiwan
47.7
5.4
1.9
2.1
–0.3
South Korea
41.9
4.7
3.1
3.4
–14.8
Singapore
37.8
4.3
4.4
4.8
39.3
Source: Chinese Ministry of Commerce.
Note: Ranked by cumulative top seven investors through 2008. Excludes FDI in the financial sector
6
Gross industrial output value is the total volume of final industrial products produced and industrial services provided
during a given period. Source: China 2008 Statistical Yearbook.
7
Much of the FDI originating from the British Virgin Islands and Hong Kong may originate from other foreign
investors. For example, Taiwanese businesses are believed to invest in China through other countries or territories
(such as Hong Kong) in order to circumvent government restrictions. In addition, some Chinese investors might be
using these locations to shift funds overseas in order to re-invest in China to take advantage of preferential investment
policies (this practice is often referred to as “round-tipping”). Thus, the actual level of FDI in China may be overstated.
8
Note, U.S. data on bilateral FDI flows with China differ significantly with Chinese data.
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Figure 3. Annual U.S. FDI Flows to China: 1998-2008
Source: Chinese Ministry of Commerce and Chinese Yearbook, various years.
Note: Chinese and U.S. data on bilateral FDI flows differ sharply.
China’s Trade Patterns
Economic reforms and trade and investment liberalization have helped transform China into a
major trading power. Chinese exports rose from $14 billion in 1979 to $1,429 billion in 2008,
while imports over this period grew from $16 billion to $1,132 billion (see Table 4 and Figure
4). China’s trade growth has been particularly rapid over the past six or so years. From 2002 to
2008, China’s exports grew by 339%, a compound annual growth rate of 23.5%; while imports
increased by 283%, a compound annual growth rate of 21.2%.
In 2007, China surpassed the United States as the world’s second largest merchandise exporter,
after Germany. China was the world’s second largest exporter in 2008 (and was close to
overtaking Germany), and was the third largest importer, after the United States and Germany
(see Figure 5 and Figure 6). China’s trade surplus, which totaled $32 billion in 2004, surged to
$297 billion in 2008.
Merchandise trade surpluses, large-scale foreign investment, and large purchases of foreign
currencies to maintain its exchange rate with the dollar and other currencies have enabled China
to accumulate the world’s largest foreign exchange reserves at $2.3 trillion at the end of
September 2009, making it the world’s largest holder of such reserves.
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Table 4. China’s Merchandise World Trade: 1979-2008
($ billions)
Year
Exports
Imports
Trade Balance
1979
13.7
15.7
–2.0
1980
18.1
19.5
–1.4
1985
27.3
42.5
–15.3
1990
62.9
53.9
9.0
1995
148.8
132.1
16.7
2000
249.2
225.1
24.1
2001
266.2
243.6
22.6
2002
325.6
295.2
30.4
2003
438.4
412.8
25.6
2004
593.4
561.4
32.0
2005
762.0
660.1
101.9
2006
969.1
791.5
177.6
2007
1,218.0
955.8
262.2
2008
1,428.9
1,131.5
297.4
Source: Global Trade Atlas.
Figure 4. China’s Merchandise Trade: 1990-2008
$Billions
Source: Economist Intelligence Unit.
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Figure 5. Merchandise Exports by China, Germany and the United States: 1990-2008
$Billions
Source: Economist Intelligence Unit
Notes: These countries represented the top three global exporters in 2008.
Figure 6. Merchandise Imports by China, Germany, and the United States: 1990-2008
$Billions
Source: Economist Intelligence Unit
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Notes: These represent the top three global importers in 2008. Import data are listed on a cost, insurance, and
freight (c.i.f.) basis.
China’s Major Trading Partners
China’s trade data often differ significantly from those of its major trading partners, including the
United States. This is largely due to the large share of China’s trade (both exports and imports)
that pass through Hong Kong (which reverted back to Chinese rule in July 1997 but is treated as a
separate customs area by most countries, including China and the United States). China treats a
large share of its exports through Hong Kong as Chinese exports to Hong Kong for statistical
purposes, while many countries that import Chinese products through Hong Kong generally
attribute their origin to China for statistical purposes.
According to Chinese trade data, its top five trading partners in 2008 were the 27 countries that
make up the European Union (EU), the United States, Japan, the 10 nations that constitute the
Association of Southeast Asian Nations (ASEAN), and Hong Kong. China’s largest export
markets in 2008 were the EU, the United States, and Japan, while its top sources for imports were
Japan, the EU, and ASEAN (the United States ranked sixth). China maintained substantial trade
surpluses with the United States, the EU, and Hong Kong, but reported deficits with Japan and
ASEAN. China reported that it had a $171 billion trade surplus with the United States, but U.S.
data show that it had a $266 billion deficit with China. These trade imbalance data disparities
occur with many of China’s other major trading partners as well (see Table 5).
Chinese data indicated that 18% of its exports went to the United States in 2008. However, many
analysts contend that the United States is a much more significant market for China than its trade
data indicate, and they attempt to show this by taking U.S. data on its imports from China ($338
billion in 2008) and dividing it by China’s official data on its total exports ($1,429 billion), which
yields about 24% (i.e., the percent of Chinese exports that go to the United States).9
A growing level of Chinese exports is from foreign-funded enterprises (FFEs) in China.
According to Chinese data, FFEs were responsible for 55% of Chinese exports in 2008 compared
with 41% in 1996. A large share of these FFEs are owned by Hong Kong and Taiwan investors,
many of whom have shifted their labor-intensive, export-oriented, firms to China to take
advantage of low-cost labor. Many of the products made by such firms are likely exported to the
United States. Additional information on China’s trade with other countries and regions, including
Africa, Iran, and North Korea, can be found in the Appendix.
9
Such calculations represent a very rough estimate and should be interpreted with caution.
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Table 5. China’s Major Trading Partners: 2008
($ billions)
Country
Total Trade
Chinese
Exports
Chinese
Imports
China’s Trade
Balance
Trading
Partner’s
Reported
Trade Balance
With China
European Union
425.9
293.0
132.9
160.1
-247.6
United States
333.8
252.3
81.5
170.8
-266.2
Japan
266.8
116.2
150.6
–34.5
-18.6
ASEAN
231.0
114.1
116.9
–2.8
-21.6
Hong Kong
203.7
190.8
12.9
177.8
-3.1
2,560.4
1,428.9
1,131.5
297.4
Total Chinese
Trade
—
Source: Global Trade Atlas and World Trade Atlas using official Chinese data.
Major Chinese Trade Commodities
China’s abundance of cheap labor (the average hourly labor wage in China’s manufacturing
sector in 2008 was $1.64, compared to about $18 in the United States) has made it internationally
competitive in many low-cost, labor-intensive manufactures.10 As a result, manufactured products
constitute a significant share of China’s trade. A substantial amount of China’s imports is
comprised of parts and components that are assembled in Chinese factories (such as consumer
electronic products and computers), then exported. China’s top 10 exports and imports in 2008
are listed in Table 6 and Table 7, respectively, using the harmonized tariff system (HTS) on a
two-digit level.
10
China’s hourly average wage in 2008 was equal (in dollar terms) to about 26% of the U.S. minimum wage. Source:
Global Insight. Note, that China’s hourly wage would rise to $3.19 if measured on a purchasing power parity level.
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Table 6. Major Chinese Exports: 2008
HS
Description
—World—
$millions
Percent of
Total
2008/2007
% Change
1,428,869
100.0
17.3
85
Electrical machinery (such as computers and parts)
342,082
23.9
13.9
84
Machinery
268,740
18.8
17.5
61
Knit apparel
60,590
4.2
-1.2
72
Iron and steel
53,494
3.7
33.9
62
Woven apparel
52,430
3.7
10.8
73
Iron and steel products
48,344
3.4
31.7
90
Optical, photographic, cinematographic, measuring
checking, precision, medical or surgical instruments
and apparatus; parts and accessories thereof
43,385
3.0
17.2
94
Furniture and bedding
42,786
3.0
19.0
87
Vehicles, except railway (mainly auto parts, motorcycles,
trucks, and bicycles)
39,316
2.8
23.4
95
Toys and sports equipment
32,695
2.3
20.8
Source: World Trade Atlas, using official Chinese statistics.
Notes: Top 10 exports, 2-digit level, harmonized tariff system.
Table 7. Major Chinese Imports: 2008
HS
Description
World
$millions
1,131,469
Percent of
Total
100
2008/2007
% change
18.3
85
Electrical machinery
266,639
23.6
3.5
27
Mineral fuel, oil etc
168,643
14.9
61.1
84
Machinery
138,707
12.3
11.5
26
Ores, slag, and ash
85,236
7.5
58.1
90
Optical, photographic, cinematographic, measuring,
checking, precision, medical or surgical instruments
and apparatus; parts and accessories thereof
77,696
6.9
12.0
39
Plastic
48,841
4.3
7.8
29
Organic chemicals
39,301
3.5
2.4
87
Vehicles, not railway (mainly autos and parts)
26,941
2.4
21.8
74
Copper and articles thereof
26,085
2.3
-4.0
72
Iron And Steel
24,520
2.2
6.6
Source: World Trade Atlas, using official Chinese statistics.
Notes: Top 10 imports in 2008, two-digit level, harmonized tariff schedule.
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China’s Growing Appetite for Imported Oil
China’s rapid economic growth has fueled a growing demand for energy, such as petroleum, and
that demand is becoming an increasingly important factor in determining world oil prices. China
is the world’s second largest consumer of oil products (after the United States) at 7.6 million
barrels per day (bpd) in 2007 (compared to 3.9 million in 1997), and that level is projected to
increase to13.6 million bpd by 2030 (depending on China’s future growth and energy policies). 11
China became a net oil importer (i.e., imports minus exports) in 1993. Net oil imports grew from
632 thousand bpd in 1997 to about 4.1 million bpd in 2008. China’s net oil imports doubled from
2003 to 2008 (see Figure 7), and making it the world’s third largest net oil importer (after the
United States and Japan). China’s net oil imports are projected to rise to 13.1 million bpd by
2030, a level that would be comparable to the EU in that year. China’s dependence on imported
oil could rise from about the current level of about 50% to 80% by 2030.12
Figure 7. China’s Net Oil Imports: 1997-2008
Source: U.S. Energy Administration and China Energy Newswire.
China’s Regional and Bilateral Free Trade Agreements
The Chinese government has maintained an active policy of boosting trade and investment ties
around the world, especially countries in Asia. To that end, China has entered into a number of
regional and bilateral trade agreements, or is in the process of doing so. China currently has FTAs
that include the following trading partners: the 10 nations that make up ASEAN, Bangladesh,
11
Global Insight, Global Petroleum Outlook Forecast Tables (Long-Term), August 2008.
International Energy Agency, 2007 World Energy Outlook, p. 168. Estimates are based on Reference Scenario
projections, which assume no new government policies and measures or technological breakthroughs.
12
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India, South Korea, Sri Lanka, Chile, Hong Kong, Macau, New Zealand, Singapore, Pakistan,
and Peru. These activities are summarized in Table 8.
Table 8. China’s Free Trade Agreements
Brief Description of the
Agreement
Agreement
Implementing Year
Asia Pacific Trade Agreement
(originally founded in 1976). Current
members are China, Bangladesh,
India, S. Korea, Laos, and Sri Lanka
China joined the agreement in 2002.
Preferential tariff arrangement that
aims at promoting intra-regional
trade through exchange of mutually
agreed concessions by member
countries.
Mainland and Hong Kong Closer
Economic Partnership Arrangement
2004
Free trade and economic integration
agreement covering goods &
services.
