China’s Economic ConditionsRise: History, Trends,
Challenges, and Implications for the
United States
Wayne M. Morrison
Specialist in Asian Trade and Finance
December 4, 2012March 4, 2013
Congressional Research Service
7-5700
www.crs.gov
RL33534
CRS Report for Congress
Prepared for Members and Committees of Congress
China’s Economic ConditionsRise: History, Trends, Challenges, and Implications for the U.S.
Summary
Prior to the initiation of economic reforms and trade liberalization 3334 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 nearly 10%
through 20112012. 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 greatly 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%, although it has slowed somewhatslowed to 7.8% in 2012.
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 those 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 boostingboost productivity and innovation. China faces numerous other challenges as well
that could affect itsimpede 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
government has 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, often through the use of subsidies and other distortive
measures, could negatively affect 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 the
implications of China’s economic rise for the United States.
Congressional Research Service
China’s Economic ConditionsRise: History, Trends, Challenges, and Implications for the U.S.
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 Sinceand Reforms: 1979-2012................................................................ 3
Causes of China’s Economic Growth ........................................................................................ 5
Measuring the Size of China’s Economy ......................................................................................... 8
China as the World’s Largest Manufacturer ............................................................................ 10
Changes in China’s Wage Advantage ...................................................................................... 11
Foreign Direct Investment (FDI) in China..................................................................................... 1013
China’s Growing FDI Outflows ..................................................................................................... 1517
China’s Merchandise Trade Patterns.............................................................................................. 1820
China’s Major Trading Partners............................................................................................... 2223
Major Chinese Trade Commodities ......................................................................................... 23
China’s Growing Appetite for Energy ..................................................................................... 25
China’s Regional and Bilateral Free Trade Agreements .......................................................... 26
Major Long-Term Challenges Facing the Chinese Economy ........................................................ 27
China’s Incomplete Transition to a Market Economy ............................................................. 27
Industrial Policies and SOEs ............................................................................................. 27
The Banking System ......................................................................................................... 28
An Undervalued Currency ................................................................................................ 28
Implications of China’s “Unbalanced” Economic Growth Model .......................................... 29
Overdependence on Exporting and Fixed Investment....................................................... 29
Growing Pollution ............................................................................................................. 3132
Other Challenges ............................................................................................................... 3233
Plans Announced by the Chinese Government to Reform and Restructure the Economy ............ 3334
The Central Government Five-Year Plans ............................................................................... 3335
The Drive for “Indigenous Innovation”................................................................................... 3436
Challenges to U.S. Policy of China’s Economic Rise ................................................................... 3537
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: 2000-2011.2012 ............................................................................................................. 7
Figure 3. Projections of U.S. and Chinese Annual Real GDP Growth Rates: 20122013-2030 ........................... 8
Figure 4. Chinese and U.S. GDP as a Percent of Global Total: 1990-20112012 and Projections
through 20162017 ............................................................................................................................... 10
Figure 5. Gross Value Added Manufacturing in China, the United States, and Japan:
2004-2011 ................................................................................................................................... 11
Figure 6. Average Monthly Wages for Selected Countries: 2000-2012 ......................................... 12
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China’s Economic Rise: History, Trends, Challenges, and Implications for the U.S.
Figure 7. Industrial Output by Foreign-Invested Firms in China as a Share of National
Output Total: 1990-2010......................................................................................................................... 11 13
Figure 68. Share of China’s Exports and Imports Attributed to Foreign-Invested
Enterprises in China: 1990-2012* ................................................................................................ 1214
Figure 79. Annual FDI Flows to China: 1985-2011and estimate for 2012 2012 ................................................. 13
Figure 8....................... 15
Figure 10. Major Recipients of Global FDI Inflows in 2011........................................................... 14
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China’s Economic Conditions
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Figure 911. Annual U.S. FDI Flows to China: 1985-20112012 ................................................................ 15 17
Figure 1012. China’s Annual FDI Outflows: 2002-2011 2012................................................................... 1719
Figure 1113. Major Sources of Global FDI Outflows in 2011 .......................................................... 1719
Figure 1214. China’s Merchandise Trade: 2000-2011 and 2012 Estimates2012 ..................................................... 19
Figure 13.................. 21
Figure 15. Annual Change in China’s Merchandise Exports and Imports: 1990-2011 and