Mainland and Macao Closer
Economic Partnership Arrangement
2004
Free trade and economic integration
agreement covering goods & services
Framework Agreement on
Comprehensive Economic CoOperation Between ASEAN and the
People’s Republic of China. Three
separate agreements covering goods,
services, and investment
Goods agreement entered into force
in 2005. ASEAN 6 countries (Brunei
Darussalam, Indonesia, Malaysia,
Philippines, Singapore and Thailand)
to implement most tariff cuts by
2010, and the remaining countries to
implement most cuts by 2015 (longer
phase-ins and/ remaining tariffs for
certain “sensitive” and “highly
sensitive” products.. Services
agreement effective 2007. Investment
agreement effective 2009
Establishes the ASEAN-China Free
Trade Area (ACFTA), which would
constitute the world’s largest free
trade area in terms of population
(1.9 billion people).
China-Chile FTA
2006
China agreed to immediately reduce
tariffs on 92% of Chilean exports to
China.
China-Pakistan FTA (separate
agreements on goods and services
2007 for goods and 2009 for services
China agreed to eliminate tariffs on
35.5% of tariff lines within three
years and reduce tariffs on another
48.5% within five years.
China-New Zealand FTA
2008
China agreed to remove tariffs on
96% of New Zealand exports by
2019.
China-Singapore FTA
2009
China agreed to remove tariffs on
85% of Singapore’s exports to China
by 2010.
China-Peru FTA
2009
Will eliminate tariffs on 90% of all
trade items within 16 years.
Source: WTO Regional Trade Agreements Information System and Chinese Ministry of Commerce.
China is also in the process of negotiating FTAs with the following countries and entities:
Australia, Norway, South Africa, Iceland, Costa Rica, the Cooperation Council for the Arab States
of the Gulf (which includes Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, and Bahrain),
and the Southern African Customs Union (which includes Botswana, Lesotho, Namibia, and
Swaziland). China also claims that it currently is negotiating with a number of trading partners to
begin individual FTA negotiations with India, South Korea, and Taiwan. China has been active in
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a number of regional dialogue forums that could eventually lead to regional FTAs or free trade
areas. These include the Japan-China-Republic of Korea trilateral Summit, the ASEAN Plus
Three Summit (which includes ASEAN, China, South Korea, and Japan), and the East Asian
Summit, which includes the ASEAN plus three countries, as well as India, Australia, and New
Zealand (together referred to as ASEAN Plus Six).
China’s Growing Overseas Direct Investment
A key aspect of China’s economic growth strategy has been to attract foreign investment into
China. However, in 2000, China’s leaders initiated a new “go global” strategy, which sought to
encourage firms (especially state-owned enterprises) to invest overseas. The Chinese government
generally refers to these activities as overseas direct investment (ODI). There appear to be several
factors driving this investment.
13
14
•
China’s massive accumulation of foreign exchange reserves has led government
officials to seek more profitable ways of investing these holdings (which
traditionally have mainly been put into relatively safe, low yield assets, such as
U.S. Treasury securities). On September 29, 2007, the Chinese government
officially launched the China Investment Corporation (under the direction of the
State Council) in an effort to better manage its foreign exchange reserves. It was
originally funded at $200 billion, making it one of the world’s largest sovereign
wealth funds.13 Some analysts believe that China will increasingly use its
reserves to purchase foreign firms, or shares of foreign firms, that are perceived
to be profitable in order to diversify its use of foreign exchange holdings.
•
As a developing country, China has traditionally sought to attract FDI into the
country in order to, through joint ventures, gain access to foreign technology and
management skills to help domestic firms become more efficient and
internationally competitive. Now the Chinese government is attempting to
promote the development of internationally recognized Chinese brands. One
strategy has been to purchase (or attempt to purchase) existing companies and
their internationally-recognized brand names (as well as to obtain technology and
management skills). For example, in April 2005 Lenovo Group Limited, a
Chinese computer company, purchased IBM Corporation’s personal computer
division for $1.75 billion. 14 On June 20, 2005, Haier Group, a major Chinese
home appliances manufacturer, made a $1.28 billion bid to take over Maytag
Corporation, although the bid was later withdrawn.
•
Acquisition of energy and raw materials has been a major priority of China’s
overseas investment strategy. As such, China has sought to either purchase or
invest in foreign energy and raw material companies, infrastructure projects (such
as oil and gas pipelines, oil refineries, and mines), and joint ventures. For
example, in June 2005, the China National Offshore Oil Corporation (CNOOC),
through its Hong Kong subsidiary (CNOOC Ltd.), made a bid to buy a U.S.
energy company, UNOCAL, for $18.5 billion, although CNOOC later withdrew
its bid due to opposition by several congressional Members. In August 2005, the
See, CRS Report RL34337, China’s Sovereign Wealth Fund, by Michael F. Martin.
The Chinese government is believed to be the largest shareholder in the company.
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China National Petroleum Corporation (CNPC), China’s largest oil company,
purchased PetroKazakhstan Inc., a Canadian-registered company, for $4.2
billion.15 According to the Eurasia Group, since the 1990s CNPC has signed
energy deals with Sudan worth $10 billion, with $4 billion in actual investment. 16
In June 2009, China’s Sinopec Group acquired Addax Petroleum Corporation (a
Swiss company) for $7.2 billion.
China appears to be a relatively small, but growing, global investor. According to Chinese data,
its annual ODI increased from $2.9 billion in 2003 to $55.9 billion in 2008; its ODI in 2008 was
more than double 2007 levels ($26.5 billion). 17 China’s cumulative ODI through 2008 was
reported at $184.0 billion.18 China’s state-owned enterprises accounted for 64% of ODI in 2008.19
Broken down by country, China’s ODI data are somewhat misleading because the three top ODI
destinations on a cumulative basis (as of 2008) were Hong Kong, the Cayman Islands, and the
British Virgin Islands. It is likely that these were not the final destination for most of these
investment funds. Some analysts contend that a large share of ODI going to Hong Kong and
Caribbean islands represents “round-tipping,” that is, Chinese capital that is sent overseas but
then re-invested elsewhere (some of which may come back to China in the form of “foreign
investment”) to take advantage of favorable treatment afforded to foreign investment. Some of
that capital could be also going into tax havens.
Table 9 lists the top 10 destinations for China’s cumulative ODI through 2008. Hong Kong was
by far the major destination (accounting for 63% of total), followed by the Cayman Island (14%),
the British Virgin Islands (6%), and the United States (2%).20 China has sharply increased its
investment in Africa over the past few years; annual ODI there rose from $75 million in 2003 to
$5.5 billion in 2008 (cumulative ODI through 2008 was $7.8 billion). China’s increased level of
overseas investment has raised some concerns among U.S. policymakers, in large part because it
is often unclear to what extent such investments are being made for economic reasons and to what
extent the central government is attempting to guide such investments.
15
16
Asia Times, August 24, 2005.
Eurasia Group, China’s Overseas Investments in Oil and Gas Production, October 16, 2006, p. 20.
17
However, the Chinese government reported that ODI during the first quarter of 2009 was down 60% over the same
period in 2008, due largely to the effects of the global economic slowdown.
18
In comparison, U.S. FDI (as reported by the U.S. Bureau of Economic Analysis) was $311.8 billion and cumulative
FDI through 2008 was $3,162.0 billion (on a historical cost basis).
19
China Daily, September 19, 2009.
20
In terms of regions, Asia accounted for 77.9% of China’s cumulative ODI, followed by Africa (9.8%) Latin America
(6.6%), Oceania (3.5%).Europe (1.6%), and North America (0.7%).
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Table 9.Top 10 Destinations for China’s Overseas Direct Investment: 2008
($ millions)
Country
Hong Kong
ODI in 2008
Cumulative ODI Through 2008
38,640
115,845
Cayman Islands
1,524
20,327
British Virgin Islands
2,104
10,477
Singapore
1,551
3,335
Australia
1,952
3,255
South Africa
4,808
3,049
United States
462
2,390
Russian Federation
395
1,838
Macau
643
1,561
Pakistan
265
1,328
55,907
183,970
Total Chinese ODI
Source: China Ministry of Commerce, 2008 Statistical Bulletin of China’s Outward Foreign Investment, 2009.
Major Long-Term Challenges Facing the
Chinese Economy
China’s economy has shown remarkable growth over the past several years, and many economists
project that it will enjoy fairly healthy growth in the near future. However, economists caution
that these projections are likely to occur only if China continues to make major reforms to its
economy. Failure to implement such reforms could endanger future growth.
•
Uneven economic growth. The global economic crisis has demonstrated to the
Chinese government the dangers of relying too heavily on foreign trade and
investment for economic growth. That dependency made China’s economy
particularly vulnerable to the effects of the global economic downturn (discussed
in more detail below).
•
An inflexible currency policy. China does not allow its currency to float and
therefore must make large-scale purchases of dollars to keep the exchange rate
within certain target levels. Although the renminbi (or yuan) has appreciated
somewhat since reforms were introduced in July 2005, analysts contend that it
remains highly undervalued against the dollar.21 Economists warn that China’s
currency policy has made the economy overly dependent on exports and fixed
investment for growth and has promoted easy credit policies by the banks. These
policies may undermine long-term economic stability by causing overproduction
21
The renminbi appreciated by about 18% against the dollar from July 2005 to July 2008, but since then the Chinese
government has halted any further appreciation.
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in various sectors, increasing the level of non-performing loans held by the banks
and boosting inflationary pressures.22
•
State-owned enterprises (SOEs), which account for a significant amount of
Chinese industrial production, put a heavy strain on China’s economy. By some
estimates, over half lose money and must be supported by subsidies, mainly
through state banks. Government support of unprofitable SOEs diverts resources
away from potentially more efficient and profitable enterprises. In addition, the
poor financial condition of many SOEs makes it difficult for the government to
reduce trade barriers out of fear that doing so would lead to widespread
bankruptcies among many SOEs and unemployment.
•
The banking system faces several major difficulties due to its financial support
of SOEs and its failure to operate solely on market-based principles. China’s
banking system is regulated and controlled by the central government, which sets
interest rates and attempts to allocate credit to certain Chinese firms. The central
government has used the banking system to keep afloat money-losing SOEs by
pressuring state banks to provide low-interest loans, without which a large
number of the SOEs would likely go bankrupt. According to some estimates,
over 50% of state-owned bank loans go to the SOEs, even though a large share of
loans are not likely to be repaid. The precarious financial state of the Chinese
banking system has made Chinese reformers reluctant to open the banking sector
to foreign competition. Corruption poses another problem for China’s banking
system because loans are often made on the basis of political connections. This
system promotes widespread inefficiency in the economy because savings are
generally not allocated on the basis of obtaining the highest possible returns.
Many private companies in China find it difficult to borrow from state banks.
•
Public unrest. The Chinese government acknowledged that there were over
87,000 protests (many of which were violent) in 2005 (compared with 53,000
protests in 2003) over such issues as pollution, government corruption, and land
seizures.23 A number of protests in China have stemmed in part from frustrations
among many Chinese (especially peasants) that they are not benefitting from
China’s economic reforms and rapid growth, and perceptions that those who are
getting rich are doing so because they have connections with government
officials. Protests have broken out over government land seizures and plant
shutdowns in large part due to perceptions that these actions benefitted a select
group with connections. A 2005 United Nations report stated that the income gap
between the urban and rural areas was among the highest in the world and
warned that this gap threatens social stability. The report urged China to take
greater steps to improve conditions for the rural poor, and bolster education,
health care, and the social safety net.24 It is estimated that 300 million people in
China (mainly in rural areas) lack health insurance, and many that do have basic
22
For further information on the economic consequences of China’s currency policy, see CRS Report RL32165,
China’s Currency: Economic Issues and Options for U.S. Trade Policy, by Wayne M. Morrison and Marc Labonte.
23
See CRS Report RL33416, Social Unrest in China, by Thomas Lum.
24
China’s Human Development Report 2005.
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insurance must pay a significant amount of medical expenses out of their own
pocket. 25
25
26
•
The lack of the rule of law in China has led to widespread government
corruption, financial speculation, and misallocation of investment funds. In many
cases, government “connections,” not market forces, are the main determinant of
successful firms in China. Many U.S. firms find it difficult to do business in
China because rules and regulations are generally not consistent or transparent,
contracts are not easily enforced, and intellectual property rights are not protected
(due to the lack of an independent judicial system). The lack of the rule of law in
China limits competition and undermines the efficient allocation of goods and
services in the economy.
•
Poor government regulatory environment. China maintains a weak and
relatively decentralized government structure to regulate economic activity in
China. Laws and regulations often go unenforced or are ignored by local
government officials. As a result, many firms cut corners in order to maximize
profits. This has lead to a proliferation of unsafe food and consumer products
being sold in China or exported abroad.26 Lack of government enforcement of
food safety laws led to a massive recall of melamine-tainted infant milk formula
that reportedly killed at least four children and sickened 53,000 others in 2008.
Growing concerns over the health and safety of Chinese products (such as fish,
pet food, tires, and toys) in the United States and other countries could lead
consumers to reduce their purchases of Chinese products and could undermine
China’s efforts to develop and promote internationally recognized Chinese
brands.
•
Growing pollution. The level of pollution in China continues to worsen, posing
series health risks to the population. The Chinese government often disregards its
own environmental laws in order to promote rapid economic growth. According
to the World Bank, 20 out of 30 of the world’s most polluted cities are in China,
with significant costs to the economy (such as health problems, crop failures and
water shortages). According to one government estimate, environmental damage
costs the country $226 billion, or 10% of the country’s GDP, each year. The
Chinese government estimates that there are over 300 million people living in
rural areas that drink unsafe water (caused by chemicals and other contaminants).
Toxic spills in 2005 and 2006 threatened the water supply of millions of people.
China is the largest producer and consumer of coal, which accounts for about
70% of China’s energy use. In October 2009, China’s media reported that
thousands of children living near smelters had been found to have excessive
amounts of lead in their blood. Although growing environmental degradation has
been recognized as a serious problem by China’s central government, it has
found it difficult to induce local governments to comply with environmental
laws, especially when such officials feel doing so will come at the expense of
economic growth. According to a study by ExxonMobil, China’s, energy demand
for power generation will more than double by 2030, surpassing U.S. demand by
Washington Post, October 29, 2009.
See CRS Report RS22713, Health and Safety Concerns Over U.S. Imports of Chinese Products: An Overview.
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more than one third. In addition, by 2030, China’s CO2 emissions are expected to
be comparable to those in the United States and EU combined. 27
The Chinese government is attempting to address several of these areas. In October 2006, the
Chinese government formally outlined its goal of building a “harmonious socialist society” by
taking steps (by 2020) to lessen income inequality, improve the rule of law, enhance
environmental protection, reduce corruption, and improve the country’s social safety net (such as
expanding health care and pension coverage to rural areas). In March 2007, the Chinese National
People’s Congress (NPC) passed a law to strengthen property laws to help prevent local
governments from unfairly seizing land from farmers, and in June 2007, it passed a new labor
contract law to enhance labor rights. In addition, the government has scrambled to improve health
and safety laws and regulations. The government has also pledged to boost energy efficiency,
crack down on polluting industries, and to promote the development of and use of green
technology (such as solar power, wind power, biomass). For example, it has set a target of
deriving 20% of energy from renewable sources by 2020. In April 2009, the government pledged
to implement a three-year, $124.4 billion, plan to begin the establishment of universal health care
plan, expected to be in place by 2020.
Fallout From the Current Global Financial Crisis28
China’s economy suffered a sharp slow-down as a result of the global financial crisis, largely due
to a decline in foreign demand for Chinese imports and a drop-off in FDI in China. From January
to September 2008, China enjoyed nearly double-digit growth in monthly exports and FDI on a
year-on-year basis. However, from November 2008 to October 2009, China’s monthly exports
(and imports) on a year-on-year basis declined. FDI flows dropped during the months of October
2008 through July 2009, (see Figure 8). From January-October 2009, China’s total exports,
imports, and FDI were down by 20.5%, 19.9%, and 12.6%, respectively over the same period in
2008. China’s trade with its major trading partners has declined sharply in 2009 (through
September 2009) over 2008 levels, as indicated in Figure 9.
27
ExxonMobil, The Outlook for Energy, A View to 2030, p. 4.
For additional information, see CRS Report RS22984, China and the Global Financial Crisis: Implications for the
United States, by Wayne M. Morrison.
28
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Figure 8. Monthly Percentage Change in China’s Trade and FDI:
April 2008-October 2009
Year-on-Year Basis
Source: China’s Customs Administration.
Figure 9. Change in China’s Trade With its Major Trading Partner: JanuarySeptember 2009 Over the Same Period in 2008
Source: China’s Customs Administration.
China’s quarterly real GDP growth on a year-on-year basis dropped from 10.1% in the second
quarter of 2008 to 6.1% in the first quarter of 2009. In January 2009, the Chinese government
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China’s Economic Conditions
reported that 20 million migrant workers had lost their jobs due to the global financial crisis. The
real estate market in several Chinese cities exhibited signs of a bursting bubble, including a slow
down in construction, falling prices, and growing levels of unoccupied buildings.
China took a number of steps to stimulate its economy. On November 9, 2008, it announced that
it would implement a two-year $586 billion stimulus package, mainly dedicated to infrastructure
projects. Interest rates and taxes were cut, and a number of subsidies were offered to consumers
to purchase various products, such as cars. In addition, the government directed banks to loosen
credit requirements, which resulted in a sharp increase in bank lending. It is estimated that
Chinese banks made $1.27 trillion in new loans during the first nine months of 2009.29
These measures appear to have been effective. China’s real quarterly GDP on a year-on-year basis
rose by 7.9% in the 2nd quarter of 2009 and by 8.9% in the 3rd quarter of 2009. The IMF predicts
4th quarter growth at 10.1% (see Figure 10). Although China’s trade in 2009 has not rebounded to
2008 growth levels, it has shown gradual growth since around February 2009 (see Figure 11). In
addition, FDI growth in China for the months of August, September, and October 2009 were
higher than in the same months in 2008. The IMF in October 2009 projected China’s real GDP
would rise by 8.5% in 2009 (and by 9.0% in 2010), a level significantly higher than what has
been projected for most of the other major world economies (see Figure 12).
Despite these positive growth projections, some economists warn that long-term economic
growth will depend largely on the ability of the government to rebalance the economy away from
trade and FDI to domestic consumption. Many have also raised concerns that easy money policies
could lead to overproduction in some industries and create asset bubbles in certain sectors, such
as in real estate and the stock market. In June 2009, a Chinese government agency estimated that
20% of new bank credit was going into China’s stock markets.
29
Global Insight, Country Intelligence, China, October 15, 2009.
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Figure 10. Change in China’s Quarterly Real GDP Growth: Second Quarter 2008 to
Third Quarter 2009 and Projection for Fourth Quarter 2009
Year-On-Year Change
Source: Actual data from Global Insight. Fourth Quarter 2009 projection from IMF.
Figure 11. China’s Monthly Trade Data in Dollars: January 2008-October 2009
$ millions
Source: China Customs Administration.
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Figure 12. Projected Real GDP of Major Economies in 2009
% growth over 2008 levels
Source: International Monetary Fund, World Economic Outlook, October 2009.
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Appendix. China’s Growing Economic Ties with
Africa, North Korea, and Iran
China has sought to expand its trade with countries around the world, especially those that
possess energy and raw materials China needs to sustain its rapid economic growth, such as those
in Africa. Although China’s trade with these countries is relatively small (compared with its major
trading partners), it is growing rapidly. China is also a major trading partner of various countries
that pose challenges to U.S. foreign policy, such as Iran, Sudan, and North Korea.30
China-Africa Trade
China’s Imports From Africa
China’s imports from Africa as a percent of its total imports grew from 2.8% in 2004 to 5.2% in
2008 (to $46.7 billion).31 If taken as a whole, Africa would have been China’s seventh largest
source of imports in 2008. From 2004-2008, China’s imports from Africa grew by 192%. Mineral
fuels were by far China’s largest import from Africa, accounting for 71% of total imports. Angola
was China’s largest source of imports from Africa, accounting for 41% of those imports in 2008,
followed by South Africa, Sudan, the Congo, and Libya. China’s imports from Sudan were up
199% from 2004 to 2008 (see Table A-1 and Table A-2). It is estimated that China is Sudan’s
largest trading partner, accounting for 56% of its exports, and 25% of its imports, in 2008.32
Table A-1.Top Five African Sources of Chinese Imports: 2004-2008
($ millions)
2004
Africa Total
2005
2006
2007
2008
2004-2008
% Change
15,641
21,114
28,768
36,330
45,672
192.0
Angola
4,718
6,581
10,931
12,885
18,721
296.8
South Africa
2,955
3,444
4,095
6,608
6,976
136.1
Sudan
1,706
2,615
1,941
4,114
5,108
199.4
Congo
1,569
2,278
2,785
2,828
3,724
137.3
417
942
1,694
1,548
2,577
518.0
Libya
Source: World Trade Atlas. Official Chinese statistics.
30
For additional information on policy challenges posed by North Korea, see CRS Report RL33590, North Korea’s
Nuclear Weapons Development and Diplomacy; and CRS Report RL32493, North Korea: Economic Leverage and
Policy Analysis. For information on policy challenges posed by Sudan, see CRS Report RL33574, Sudan: The Crisis in
Darfur and Status of the North-South Peace Agreement.
31
In comparison, U.S. imports from Africa in 2008 were $85.0 billion (or 5.9% of total). Note, the United States
reports import trade data on a customs basis, while China reports imports on a cost, insurance, and freight (C.I.F.) basis.
The C.I.F. basis differs from the customs basis in that the former includes the cost of insurance and freight and thus
raises the value of imports (which the customs basis does not), by about 10%. Both U.S. and Chinese imports from
Africa have declined sharply in 2009.
32
CIA, The World Factbook, 2009.
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Table A-2. Major Chinese Imports from Africa: 2004-2008
($ millions and %)
HS 2 Commodity Description
Mineral fuel, oil, etc.
Ores, slag, ash
Precious stones and metals (mainly platinum
and diamonds)
20042008
%
Change
2004
2005
2006
2007
2008
% of
Total
2008
10,135
14,676
21,083
25,997
38,489
70.7
279.8
1,393
1,577
2,116
3,298
7,254
13.0
402.7
742
967
1,196
1,358
1,772
3.2
138.8
Source: World Trade Atlas. Official Chinese statistics.
China’s Mineral Fuel Imports From Africa
Africa has become an important source of China’s surging energy needs. In 2008, 71% of China’s
imports from Africa were mineral fuels.33 China’s fuel imports from Africa rose from $10.1
billion in 2004 to $38.5 billion in 2008, up 280%. In 2008, Africa supplied 27.8% of China’s
imported mineral fuels (compared with 9.1% in 1997). Angola was China’s second largest overall
mineral fuel supplier and its largest African supplier. Other major African suppliers (and the
world rank) of mineral fuel to China were Sudan (7th), the Congo (16th), and Libya (18th) (see
Table A-3).