2012 Estimates........
1990-2012 Estimates .................................................................................................................... 20 22
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 ............. 21
Figure 16. China’s Global Share of Merchandise Exports: 1990-2011and 2012 Estimate16. China’s Global Share of Merchandise Exports: 1990-2012 ......................................... 22
Figure 17. China’s Net Oil Imports: 1997-20112012 ............................................................................ 26
Figure 18. Chinese Gross Savings, Gross Fixed Investment, and Private Consumption as
a Percent of GDP: 1990-20112012 ..................................................................................................... 30
Figure 19. Chinese Disposable Personal Income as a Percent of GDP: 2000-20112012 ...................... 31
Figure 20. Current Account Balances as a Percent of GDP for China and the United
States: 2000-2011 .............Sources of Chinese GDP Growth: 2006-2012 ........................................................................... 31
Figure 21. Current Account Balances as a Percent of GDP for China
and the United States: 2000-2012 ............................... 36
Figure 21. Sources of China’s GDP Growth: 2007-2011................................................................ 3738
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: 20112012 ............................................ 10
Table 3. Major Sources of FDI in China: 1979-20112012 ..................................................................... 14 16
Table 4. China’s Merchandise World Trade: 1979-2011 and 2012 Estimates 2012 .................................... 18........................... 20
Table 5. China’s Major Trading Partners in 20112012 .......................................................................... 23
Table 6. Major Chinese Exports: 2011.2012 .......................................................................................... 24
Table 7. Major Chinese Imports: 2011.2012 .......................................................................................... 2425
Contacts
Author Contact Information........................................................................................................... 3839
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China’s Economic ConditionsRise: History, Trends, Challenges, and Implications for the U.S.
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 20112012, 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 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 thirdlargest 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
It is estimated that to
date 500 million people in China have been raised out of extreme poverty. China has emerged as
a major global economic power. It is now the world’s largest manufacturer, merchandise exporter,
and holder of foreign exchange reserves. China is currently the second largest economy after the
United States, and some analysts predict that it could become the largest within the next five
years or so. On a per capita basis (a common measurement of a nation’s standard of living),
however, China is significantly less developed than the United States.
China’s rapid economic growth has led to a substantial increase in bilateral commercial ties with
the United States. According to U.S. trade data, total trade between the two countries grew from
$5 billion in 1980 to $536 billion in 2012. 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 2012) 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 underminedampen 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
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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spending, expand social safety net coverage, and encourage the development of less-polluting
industries.
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
plannedcentrallyplanned, 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 generally barred. A central goal of the
Chinese government was to make China’s economy relatively self-sufficient. Foreign trade was
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
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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China’s Economic Conditions
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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
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 attracted foreign direct investment (FDI)
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.”54
China’s Economic Growth Sinceand 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). According to the Chinese government, from 1953 to
1978, real annual GDP growth was estimated at 6.7%,65 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
6 Economist Agnus
Maddison estimated China’s average annual real GDP during this period at 4.4%.87
China’s economy suffered economic downturns during the leadership of Chairman Mao Zedong,
including during the Great Leap Forward from 1958 to 1960 (which led to a massive famine and
reportedly the deaths of tens of millions of people) and the Cultural Revolution from 1966 to
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%. The International Monetary Fund (IMF) projects that China’s
real GDP will grow by 7.8% in 2012. From 2013 to 2017, the IMP projects that China’s real
GDP growth will average 8.5%.
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
As indicated in Figure 1, China has been able to maintain
healthy economic growth rates, especially compared those of other major economies. In 2012,
China’s real GDP growth slowed to 7.8%. The International Monetary Fund (IMF) projects that
China’s real GDP growth will average 8.5% from 2013 to 2017.
4
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.
65
Chinability, GDP Growth in China, 1952-2011, at http://www.chinability.com/GDP.htm.
76
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.
87
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 IMF projection
7.8
Source: Economist Intelligence Unit and IMF.
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Figure 1. Average Real GDP Growth Among Major Global Economies: 2008-2011
(percent)
12.0
10.0
China
8.0
China
India
6.0
Brazil
4.0
2.0
Brazil
Russia
Germany U.S.
France
0.0
-2.0
UK
France
UK
-2.0
Japan
Italy
Source: EIUEconomist Intelligence Unit 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 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 as well as corporate savings.
As a result, China’s gross savings as a percentage of GDP has steadily risen, reaching 53.90% in
20102008 (compared to a U.S. rate of 9.30%), and is among the highest savings rates in the world.98 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.
8
China’s savings rate peaked in 2008, but has fallen in recent years. It was 49.3% in 2012, while the U.S. rate was
10.0%. Source: Economist Intelligence Unit Database.
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Several economists have concluded that productivity gains (i.e., increases in efficiency) 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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China’s Economic Conditions
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,
and 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, FDI in China brought with it new technology and processes that boosted
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 use
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 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 comprehensive
economic reforms.109 As indicated in Figure 3, the EIU currently projects that
Economist Intelligence Unit, (EIU) currently
projects that China’s real GDP growth will slow considerably in the years ahead, averaging 7.0%
from 2012 to
2013 to 2020, and falling to 3.7% from 2021 to 2030.1110
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.)
109
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
"’s
“Economic Miracle"”: What Happened?, by William H. Cooper
11.
10
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
and the United States: 2000-20112012
(percent)
10.0
8.0
6.0
4.0
2.0
0.0
8.0
6.0
4.0
2.0
0.0
-2.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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 Rates: 2012-2030
(percent)
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
China
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
0.0
United States
2013-2030
(percent)
Source: Economist Intelligence Unit.
Note: Long-range economic projections should be viewed 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 20112012 was $78.2 trillion, less than halfabout two-thirds the
size of the U.S. economy.1211 The per capita GDP (a common measurement of a country’s living
standards) of China was $5,4606,190, which was 1213% the size of Japan’s level and 1112% 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
11
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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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
to develop estimates of exchange rates based on their actual purchasing power relative to the
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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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 to the Economist Intelligence Unit, (EIU), which utilizesuses World Bank
data,
prices for goods and services in China are 41.5about 47% the level they are in the United States.
Adjusting for this price differential raises the value of China’s 20112012 GDP from $78.2 trillion
(nominal dollars) to $11.412.6 trillion (on a PPP basis).1312 This would indicate that China’s economy is
7680.0% the size of the U.S. economy. China’s share of global GDP on a PPP basis rose from 3.7%
in 1990 to 14.315.0% in 20112012 (the U.S. share of global GDP peaked at 24.3% in 1999 and declined to
18.97% in 20112012); see Figure 4.
Many economic analysts predict that on a PPP basis China will soon overtake the United States as
the world’s largest economy. EIU, for example, projects this will occur by 20162017, and that by 2030,
China’s economy could be 3024.1% larger than that of the United States.1413 This would not be the first
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 by 1978, it slid
to 4.9%.1514 The adoption of economic reforms by China in the late 1970s led to a surge in China’s economic growth
and has helped restore China as a major 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 20112012 nominal per capita GDP (from $5,460) to $8,650, which
was 176,190) to $9,460,
which was 18.9% of the U.S. level. The EIU projects this level will rise to 34.332.8% by 2030. Thus,
although China will likelycould become the world’s largest economy in a few years on a PPP basis, it
will will
likely take many years for its living standards to approach U.S. levels.16
1315
12
In other words, the PPP data reflect what the value of China’s goods and services would be if they were sold in the
United States.
1413
However, such long-term economic projections should be viewed with caution.
1514
In comparison, the U.S. share of global GDP rose from 1.8% in 1820 to 27.5% in 1952, but declined to 21.6% by
1978.
1615
EIU database, surveyed on May 22, 2012February 11, 2013.
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Table 2. Comparisons of Chinese, Japanese, and U.S. GDP and Per Capita GDP in
Nominal U.S. Dollars and a Purchasing Power Parity Basis: 20112012
China
Nominal GDP ($ billions)
Japan
United States
7,208
5,871
15,094
11,425
4,384
15,0948,231
5,887
15,724
12,576
4,558
15,724
Nominal Per Capita GDP ($)
5,460
46,420
48,4106,190
46,680
50,020
Per Capita GDP in PPP ($)
8,650
34,660
48,4109,460
36,150
50,020
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:
1990-20112012 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 basis2017
(percent)
25
20
15
China
United States
10
5
0
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
Source: Economist Intelligence Unit.