Table A-3.Top Five African Suppliers of Mineral Fuel to China: 2008
Imports
($ millions)
Rank as a Supplier
of Mineral Fuel to
China
Angola
22,347
2
Sudan
6,267
7
Congo
3,085
16
Libya
2,540
18
Equatorial Guinea
2,190
19
Africa Total
38,489
—
Country
Source: Global Trade Atlas.
China’s Exports to Africa
The share of Chinese exports going to Africa rose from 2.3% in 2004 to 3.6% in 2008 ($50.9
billion).34 If Africa were treated as a single trading partner, it would rank as China’s sixth largest
export market (2008).35 Exports to Africa grew by 268% from 2004 to 2008. Major Chinese
exports to Africa in 2008 included electrical machinery, machinery (such as computers and
33
If Africa were treated as a single trading bloc, it would be the largest source of Chinese mineral fuel imports.
In comparison, total U.S. exports to Africa in 2008 were $28.4 billion (2.2% of total U.S. exports).
35
Chinese and U.S. exports to Africa have declined sharply in 2009.
34
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components), and vehicles (mainly motorcycles and trucks). The top five African destinations of
Chinese exports in 2008 were South Africa, Nigeria, Egypt, Algeria, and Angola (see Table A-4
and Table A-5).
Table A-4. China’s Top Five African Export Markets: 2004-2008
($ millions)
Country
Africa Total
2004
2005
2006
2007
2008
2004-2008
% Change
13,815
18,687
26,705
37,314
50,869
268.2
South Africa
2,952
3,826
5,769
7,429
8,596
191.2
Nigeria
1,719
2,305
2,856
3,800
6,758
293.1
Egypt
1,389
1,935
2,976
4,432
5,817
318.8
Algeria
981
1,405
1,952
2,709
3,685
275.6
Angola
193
373
894
1,241
2,931
1,418.7
Source: World Trade Atlas. Official Chinese statistics.
Table A-5. Major Chinese Exports to Africa: 2004-2008
($ millions)
HS 2 Commodity
Description
2008
20042008
%
Change
2004
2005
2006
Electrical machinery
and partsa
1,905
2,799
4,122
5,806
8,882
17.5
366.2
Machinery,
mechanical
appliances, and parts
1,374
2,141
3,220
4,517
7,292
14.3
430.7
936
1,448
2,023
3,165
4,730
9.3
405.3
Vehicles (excluding
railway) and parts
2007
% of
Total
2008
Source: World Trade Atlas. Official Chinese statistics.
a.
Includes electrical machinery and equipment and parts thereof; sound recorders and reproducers; television
image and sound recorders and reproducers; and parts and accessories of such articles.
China’s Trade with North Korea
Chinese trade with North Korea is of concern to Congress due to North Korea’s nuclear program,
its violations of human rights, and the military threat it poses to South Korea. 36 China is North
Korea’s largest trading partner and is believed to be a major provider of foreign aid to North
36
See CRS Report RL33590, North Korea’s Nuclear Weapons Development and Diplomacy; CRS Report RL31785,
Foreign Assistance to North Korea; and CRS Report RL32493, North Korea: Economic Leverage and Policy Analysis.
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China’s Economic Conditions
Korea, largely in the form of food and fuel.37 Many U.S. policymakers have urged China to make
greater use of its “economic leverage” with North Korea, especially on the nuclear issue.
North Korea is a relatively minor trading partner for China. In 2008, Chinese exports to, and
imports from, North Korea totaled $2,033 million and $754 million, respectively.
North Korea was China’s 70th largest source of imports (0.07% of total) and its 64th largest export
market (0.14% of total). 38
Chinese exports to North Korea rose by 13.0% and imports were up 24.3%, over 2006 levels.
China accounted for 37.3% of North Korea’s exports and 39.8% of its imports (2005 data).39
According to Chinese data, its top five exports to North Korea (2007) were oil, machinery,
electrical machinery (such as TVs), plastics, and vehicles (see Table A-6), while its top imports
from North Korea were ores, coal, woven apparel, fish, and iron and steel (see Table A-7).
Table A-6. Major Chinese Exports to North Korea: 2004-2008
($ millions and % change)
2004
2005
2006
2007
2008
2006-2007
% Change
Total Exports
795
1,085
1,232
1,392
2,003
151.9
Mineral fuel, oil, etc. (mainly oil)
204
286
348
402
586
187.3
Machinery
40
77
83
104
145
262.5
Electrical machinery (such as TVs)
46
57
98
69
101
119.6
5
6
10
24
87
1,640.0
32
52
52
55
80
150.0
Knit apparel
Plastics
Source: World Trade Atlas, which uses official Chinese statistics.
Table A-7. Major Chinese Imports from North Korea: 2004-2008
($ millions and % change)
2004
Total Imports
2005
2006
2007
2008
2004-2008
% Change
582
497
468
582
754
29.6
Ores, slag, and ash
59
92
118
164
213
261.0
Mineral fuel, oil, etc. (mainly coal)
53
112
102
170
208
292.5
Iron and steel
75
72
35
45
78
4.0
Woven apparel
49
58
63
60
77
57.1
Fish and seafood
261
92
43
30
40
-84.7
Source: World Trade Atlas, which uses official Chinese statistics.
37
See CRS Report R40095, Foreign Assistance to North Korea.
World Trade Atlas.
39
Economist Intelligence Unit, Country Report, North Korea, February 2008, p. 5.
38
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China’s Economic Conditions
China’s Trade With Iran
Chinese economic ties with Iran are of concern to Congress because of Iran’s nuclear program
and because of Iranian threats to U.S. foreign policy interests.40 China is Iran’s largest trading
partner, accounting for 18.5% of Iran’s exports and 13.0% of its imports (2008).41 Iran was
China’s 16th largest source of imports ($19.6 billion) and 32nd largest export market ($8.0 billion),
according to Chinese trade data (see Table A-8). Mineral fuels accounted for 86% of China’s
imports from Iran;42 other major imports included ores and organic chemicals. China’s main
exports to Iran were machinery, electrical machinery, and vehicles (excluding railroad).
Table A-8. China’s Trade With Iran: 2004-2008
($ billions and % change)
2004-2008 %
Change
2004
2005
2006
2007
2008
Exports
2,555
3,298
4,479
7,288
8,047
215.0
Imports
4,484
6,796
9,946
13,300
19,581
336.7
Source: Global Trade Atlas.
Author Contact Information
Wayne M. Morrison
Specialist in Asian Trade and Finance
wmorrison@crs.loc.gov, 7-7767
40
See CRS Report RL32048, Iran: U.S. Concerns and Policy Responses; and CRS Report RL34525, Iran’s Economic
Conditions: U.S. Policy Issues.
41
CIA, The World Factbook, 2009.
42
Iran was China’s third largest source of mineral fuels.
Congressional Research Service
32, less than half the
size of the U.S. economy.12 The per capita GDP (a common measurement of a country’s living
standards) of China was $5,460, which was 12% the size of Japan’s level and 11% that of the
United States (see Table 2).
Many economists contend that using nominal exchange rates to convert Chinese data (or that of
other countries) into U.S. dollars fails to reflect the true size of China’s economy and living
standards relative to the United States. Nominal exchange rates simply reflect the prices of
foreign currencies vis-à-vis the U.S. dollar and such measurements exclude differences in the
prices for goods and services across countries. To illustrate, one U.S. dollar exchanged for local
currency in China would buy more goods and services there than it would in the United States.
This is because prices for goods and services in China are generally lower than they are in the
United States. Conversely, prices for goods and services in Japan are generally higher than they
are in the United States (and China). Thus, one dollar exchanged for local Japanese currency
would buy fewer goods and services there than it would in the United States. Economists attempt
12
On a nominal dollar basis, China overtook Japan in 2010 to become the world’s second largest economy (after the
United States).
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China’s Economic Conditions
to develop estimates of exchange rates based on their actual purchasing power relative to the
dollar in order to make more accurate comparisons of economic data across countries, usually
referred to as a purchasing power parity (PPP) basis.
The PPP exchange rate increases the (estimated) measurement of China’s economy and its per
capita GDP. According the Economist Intelligence Unit, (EIU), which utilizes World Bank data,
prices for goods and services in China are 41.5% the level they are in the United States. Adjusting
for this price differential raises the value of China’s 2011 GDP from $7.2 trillion (nominal
dollars) to $11.4 trillion (on a PPP basis).13 This would indicate that China’s economy is 76.0%
the size of the U.S. economy. China’s share of global GDP on a PPP basis rose from 3.7% in 1990
to 14.3% in 2011 (the U.S. share of global GDP peaked at 24.3% in 1999 and declined to 18.9%
in 2011), see Figure 4.
Many economic analysts predict that a PPP basis China will soon overtake the United States as
the world’s largest economy. EIU, for example, projects this will occur by 2016, and that by 2030,
China’s economy could be 30% larger than that of the United States.14 This would not be the first
time in history that China was the world’s largest economy (see text box).
The Decline and Rise of China’s Economy
According to a study by economist Angus Maddison, China was the world’s largest economy in 1820, accounting for
an estimated 32.9% of global GDP. However, foreign and civil wars, internal strife, weak and ineffective governments,
natural disasters (some of which were man-made) and distortive economic policies caused China’s share of global
GDP on a PPP basis to shrink significantly. By 1952, China’s share of global GDP had fallen to 5.2%, and by1978, it slid
to 4.9%.15 The adoption of economic reforms by China in the late 1970s led to a surge in China’s economic growth
and has help restore China as major a global economic power.
Source: The Organization for Economic Cooperation and Development, Chinese Economic Performance in the Long Run,
960-2030, by Angus Maddison, 2007.
The PPP measurement also raises China’s 2011 per capita GDP (from $5,460) to $8,650, which
was 17.9% of the U.S. level. The EIU projects this level will rise to 34.3% by 2030. Thus,
although China will likely become the world’s largest economy in a few years on a PPP basis, it
will likely take many years for its living standards to approach U.S. levels.16
13
In other words, the PPP data reflect what the value of China’s goods and services would be if they were sold in the
United States.
14
However, such long-term economic projections should be viewed with caution.
15
In comparison, the U.S. share of global GDP rose from 1.8% in 1820 to 27.5% in 1952, but declined to 21.6% by
1978.
16
EIU database, surveyed on May 22, 2012.
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China’s Economic Conditions
Table 2. Comparisons of Chinese, Japanese, and U.S. GDP and Per Capita GDP in
Nominal U.S. Dollars and a Purchasing Power Parity Basis: 2011
China
Nominal GDP ($ billions)
Japan
United States
7,208
5,871
15,094
11,425
4,384
15,094
Nominal Per Capita GDP ($)
5,460
46,420
48,410
Per Capita GDP in PPP ($)
8,650
34,660
48,410
GDP in PPP ($ billions)
Source: Economist Intelligence Unit estimates using World Bank PPP data.
Figure 4. Chinese and U.S. GDP as a Percent of Global Total: 1990-2011 and
Projections through 2016
(percent)
25.00
20.00
15.00
10.00
5.00
China
20
16
20
14
20
12
20
10
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
0.00
United States of America
Source: Economist Intelligence Unit
Note: Based on estimates of GDP on a PPP basis.
Foreign Direct Investment (FDI) in China
China’s trade and investment reforms and incentives led to a surge in FDI beginning in the early
1990s. Such flows have been a major source of China’s productivity gains and rapid economic
and trade growth. There were reportedly 445,244 foreign-invested enterprises (FIEs) registered in
China in 2010, employing 55.2 million workers or 15.9% of the urban workforce.17 As indicated
in Figure 5, FIEs account for a significant share of China’s industrial output. That level rose from
17
China 2011 Statistical Yearbook.