Note: Based on estimates of GDP on a PPP basis.
China as the World’s Largest Manufacturer
China has emerged as the world’s largest manufacturer according to the United Nations. Figure 5
lists estimates of the gross value added of manufacturing in China, the United States, and Japan
expressed in U.S. dollars for 2004 to 2011. Gross value added data reflect the actual value of
manufacturing that occurred in the country (i.e., it subtracts the value of intermediate inputs and
raw materials used in production). These data indicate that China overtook Japan as the world’s
second largest manufacturer on a gross value added basis in 2006 and the United States in 2010.
In 2011, the value of China’s manufacturing on a gross value added basis was 23.3% higher than
that in the United States. Manufacturing plays a considerably more important role in the Chinese
economy than it does for the United States and Japan. In 2011, China’s gross valued added
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manufacturing was equal to 32.3% of GDP, compared to 12.1% for the United States and 18.9%
for Japan.16
In its 2013 Global Manufacturing Competitiveness Index, Deloitte (an international consulting
firm) ranked China first in manufacturing in 2013 and projected it would remain so in five years
(the United States ranked third in 2013 and was projected to rank fifth in 2018). The report stated
that “China’s competitiveness is bolstered by conducive policy environment either encouraging or
directly funding investments in science and technology, employee education and infrastructure
development,” and further stated that “the landscape for competitive manufacturing is in the
midst of a massive power shift, in which twentieth-century manufacturing stalwarts like the
United States, Germany and Japan will be challenged to maintain their competitive edge to
emerging nations, including China.”17
Figure 5. Gross Value Added Manufacturing in China, the United States, and Japan:
2004-2011
($ billions)
2,500
2,000
1,500
1,000
500
0
2004
2005
2006
China
2007
2008
United States
2009
2010
2011
Japan
Source: United Nations, UNdata.
Changes in China’s Wage Advantage
China’s huge population and relatively low wage rates gave it a significant competitive advantage
when economic reforms and trade liberalization were first begun by the government in the late
1970’s. However, this advantage appears to be eroding as wages in China have risen in recent
years. From 2000 to 2012, Chinese average real wages grew at an average annual rate of 11.8%.
As indicated in in Figure 6, China’s average monthly wages in 2000 were $94 compared with
16
United Nations, UNdata.
Deloitte, Press Release, January 22, 2013, available at http://www.deloitte.com/view/en_CN/cn/Pressroom/pr/
105280463d16c310VgnVCM2000003356f70aRCRD.htm. The index was based on a survey of 550 chief executive
officers and senior leaders in manufacturing companies around the world.
17
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$311 per month for Mexico—China’s wages were 30.2% the size of Mexican wages.18 However
in 2012, China’s average monthly wages at $625 were 32.6% higher than those in Mexico ($459).
In 2000, China’s average wages were 92% higher than those than Vietnam, but by 2012, they
were 434% higher. A survey by the American Chamber of Commerce of its member companies in
China reported that 39% of respondents said that labor costs ranked as the biggest business risk
facing their China operations (up from 23% in 2011) and 82% stated that rising labor costs were
affecting their China operations.19 In addition, 89% of respondents said that China was losing its
competitive edge “to some degree” or “to a great degree” due to rising costs.20 Rising labor costs
are one of the main reasons why the Chinese government has focused on boosting the nation’s
innovation and productivity levels.21
Figure 6. Average Monthly Wages for Selected Countries: 2000-2012
(U.S. dollars)
800
700
600
500
400
300
200
100
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
China
Mexico
Indonesia
Philippines
Thailand
Vietnam
Malaysia
Source: Economist Intelligence Unit.
Notes: Because data are listed in U.S. dollars rather than local currency, changes to monthly wages may also
partially reflect changes to exchange rates with the U.S. dollar. However, such data reflect average labor costs
that U.S.-invested firms in China might face.
18
Wage data are from the Economist Intelligence Unit.
This issue ranked third overall among respondents as the biggest risk, after the Chinese economic slowdown and the
global economic slowdown. Source: U.S. Chamber of Commerce, 2012 China Business Climate Survey Report, March
26, 2012, p.10.