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China’s Economic Conditions
2.3% in 1990 to a high of 35.9% in 2003, but fell to 27.1% by 2010.18 In addition, FIE’s are
responsible for a significant level of China’s foreign trade. In 2011, FIEs in China accounted for
52.4% of China’s exports and 49.6% of its imports, although this level was down from its peak in
2006 when FIEs’ share of Chinese exports and imports was 58.2% and 59.7%, respectively, as
indicated in Figure 6. FIEs in China dominate China’s high technology exports. From 2002 to
2010, the share of China’s high tech exports by FIEs rose from 79% to 82%. During the same
period, the share of China’s high tech exports by wholly owned foreign firms (which excludes
foreign joint ventures with Chinese firms), rose from 55% to 67%.
Figure 5. Industrial Output by Foreign-Invested Firms in China as a Share of
National Total: 1990-2010
(percent)
40
35
30
25
20
15
10
5
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
0
Source: Invest in China (www.fdi.gov.cn)
18
Industrial output is defined by the Chinese government as the total volume of final industrial products produced and
industrial services provided during a given period. Source: China 2011 Statistical Yearbook.
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China’s Economic Conditions
Figure 6. Share of China’s Exports and Imports Attributed to Foreign-Invested
Enterprises in China: 1990-2012*
(percent)
70
60
50
40
30
20
10
20
10
20
09
20
08
20
07
Imports
20
Ja
n11
Ap
r2
01
2
Exports
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
95
19
90
0
Source: “Invest in China (http://www.fdi.gov.cn/pub/FDI_EN/default.htm)
Note: Data for 2012 are January-April 2012.
According to the Chinese government, annual FDI inflows into China grew from $2 billion in
1985 to $108 billion in 2008. Due to the effects of the global economic slowdown, FDI flows to
China fell by 12.2% to $90 billion in 2009. They totaled $106 billion in 2010 and $116 billion in
2011 (see Figure 7). Chinese data for January-May 2012 indicate that FDI fell by 1.9% on a yearon-year basis. Hong Kong was reported as the largest source of FDI flows to China in 2011
(63.9% of total), followed by Taiwan, Japan, and Singapore, and the United States. Accoroding to
Chinese data, annual U.S. FDI flows to China peaked at $5.4 billion in 2002 (10.2% of total FDI
in China). In 2011, they were $3.0 billion or 2.6% of total (see Figure 9).19
The cumulative level (or stock) of FDI in China at the end of 2011 is estimated at $1.2 trillion,
making it one of the world’s largest destinations of FDI. According to the United Nations
Conference on Trade and Development, China was the world’s second largest destination for FDI
flows in 2011, after the United States (see Figure 8). The largest sources of cumulative FDI in
China for 1979-2011 were Hong Kong (43.5% of total), the British Virgin Islands, Japan, the
United States, and Taiwan (see Table 3).20
19
U.S. data on bilateral FDI flows with China differ significantly with Chinese data. For additional info on bilateral
FDI flows based on U.S. data, see CRS Report RL33536, China-U.S. Trade Issues, by Wayne M. Morrison.
20
Much of the FDI originating from the British Virgin Islands and Hong Kong may originate from other foreign
investors. In addition, some Chinese investors might be using these locations to shift funds overseas in order to reinvest in China to take advantage of preferential investment policies (this practice is often referred to as “roundtipping”). Thus, the actual level of FDI in China may be overstated.
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China’s Economic Conditions
Figure 7. Annual FDI Flows to China: 1985-2011
($ billions)
140
120
100
80
60
40
20
19
8
19 5
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
0
20 2
0
20 3
0
20 4
0
20 5
0
20 6
0
20 7
0
20 8
0
20 9
1
20 0
11
0
Source: United Nations Conference on Trade and Investment and Invest China.
Figure 8. Major Recipients of Global FDI Inflows in 2011
($ billions)
250
U.S.
200
150
China
100
Hong Kong
UK
50
Brazil
Ireland
Russian
Belgium
SingaporeFrance
0
Source: United Nations Conference on Trade and Investment and Invest and Chinese Ministry of Commerce
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China’s Economic Conditions
Note: Data for China are official Chinese data; all are estimates by the United Nations.
Table 3. Major Sources of FDI in China: 1979-2011
($ billions and % of total)
Estimated Cumulative Utilized
FDI: 1979-2011
Country
Amount
Total
Utilized FDI in 2011
% of Total
Amount
% of Total
1,224.0
100.0
116.1
100.0
Hong Kong
533.2
43.5
77.0
66.3
British Virgin Islands*
111.8
9.1
NA
Japan
79.9
6.5
6.3
5.4
United States
68.1
5.6
3.0
2.6
Taiwan
58.7
4.8
6.7
5.8
Singapore
53.4
4.5
6.3
5.4
South Korea
49.9
4.1
2.6
2.2
NA
Source: Chinese Ministry of Commerce and Chinese Statistical Yearbook.
Notes: Ranked by cumulative top seven sources of FDI in China through 2011. *Data for the British Virgin
Islands are through 2010.
Figure 9. Annual U.S. FDI Flows to China: 1985-2011
($ millions)
6,000
5,000
4,000
3,000
2,000
1,000
1
0
20
1
9
20
1
20
0
8
20
0
6
5
4
3
2
1
7
20
0
20
0
20
0
20
0
20
0
20
0
20
0
9
8
5
0
0
20
0
19
9
19
9
19
9
19
9
19
8
5
0
Source: Chinese Ministry of Commerce and Chinese Yearbook, various years.
Note: Chinese and U.S. data on bilateral FDI flows differ sharply because of different methodologies used.
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China’s Economic Conditions
China’s Growing FDI Outflows
A key aspect of China’s economic modernization and growth strategy during the 1980s and 1990s
was to attract FDI into China to help boost the development of domestic firms. Investment by
Chinese firms abroad was sharply restricted. However, in 2000, China’s leaders initiated a new
“go global” strategy, which sought to encourage Chinese firms (primarily SOEs) to invest
overseas. One key factor driving this investment is China’s massive accumulation of foreign
exchange reserves, Traditionally much of those reserves have been invested in relatively safe, but
low-yielding, assets, such as U.S. Treasury securities. On September 29, 2007, the Chinese
government officially launched the China Investment Corporation (CIC) in an effort to seek more
profitable returns on its foreign exchange reserves and diversify away from its U.S. dollar
holdings. The CIC was originally funded at $200 billion, making it one of the world’s largest
sovereign wealth funds.21 Another factor behind the government’s drive to encourage more
outward FDI flows has been to obtain natural resources, such as oil and minerals, deemed by the
government as necessary to sustain China’s rapid economic growth.22 In June 2005, the China
National Offshore Oil Corporation (CNOOC), through its Hong Kong subsidiary (CNOOC Ltd.),
made a bid to buy a U.S. energy company, UNOCAL, for $18.5 billion, although CNOOC later
withdrew its bid due to opposition by several congressional Members. Finally, the Chinese
government has indicated its goal of developing globally competitive Chinese firms with their
own brands. Investing in foreign firms, or acquiring them, is viewed as a method for Chinese
firms to obtain technology, management skills, and often, internationally recognized brands,
needed to help Chinese firms become more globally competitive. For example, in April 2005
Lenovo Group Limited, a Chinese computer company, purchased IBM Corporation’s personal
computer division for $1.75 billion.23 Similarly, overseas FDI in new plants and businesses is
viewed as developing multinational Chinese firms with production facilities and R&D operations
around the world.
China has become a significant source of global FDI outflows, which rose from $2.7 billion in
2002 to $67.6 billion in 2011 (see Figure 10). In 2011, China ranked as the 9th largest source of
global FDI, according to the United Nations (see Figure 11).24 The stock of China’s outward FDI
through 2011 is estimated at $384.9 billion.
China’s data indicate that the top five destinations of its FDI outflows in 2010 were Hong Kong
(which accounted for 56.5% of total), the British Virgin Islands, the Cayman Islands,
Luxembourg, and Australia (the United States ranked 7th). In terms of the stock of Chinese FDI
outflows, the largest destinations were Hong Kong (62.8% of total), the British Virgin Islands, the
Cayman Islands, Australia, and Singapore (the United States ranked 7th).25 According to China’s
Ministry of Commerce, four out of 10 of biggest overseas Chinese corporate investors were oil
companies (based on FDI stock through 2010).26
21
See, CRS Report RL34337, China’s Sovereign Wealth Fund, by Michael F. Martin.
Chinese oil and mineral companies are dominated by SOEs.
23
The Chinese government is believed to be Lenovo’s largest shareholder.
24
United Nations Conference on Trade and Development, Global Investment Trade Monitor, April 12, 2012.
25
It is likely that a significant level of Chinese FDI in the British Virgin Islands, the Cayman Islands, and Hong Kong
are re-directed elsewhere.
26
Chinese Ministry of Commerce, 2010 Statistical Bulletin of China’s Outward Foreign Direct Investment, October
2011.
22
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China’s Economic Conditions
According to A Capital Dragon Index, a firm that tracks China’s FDI, 56% of China’s outbound
FDI in 2011was in greenfield projects (such as new plants and business facilities) and 44%
involved mergers and acquisitions. In terms of sectors, 51% of China’s 2011 FDI went to
resources (such as oil and minerals), 22% to chemicals, 14% to services, 12% to industry, and 1%
to automotive. SOEs accounted for 72% of Chinese FDI that involved mergers and acquisitions in
2011.27 A Capital Dragon Index estimates that China’s first quarter 2012 outbound FDI was $21.4
billion and that SOEs accounted for 98% of mergers and acquisitions, which were largely in
resources.28
Figure 10. China’s Annual FDI Outflows: 2002-2011
($ billions)
80
70
60
55.9
56.3
2008
2009
68.8
67.6
2010
2011
50
40
26.5
30
20
10
12.3
2.7
2.9
2002
2003
17.6
5.5
0
2004
2005
2006
2007
Source: Ministry of Commerce, 2011 Statistical Bulletin of China’s Outward Foreign Direct Investment, 2011.
Data for 2011 are from the United Nations.
27
28
A Capital Dragon Index, 2011 Full Year, available at http://www.acapital.hk/dragonindex/datasheets.
A Capital Dragon Index, 2012 Q1, available at http://www.acapital.hk/dragonindex/datasheets.
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China’s Economic Conditions
Figure 11. Major Sources of Global FDI Outflows in 2011
$billions
450
400
U.S.
350
300
250
200
150
Japan
100
France
UK
Hong Kong
Belgium
Italy
Switzerland
China
Russia
50
0
Source: United Nations estimates.
China’s Merchandise Trade Patterns
Economic reforms and trade and investment liberalization have helped transform China into a
major trading power. Chinese merchandise exports rose from $14 billion in 1979 to $1.9 trillion
in 2011, while merchandise imports over this period grew from $16 billion to $1.7 trillion (see
Table 4 and Figure 12). From 1990 to 2011, the annual growth of China’s exports and imports
averaged 19.5% and 18.4%, respectively (see Figure 13).
Although Chinese exports and imports dropped sharply in 2009 (over 2008 levels) because of the
global economic slowdown, they both recovered in 2010 and exceeded pre-crisis levels. In 2011,
China’s exports and imports rose by 20.3% and 24.9%, respectively. However, from January-May
2012, China’s exports and imports grew by only 8.7% and 6.6%, respectively, over the same
period in 2011. China’s merchandise trade surplus grew sharply from 2004 to 2008, but fell
sharply in 2009-2011. China’s merchandise trade surplus fell from its peak of $297.4 billion in
2007 to $157.9 billion – a 46.9% decline. Based on January-May 2012 trade data, China’s trade
surplus for the full year could fall to about $90 billion.
China overtook Germany in 2009 to become the world’s largest merchandise exporter and the
second largest importer (see Figure 14 and Figure 15). As indicated in Figure 16, China’s share
of global exports increased from 3.3% in 2000 to 10.4% in 2011; the World Bank projects this
figure could increase to 20% by 2030.29 Merchandise trade surpluses, large-scale foreign
29
The World Bank, China 2030, Building a Modern, Harmonious, and Creative High-Income Society, 2012, p. 14.
Hereafter referred to as World Bank, China 2030.
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investment, and large purchases of foreign currencies to maintain its exchange rate with the dollar
and other currencies have enabled China to become by far the world’s largest holder foreign
exchange reserves at $3.2 trillion at the end of 2011.
Table 4. China’s Merchandise World Trade: 1979-2011
($ billions)
Year
Exports
Imports
Trade Balance
1979
13.7
15.7
–2.0
1980
18.1
19.5
–1.4
1985
27.3
42.5
–15.3
1990
62.9
53.9
9.0
1995
148.8
132.1
16.7
2000
249.2
225.1
24.1
2001
266.2
243.6
22.6
2002
325.6
295.2
30.4
2003
438.4
412.8
25.6
2004
593.4
561.4
32.0
2005
762.0
660.1
101.9
2006
969.1
791.5
177.6
2007
1,218.0
955.8
262.2
2008
1,428.9
1,131.5
297.4
2009
1,202.0
1,003.9
198.2
2010
1,578.4
1,393.9
184.5
2011
1,899.3
1,741.4
157.9
Source: Global Trade Atlas.
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China’s Economic Conditions
Figure 12. China’s Merchandise Trade: 2000-2011
($ billions)
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
24.1
22.6
30.4
32
25.6
177.6
101.9
262.2 297.4
198.2 184.5 157.9
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Trade Balance
Exports
Imports
Source: Economist Intelligence Unit.
Figure 13. Annual Change in China’s Merchandise Exports and Imports: 1990-2011
(percent)
50.0
40.0
30.0
20.0
10.0
0.0
-10.0
Exports
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
-20.0
Imports
Source: Global Trade Atlas using official Chinese data.
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China’s Economic Conditions
Figure 14. Merchandise Exports by China, Germany and the United States: 19902011
($ billions)
2000
1800
1600
1400
1200
1000
800
600
400
200
0
1990
1993
1996
1999
China
2002
Germany
2005
2008
2011
United States
Source: Economist Intelligence Unit.
Note: Top three global importers in 2011.
Figure 15. Merchandise Imports by China, Germany, and the United States: 19902011
($ billions)
2,500
2,000
1,500
1,000
500
China
Germany
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
United States
Source: Economist Intelligence Unit.
Note: Top three global importers in 2011.
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Figure 16. China’s Global Share of Merchandise Exports: 1990-2011
($ billions)
12.0
10.4
10.1
9.5
10.0
8.6 8.8
7.8
8.0
7.1
6.3
5.7
6.0
4.9
4.0
2.0
2.3 2.5
1.8 2.1
2.8 2.9 2.8
3.3 3.4 3.3
3.8
4.2
0.0
1990
1993
1996
1999
2002
2005
2008
2011
Source: Economist Intelligence Unit.
China’s Major Trading Partners
Table 5 lists Chinese trade data on its major trading partners in 2011, which included the 27
countries that make up the European Union (EU27), the United States, Japan, and the 10 nations
that constitute the Association of Southeast Asian Nations (ASEAN).30 China’s largest export
markets were the EU27, the United States, Hong Kong, and ASEAN, while its top sources for
imports were the EU27, Japan, ASEAN, and South Korea. According to Chinese data, it
maintained substantial trade surpluses with the United States, the EU27, and Hong Kong, but
reported large deficits with Taiwan, South Korea, and Japan. China reported that it had a $206.2
billion trade surplus with the United States, but U.S. data show that it had a $295.5 billion deficit
with China. These trade imbalance data disparities occur with many of China’s other major
trading partners as well. China reported that it had a $46.7 billion trade deficit with Japan, while
Japan reported that it had a $22.1 billion trade deficit with China. These differences appear to be
largely caused by how China’s trade via Hong Kong is counted in official trade data. China treats
a large share of its exports through Hong Kong as Chinese exports to Hong Kong for statistical
30
ASEAN members include Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the Philippines,
Singapore, Thailand, and Vietnam.
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purposes, while many countries that import Chinese products through Hong Kong generally
attribute their origin to China for statistical purposes, including the United States.31
Table 5. China’s Major Trading Partners in 2011
($ billions)
Country
Total Trade
Chinese
Exports
Chinese
Imports
China’s Trade
Balance
Foreign
Partner’s
Reported
Trade Balance
with China
European Union
567.2
356.0
211.2
144.8
-217.6
United States
442.4
324.3
118.1
206.2
-295.5
Japan
342.1
147.7
194.4
-46.7
-22.1
ASEAN
362.4
169.9
192.5
-22.6
NA
Hong Kong
277.9
267.5
10.4
257.1
26.6
South Korea
250.6
82.9
167.7
-84.8
47.8
Taiwan
155.0
30.1
124.9
-94.8
34.7
3,640.7
1,899.3
1,741.4
157.9
--
Total Chinese
Trade
Source: Global Trade Atlas and World Trade Atlas.
Note: Rankings according to China’s total trade in 2011.
Major Chinese Trade Commodities
China’s abundance of low-cost labor has made it internationally competitive in many low-cost,
labor-intensive manufactures. The average hourly labor cost for manufacturing in China in 2010
(at $2) was 5.7% the cost in the United States (at $35). 32 As a result, manufactured products
constitute a significant share of China’s trade. A substantial amount of China’s imports is
comprised of parts and components that are assembled into finished products, such as consumer
electronic products and computers, and then exported. Often, the value-added to such products in
China by Chinese workers is relatively small compared to the total value of the product when it is
shipped abroad.
China’s top 10 exports and imports in 2011 are listed in Table 6 and Table 7, respectively, using
the harmonized tariff system (HTS) on a two-digit level. Major exports included electrical
machinery (such as computers and parts), machinery, knit apparel, and woven apparel, while
major imports included electrical machinery, mineral fuel, machinery, and ores.
31
See CRS Report RS22640, What’s the Difference?—Comparing U.S. and Chinese Trade Data, by Michael F.
Martin.
32
In addition, the overall average monthly wage in China, at $539 (nominal U.S. dollars) in 2011, was about 13% U.S.
levels (although the disparity would lessen if purchasing power data were used). Source: Economist Intelligence Unit
data tool.
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Table 6. Major Chinese Exports: 2011
HS Code
Description
$billions
World
1,899.3
Percent of
Total
100
2011/2010
% Change
20.3
85
Electrical machinery (such as computers and parts)
445.8
23.5
14.6
84
Machinery
353.9
18.6
14.2
61
Knit apparel
80.2
4.2
20.2
62
Woven apparel
63.1
3.3
16.0
90
Optical, photographic, cinematographic, measuring
checking, precision, medical or surgical instruments
and apparatus; parts and accessories thereof
60.7
3.2
16.5
94
Furniture and bedding
59.4
3.1
17.3
73
Iron and steel products
51.2
2.7
30.8
87
Vehicles, except railway (mainly auto parts, motorcycles,
trucks, and bicycles)
49.6
2.6
29.2
39
Plastic
45.5
2.4
30.9
89
Ships and boats
43.7
2.3
8.5
Source: World Trade Atlas, using official Chinese statistics.
Notes: Top 10 exports in 2011, 2-digit level, harmonized tariff system.
Table 7. Major Chinese Imports: 2011
HS Code
Description
$ billions
World
1,741.4
Percent of
Total
100
2011/2010
% change
24.9
85
Electrical machinery
351.0
20.2
11.6
27
Mineral fuel, oil etc.
273.5
15.7
45.2
84
Machinery
199.6
11.5
15.8
26
Ores, slag, and ash
150.7
8.7
39.5
90
Optical, photographic, cinematographic, measuring,
checking, precision, medical or surgical instruments
and apparatus; parts and accessories thereof
99.0
5.7
10.4
39
Plastic
70.2
4.0
10.2
87
Vehicles, not railway (mainly autos and parts)
65.3
3.8
32.2
29
Organic chemicals
63.2
3.6
31.0
74
Copper and articles thereof
54.3
3.1
18.0
98
Special Classification
49.5
2.8
168.5
Source: World Trade Atlas, using official Chinese statistics.
Notes: Top 10 imports in 2011, two-digit level, harmonized tariff schedule.
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China’s Growing Appetite for Energy
China’s rapid economic growth has fueled a growing demand for energy, such as petroleum and
coal, and that demand is becoming an increasingly important factor in determining global energy
prices. According to the International Energy Agency (IEA), China overtook the United States in
2009 as the world’s largest energy user (in comparison, China’s energy use was only half that of
that of the United States in 2000). According to IEA projections, China’s demand for energy from
2008 (the baseline year) to 2035 will account for 30% of the projected increase in global demand
for energy during this period. By 2035, China is projected to consume 70% more energy than the
United States (even though, on a per capita basis, China’s energy consumption will be less than
half of U.S. levels).33
China is the world’s second largest consumer of oil products (after the United States) at 9.8
million barrels per day (bpd) in 2011 (compared to 3.9 million in 1997), and that level rises to
16.9 million bpd by 2035.34 China became a net oil importer (i.e., imports minus exports) in 1993.
Net oil imports grew from 632 thousand bpd in 1997 to about 5.0 million bpd in 2010 (see Figure
17), making it the world’s second largest net oil importer after the United States.35 China’s net oil
imports are projected to rise to 13.1 million bpd by 2030, a level that would be comparable to the
European Union in that year.36
33
International Energy Agency, 2011 World Energy Outlook, November 2011, available at http://www.iea.org/weo.
U.S. Energy Information Administration, Forecasts and Analysis, at http://www.eia.doe.gov/oiaf/forecasting.html.
35
China overtook Japan as the second largest net oil importer in 2009.
36
EIA, International Energy Outlook, September 19, 2011, available at http://www.eia.gov/forecasts/ieo.
34
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Figure 17. China’s Net Oil Imports: 1997-2011
(Thousands BPD)
6,000
5,000
4,000
3,000
2,000
1,000
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
0
Source: U.S. Energy Administration, China Energy Newswire, and British Petroleum June 2010 Statistical Review
of World Energy. Data for 2010 and 2011 from China Daily.
China’s Regional and Bilateral Free Trade Agreements
The Chinese government has maintained an active policy of boosting trade and investment ties
around the world, especially with countries in Asia. To that end, China has entered into a number
of regional and bilateral trade agreements, or is in the process of doing so. China currently has
free trade agreements (FTAs) with ASEAN, Pakistan, Chile, Hong Kong, Macau, New Zealand,
Singapore, Pakistan, Peru, and Costa Rica. China also has an economic cooperation framework
agreement (ECFA) with Taiwan. China is currently in the process of negotiating FTAs with the
Cooperation Council for the Arab States of the Gulf (which includes Saudi Arabia, Kuwait, the
United Arab Emirates, Qatar, and Bahrain), Australia, Iceland, Norway, Switzerland, and the
Southern African Customs Union (which includes Botswana, Lesotho, Namibia, and Swaziland).
In May 2012, China, Japan, and South Korea agreed to begin negotiations for an FTA in 2012.
China has also considered negotiating an FTA with India, but with little progress to date.37
37
Chinese Ministry of Commerce, China FTA Network, available at
http://fta.mofcom.gov.cn/english/fta_qianshu.shtml.
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Major Long-Term Challenges Facing the
Chinese Economy
China’s economy has shown remarkable growth over the past several years, and many economists
project that it will enjoy fairly healthy growth in the near future. However, economists caution
that these projections are likely to occur only if China continues to make major reforms to its
economy. Failure to implement such reforms could endanger future growth. They note that
China’s current economic model has resulted in a number of negative economic (and social)
outcomes, such as over-reliance on fixed investment and exporting for its economic growth,
extensive inefficiencies that exist in many sectors (due largely to government industrial policies),
wide-spread pollution, and growing income inequality, to name a few. Many of China’s economic
problems and challenges stem from its incomplete transition to a free market economy and from
imbalances that have resulted from the government’s goal of economic growth at all costs.
China’s Incomplete Transition to a Market Economy
Despite China’s three-decade history of widespread economic reforms, Chinese officials contend
that China is a “socialist-market economy.” This appears to indicate that the government accepts
and allows the use of free market forces in a number of areas to help grow the economy, but
where the government still plays a major role in the country’s economic development.
Industrial Policies and SOEs
According to the World Bank, “China has become one of the world’s most active users of
industrial policies and administrations.” 38 According to one estimate, China’s SOEs may account
for up of 50% of non-agriculture GDP.39 In addition, although the number of SOEs has declined
sharply, they continue to dominate a number of sectors (such as petroleum and mining,
telecommunications, utilities, transportation, and various industrial sectors); are shielded from
competition; are the main sectors encouraged to invest overseas; and dominate the listings on
China’s stock indexes.40 One study found that SOEs constituted 50% of the 500 largest
manufacturing companies in China and 61% of the top 500 service sector enterprises.41 It is
estimated that there were 154,000 SOEs as of 2008, and while these accounted for only 3.1% of
all enterprises in China, they held 30% of the value of corporate assets in the manufacturing and
services sectors.42 Of the 58 Chinese firms on the 2011 Fortune Global 500 list, 54 were
38
The World Bank, China:2030, p. 114.
U.S.-China Economic and Security Review Commission, An Analysis of State-owned Enterprises and State
Capitalism in China, by Andrew Szamosszegi and Cole Kyle, October 26, 2011, p.1.
40
The nature of China’s SOEs has become increasing complex. Many SOEs appear to be run like private companies.
For example, and a number of SOEs have made initial public offerings in China’s stock markets and those in other
countries (including the United States), although the Chinese government is usually the largest shareholder. It is not
clear to what extent the Chinese government attempts to influence decisions made by the SOE’s which have become
shareholding companies.
41
Xiao Geng, Xiuke Yang, and Anna Janus, State-owned Enterprises in China, Reform Dynamics and Impacts, 2009,
p.155.
42
The World Bank, State-Owned Enterprises in China: How Big Are They?, January 19, 2010.
39
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identified as having government ownership of 50% or more. 43 The World Bank estimates that
more than one in four SOEs lose money.44
The Banking System
China’s banking system is largely controlled by the central government, which attempts to ensure
that capital (credit) flows to industries deemed by the government to be essential to China’s
economic development. SOEs, which are believed to receive preferential credit treatment by
government banks, while private firms must often pay higher interest rates or obtain credit
elsewhere. According to one estimate, SOEs accounted for 85% ($1.4 trillion) of all bank loans in
2009.45 In addition, the government sets interest rates for depositors at very low rates, often below
the rate of inflation, which keeps the price of capital relatively low for firms.46 It is believed that
oftentimes SOEs do not repay their loans, which may have saddled the banks with a large amount
of non-performing loans. In addition, local governments are believed to have borrowed
extensively from state banks shortly after the global economic slowdown began to impact the
Chinese economy to fund infrastructure and other initiatives. Some contend these measures could
further add to the amount of non-performing loans held by the banks. Many analysts contend that
one of the biggest weaknesses of the banking system is that it lacks the ability to ration and
allocate credit according to market principles, such as risk assessment.
An Undervalued Currency
China does not allow its currency to float and therefore must make large-scale purchases of
dollars to keep the exchange rate within certain target levels. Although the renminbi (RMB) has
appreciated against the dollar in real terms by about 40% since reforms were introduced in July
2005, analysts contend that it remains highly undervalued.47 China’s undervalued currency makes
its exports less expensive, and its imports more expensive, than would occur under a floating
exchange rate system. In order to maintain its exchange rate target, the government must
purchases foreign currency (such as the dollar) by expanding the money supply. This makes it
much more difficult for the government to use monetary policy to combat inflation.48
Many economists argue that China’s industrial policies have sharply limited competition and the
growth of the private sector, caused over-capacity in many industries, and distorted markets by
43
Global 500, The World's Largest Corporations," Fortune, July 25, 2011, available at
http://money.cnn.com/magazines/fortune/global500/2011/index.html.
44
World Bank, China 2030, p.25.
45
The Economist, State Capitalism’s Global Reach, New Masters of the Universe, How State Enterprise is Spreading,
January 21, 2012, available at http://www.economist.com/node/21542925.
46
Some economists argue that a significant portion of China’s SOEs could not stay in business if they had to pay a
market-based interest rate for credit.
47
See CRS Report RS21625, China's Currency Policy: An Analysis of the Economic Issues, by Wayne M. Morrison
and Marc Labonte.
48
If Chinese banks raised interest rates in an effort to control inflation, overseas investors might to try to shift funds to
China (through illegal means) to take advantage of the higher Chinese rates. The Chinese government has had difficulty
blocking such inflows of “hot money.” Such inflows force the government to boost the money supply to buy up the
foreign currency necessary to maintain the targeted peg. Expanding the money supply contributes to easy credit
policies by the banks, which has contributed to overcapacity in a number of sectors, such as steel, and speculative asset
bubbles (such as in real estate). This often forces the government to use administrative controls to limit credit to certain
sectors.
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artificially lowering the costs of various factor costs (such as capital, water, land, and energy)
below market levels in order to promote targeted industrial sectors. Such policies have come at
the expense of other (non-industrial) sectors of the economy, such as services.
Implications of China’s “Unbalanced” Economic Growth Model
China’s economic model, until recently, has emphasized rapid economic growth above nearly all
other considerations. Various data show that, while China’s GDP has risen rapidly over past 33
years, Chinese households do not appear to have shared equally in that growth. In addition,
China’s economic model has resulted in a number of significant problems that may negatively
affect future growth.
Overdependence on Exporting and Fixed Investment
The International Monetary Fund (IMF) estimates that that fixed investment related to tradable
goods plus net exports together accounted for over 60% of China’s GDP growth from 2001 to
2008 (up from 40% from 1990 to 2000), which was significantly higher than in the G-7 countries
(16%), the euro area (30%) and the rest of Asia (35%). China’s fixed investment as a percentage
of GDP is the highest of any major economy and its importance has been growing. As shown in
Figure 18, fixed investment as a percent of GDP increased from 25% in 1990 to 48.5% in 2011.
On the other hand, during the same period, private consumption of as a percent of GDP fell from
48.8% to 33.9%.49 China’s private consumption as a share of GDP is the lowest of any major
economy.50 In addition, as indicated in Figure 19, personal disposable income in China as a share
of GDP has also been falling over the past decade or so, from 47.6% in 2000 to 42.2% in 2011.51
China’s overall savings rate as a percent of GDP in 2011 was 52.1%, which was the highest rate
of any major economy.
Many economists contend that the falling share of private consumption and disposable income
relative to GDP is largely caused by two main factors: China’s banking policies and the lack of an
adequate social safety net. The Chinese government places restrictions on the export of capital.
As a result, Chinese households put a large share of their savings in domestic banks. The Chinese
government sets the interest rate on deposits. Often this rate is below the rate of inflation, which
lowers household income. Some economists consider this policy to constitute a transfer of wealth
from Chinese households to Chinese firms which benefit from low interest rates. This “tax” on
household income negatively affects household consumption. Secondly, China’s lack of an
adequate social safety net (such as pensions, health care, unemployment insurance, and
education) induces households to save a large portion of their income. According to one estimate,
the average saving rate of urban households relative to their disposable incomes rose from 18% in
1995 to nearly 29% in 2009.52 Corporations are also a major contributor the high savings rate in
China. Many Chinese firms, especially SOEs, do not pay out dividends and thus are able to retain
49
Private consumption in China has been rising rapidly over the past several years, but not as fast as over parts of the
economy.
50
In comparison, the U.S. figure was 71.1%.
51
That rate was 43.4% in 1990.
52
VOX, The Puzzle of China’s Rising Household Saving Rate, by Marcos Chamon, Kai Liu, and Eswar Prasad,
January 18, 2011, available at http://voxeu.org/index.php?q=node/6028.
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most of their earnings. Many economists contend that requiring the SOEs to pay dividends could
boost private consumption in China.
Figure 18. Chinese Gross Savings, Gross Fixed Investment, and Private Consumption
as a Percent of GDP: 1990-2011
(percent)
60.0
50.0
40.0
30.0
20.0
10.0
Private consumption
Gross fixed investment
20
10
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
0.0
Gross natonal savings
Source: Economist Intelligence Unit.
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Figure 19. Chinese Disposable Personal Income as a Percent of GDP: 2000-2011
(percent)
49.0
48.0
47.0
46.0
45.0
44.0
43.0
42.0
41.0
40.0
39.0
38.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Economist Intelligence Unit.
Growing Pollution
China’s economic growth model has emphasized the growth of heavy industry in China, much of
which is energy-intensive and high polluting. The level of pollution in China continues to worsen,
posing series health risks to the population. The Chinese government often disregards its own
environmental laws in order to promote rapid economic growth. According to the World Bank, 20
out of 30 of the world’s most polluted cities are in China, with significant costs to the economy
(such as health problems, crop failures and water shortages). According to one government
official estimate in 2006, environmental damage costs the country $226 billion, or 10% of the
country’s GDP, each year.53 The Chinese government estimated that in 2004 there were over 300
million people living in rural areas that drank unsafe water (caused by chemicals and other
contaminants).Toxic spills in 2005 and 2006 threatened the water supply of millions of people.
China is the largest producer and consumer of coal, which accounts for about 70% of China’s
energy use. In October 2009, China’s media reported that thousands of children living near
smelters had been found to have excessive amounts of lead in their blood. Although growing
environmental degradation has been recognized as a serious problem by China’s central
government, it has found it difficult to induce local governments to comply with environmental
laws, especially when such officials feel doing so will come at the expense of economic growth.
53
China Daily, June 6, 2006.
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The EIA projects that by 2035, China’s carbon dioxide emissions could be nearly double its
current levels.54 A study by ExxonMobil, by 2030, China’s CO2 emissions could equal the
combined level in the United States and EU combined.55
Other Challenges
China’s economy faces a number of social and political challenges as well:
•
Public unrest. For China’s Communist Party leadership, a growing economy is
its main source of political legitimacy. However, every year numerous protests
occur in China over a number of issues, including pollution, government
corruption, and land seizures. A number of protests in China have stemmed in
part from frustrations among many Chinese (especially peasants) that they are
not benefitting from China’s economic reforms and rapid growth, and
perceptions that those who are getting rich are doing so because they have
connections with government officials. A 2005 United Nations report stated that
the income gap between the urban and rural areas was among the highest in the
world and warned that this gap threatens social stability. The report urged China
to take greater steps to improve conditions for the rural poor, and bolster
education, health care, and the social safety net.56 It is estimated that 300 million
people in China (mainly in rural areas) lacked health insurance, and many that do
have basic insurance must pay a significant amount of medical expenses out of
their own pocket.57
•
The lack of the rule of law in China has led to widespread government
corruption, financial speculation, and misallocation of investment funds. In many
cases, government “connections,” not market forces, are the main determinant of
successful firms in China. Many U.S. firms find it difficult to do business in
China because rules and regulations are generally not consistent or transparent,
contracts are not easily enforced, and intellectual property rights are not protected
(due to the lack of an independent judicial system). The relative lack of the rule
of law and widespread government corruption in China limit competition and
undermine the efficient allocation of goods and services in the economy.
•
Poor government regulatory environment. China maintains a weak and
relatively decentralized government structure to regulate economic activity in
China. Laws and regulations often go unenforced or are ignored by local
government officials. As a result, many firms cut corners in order to maximize
profits. This has lead to a proliferation of unsafe food and consumer products
being sold in China or exported abroad. Lack of government enforcement of food
safety laws led to a massive recall of melamine-tainted infant milk formula that
reportedly killed at least four children and sickened 53,000 others in 2008.
54
EIA, International Energy Outlook, September 19, 2011, available at http://www.eia.gov/forecasts/ieo.
ExxonMobil, The Outlook for Energy, A View to 2030, December 29, 2009, p. 4.
56
China’s Human Development Report 2005.
57
Washington Post, October 29, 2009.
55
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Plans Announced by the Chinese Government to
Reform and Restructure the Economy
Various government officials have publicly stated the need for China to change course from its
traditional economic growth model of growth at all cost to one that balances economic growth
with a number of social goals in order to develop a “socialist harmonious society,” and to further
modernize the economy. In March 2007, Chinese Premier Wen Jiabao stated that there are
“structural problems in China's economy which cause unsteady, unbalanced, uncoordinated and
unsustainable development.” He defined “unsteady development” as overheated investment,
excessive credit and liquidity, and merchandise trade and current account surpluses. “Unbalanced
development” was described as economic disparities between rural and urban areas, regions of
the country, and between economic and social development. “Uncoordinated development” was
described as the lack of balance between various sectors of the economy (especially in regards to
the services sector) and between investment and consumption (i.e., economic growth is mainly
driven by investment and exports rather than consumer demand). Lastly, “unsustainable
development” referred to problems caused by China’s inefficient use of energy and resources and
failure to protect the environment.
The Central Government Five-Year Plans
China’s last two five-year plans (FYP), the 11th FYP (2006-2010) and the 12th FYP (2011-2015),
have placed strong emphasis on promoting consumer demand, addressing income disparities
(such as by boosting spending on social safety net programs) boosting energy efficiency, reducing
pollution, improving the rule of law, and deepening economic reforms. Those plans have also
identified a number of industries and technologies that the government has targeted for
development (see text box).
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China’s 12th Five-Year Plan58
China’s Five-Year Plans (FYPs), which have been issued by the government since 1953. The FYP is the major vehicle
for the government to establish broad economic and social goals for the time period under consideration, to
coordinate investments between the central and local governments, and to oversee implementation of policy. Not
only does the plan influence investments by government entities, it also provides direction for bank lending and
government approvals and regulation of private and semi-private industries. In March 2011, China’s National People’s
Congress approved the 12th Five-Year Plan (covering the years 2011 to 2015).
The 12th FYP (2011-2015) contains three broad themes or areas of focus: (1) economic restructuring, (2) promoting
greater social equality, and (3) protecting the environment. Chinese industrial policy comes into play primarily in
economic restructuring but also is apparent in the other areas of focus. Particularly noteworthy is the targeting of
seven strategic emerging industries that are intended to become the backbone of China’s economy in the future and
to be able to compete well on a global scale. These seven industries are: (1) biotechnology, (2) new energy, (3) highend equipment manufacturing, (4) energy conservation and environmental protection, (5) clean-energy vehicles, (6)
new materials, and (7) next-generation information technology. The government reportedly intends to spend up to
$2.1 trillion on these industries during the 12th FYP. Some of the highlights of the FYP include:
•
achieving an average real GDP growth rate of 7% and ensuring that incomes rise at least as fast as GDP;
•
consolidating inefficient sectors and promoting the services industry (with the goal of expanding service sector
output to account for 47% of GDP—up four percentage points from the current level);
•
promoting energy saving and new energy industries, promoting the development of nuclear, water, wind, and
solar power, and expanding non-fossil fuel to account for 11.4% of primary energy consumption;
•
welcoming foreign investment in modern agriculture, high-technology, and environmental protection industries;
•
turning coastal regions from “world’s factory” to hubs of research and development, high-end manufacturing, and
services;
•
lengthening high-speed railway and highway networks;
•
increasing expenditure on R&D to account for 2.2 percent GDP;
•
expanding non-fossil fuel to account for 11.4% of primary energy consumption;
•
cutting water consumption per unit of value-added industrial output by 30%, energy consumption per unit of
GDP by 16%, and carbon dioxide emission per unit of GDP by 17%;
•
transfer the coastal regions from the “world’s factory” to hubs of R&D, high-end manufacturing, and
environmental protection industries;
•
increasing the minimum wage by no less than 13% on average each year; and
•
building 36 million affordable apartments for low-income people.
Sources: Xinhua News Agency, Highlights of China’s 12th Five-Year Plan, March 5, 2011; and APCO Worldwide, China’s
12th Five-Year Plan: How it Actually Works and What’s in Store For the Next Five Years, December 10, 2010.
The Drive for “Indigenous Innovation”
Many of the industrial policies that China has implemented or formulated since 2006 appear to
stem largely from a comprehensive document issued by China’s State Council (the highest
executive organ of state power) in 1996 titled “the National Medium-and Long-Term Program for
Science and Technology Development (2006-2020),” often referred to as the MLP. The MLP
appears to represent an ambitious plan to modernize the structure of China’s economy by
transforming it from a global center of low-tech manufacturing to a major center of innovation
(by the year 2020) and a global innovation leader by 2050. As some observers describe it, China
58
"Highlights of China's Draft 12th Five-Year Plan," Xinhua, March 5, 2011.
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wants to go from a model of “made in China” to “innovated in China.” It also seeks to sharply
reduce the country’s dependence on foreign technology. The MLP includes the stated goals of
“indigenous innovation, leapfrogging in priority fields, enabling development, and leading the
future.”59 Some of the broad goals of the MLP state that by 2020:
•
The progress of science and technology will contribute 60% or above to China’s
development.
•
The country's reliance on foreign technology will decline to 30% or below (from
an estimated current level of 50%).
•
Gross expenditures for research and development (R&D) would rise to 2.5% of
gross domestic product (from 1.3% in 2005). Priority areas for increased R&D
include space programs, aerospace development and manufacturing, renewable
energy, computer science, and life sciences.60
The document states that “China must place the strengthening of indigenous innovative capability
at the core of economic restructuring, growth model change, and national competitiveness
enhancement. Building an innovation-oriented country is therefore a major strategic choice for
China’s future development.” This goal, according to the document, is to be achieved by
formulating and implementing regulations in the country’s government procurement law to
“encourage and protect indigenous innovation,” establishing a coordination mechanism for
government procurement of indigenous innovative products, requiring a first-buy policy for major
domestically made high-tech equipment and products that possess proprietary intellectual
property rights, providing policy support to enterprises in procuring domestic high-tech
equipment, and developing “relevant technology standards” through government procurement.
Challenges to U.S. Policy of China’s Economic Rise
China’s rapid economic growth and emergence as major economic power have given China’s
leadership increased confidence in its economic model. Many believe the key challenges for the
United States are to convince China that: (1) it has a stake in maintaining the international trading
system, which is largely responsible for its economic rise, and to take a more active leadership
role in maintaining that system; and (2) that further economic and trade reforms are the surest
way for China to grow and modernize its economy. For example, by boosting domestic spending
and allowing its currency to appreciate, China would import more, which would help speed
economic recovery in other countries, promote more stable and balanced economic growth in
China, and lessen trade protectionist pressures around the world. Lowering trade barriers on
imports would boost competition in China, lower costs for consumers, and increase economic
efficiency. However, many U.S. stakeholders are concerned that China’s efforts to boost the
development of indigenous innovation and technology could result in greater intervention by the
state (such as subsidies and trade and investment barriers), which could negatively affect U.S. IPintensive firms. Failure by China to take meaningful steps to rebalance its economy could
59
The MLP identifies main areas and priority topics, including energy, water and mineral resources, the environment,
agriculture, manufacturing, communications and transport, information industry and modern service industries,
population and health, urbanization and urban development, public security, and national defense. The report also
identifies 16 major special projects and 8 “pioneer technologies.”
60
R&D Magazine, December 22, 2009.
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China’s Economic Conditions
increase tensions with its trading partners, especially if China’s share of global exports continues
to increase rapidly, and if that increase is viewed as being the result of non-market policies that
give Chinese exports an unfair competitive advantage.61 Some economist contend that some
economic rebalancing by China appears to taken place in recent years, noting that China’s current
account surplus as a percent of GDP declined from a historical high of 10.1% in 2007 to 2.8% in
2011 (see Figure 20). However, ass indicated in Figure 21, fixed investment has been the largest
contributor to China’s economic growth over the past five years, rather than private consumption.
Figure 20. Current Account Balances as a Percent of GDP for China and the United
States: 2000-2011
(percent)
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
8.6
10.1
9.1
5.9
1.7
-4.2
1.3
-3.9
2.4
-4.3
2.8
5.2
3.6
2.8
-2.7
-4.7
-5.3
5.1
-5.9
-6.0
-5.1
-4.7
-3.2
-3.1
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
China
United States
Source: International Monetary Fund.
61
Sharp increases in Chinese exports of higher-end manufacturing could also raise trade tensions between China and its
major trading partners. This has already occurred in some areas, such as wind turbines and solar panels.
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Figure 21. Sources of China’s GDP Growth: 2007-2011
(% points)
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
2007
2008
Gross fixed investment
Government consumption
2009
External balance
Stockbuilding
2010
2011
Private consumption
GDP growth
Source: Economist Intelligence Unit.
Opinions differ as to the most effective way of dealing with China on major economic issues.
Some support a policy of engagement with China using various forums, such as the U.S.-China
Strategic and Economic Dialogue (S&ED), which holds discussions on major long-term
economic issues the highest government level. Others support a somewhat mixed policy of using
engagement when possible, coupled with a more aggressive use of the World Trade Organization
(WTO) dispute settlement procedures to address China’s unfair trade policies. Still others, who
see China as a growing threat to the U.S. economy and the global trading system, advocate a
policy of trying to contain China’s economic power and using punitive measures when needed to
force China to “play by the rules.”
China’s growing economic power has made it a critical and influential player on the global stage
on a number of issues important to U.S. interests, such as global economic cooperation, climate
change, nuclear proliferation, and North Korean aggression.62 China is in a position to help
advance U.S. interests or to frustrate them. China’s rising economy has also enabled it to boost its
military capabilities, raising the prospects that China could use that power to project its interests
globally, which could bring it into conflict with the United States and its allies.
U.S. policymakers face a number of complex challenges on how to deal with these issues. Can
the U.S. compel better behavior from China via quiet diplomacy or public confrontation? Has
U.S. leverage over Beijing lessened in the wake of China’s economic rise, and has China’s
leverage over Washington increased?
62
For additional information on these issues, see CRS Report R41108, U.S.-China Relations: Policy Issues, by Susan
V. Lawrence and Thomas Lum.
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Author Contact Information
Wayne M. Morrison
Specialist in Asian Trade and Finance
wmorrison@crs.loc.gov, 7-7767
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