20
Rising labor costs in China reflect a number of factors, including changing demographics in China (such as growing
labor shortages), new social insurance measures, and efforts by the government to boost the minimum wage and
improve working conditions, in part to boost domestic consumption.
21
Despite rising labor costs, China continues to enjoy a significant excess supply of labor, estimated by the IMF to be
currently at 150 million. However, that level is projected to fall to around 30 million by 2020. See IMF, 2012 Article IV
Report, People’s Republic of China, July 2012,p.8.
19
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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.1722 As indicated
in Figure 57, FIEs account for a significant share of China’s industrial output. That level rose from
17
China 2011 Statistical Yearbook.
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2.3% in 1990 to a high of 35.9% in 2003, but fell to 27.1% by 2010.1823 In addition, FIE’sFIEs 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 68. 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 57. Industrial Output by Foreign-Invested Firms in China as a Share of
National Output 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
.
22
China 2011 Statistical Yearbook.
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.
23
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Figure 6Rise: History, Trends, Challenges, and Implications for the U.S.
Figure 8. 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: “
70
60
50
40
30
20
10
0
Exports
Imports
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 2008200824. Due to the effects of the global economic slowdown, FDI flows to
China fell by 12.2% to $90 billion in 2009. They totaledthen grew to $106 billion in 2010 and $116 billion in
2011 (see Figure 7). Chinese data for January-October 2012 indicate that FDI fell by 3.5%% on a
year-on-year basis; FDI into China will likely total around $112.1 billion for the full year. Hong
Kong was reported as the largest source of FDI flows to China in 2011 (63.9% of total), followed
by Taiwan, Japan, Singapore, and the United States.
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).19
According 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 $3.0 billion or 2.6% of total FDI (see Figure 9).20 From
January to October 2012, U.S. FDI in China rose by 3.8% (year-on-year).
19
Much of the FDI originating from the British Virgin Islands and Hong Kong may originate from other foreign
investors. In addition, some Chinese investors might be using these locations to shift funds overseas in order to reinvest in China to take advantage of preferential investment policies (this practice is often referred to as “roundtipping”). Thus, the actual level of FDI in China may be overstated.
20
U.S. data on bilateral FDI flows with China differ significantly with Chinese data. For additional info on bilateral
(continued...)
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Figure 7. Annual FDI Flows to China: 1985-2011and estimate for 2012
($ billions)
140
120
100
80
60
40
20
0
Source: United Nations Conference on Trade and Investment and Invest China.
Note: Data for 2012 are estimated, based on actual data for January-October 2012.
(...continued)
FDI flows based on U.S. data, see CRS Report RL33536, China-U.S. Trade Issues, by Wayne M. Morrison.
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China’s Economic Conditions
Figure 8. Major Recipients of Global FDI Inflows in 2011
($ billions)
250
U.S.
200
150
China
100
Hong Kong
UK
Brazil
Ireland
50
Russian
Belgium
SingaporeFrance
0
Source: United Nations Conference on Trade and Investment and Invest and Chinese Ministry of Commerce
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
Total
Amount
% of Total
Utilized FDI in 2011
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.
Note: Ranked by cumulative top seven sources of FDI in China through 2011. *Data for the British Virgin
Islands are through 2010.
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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
8
7
9
20
1
20
0
20
0
20
0
6
4
5
20
0
20
0
2
1
0
3
20
0
20
0
20
0
20
0
20
0
8
5
0
9
19
9
19
9
19
9
19
9
19
8
5
billion in 2011. However, FDI flows to China fell to $112 billion in 2012, mainly because of
sluggish global economic growth (see Figure 9). Hong Kong was the dominant source of FDI
flows into China in 2012 (63.8% of total), followed by Japan, Singapore, Taiwan, and the United
States.25 The United Nations Conference on Trade and Development reports that China was the
world’s second-largest destination for FDI flows in 2011 (after the United States) (see Figure 10),
and estimates that China was the world’s largest recipient of global FDI in the first half of 2012 at
$59.1 billion (compared with $57.4 billion for the United States).26
The cumulative level (or stock) of FDI in China at the end of 2012 is estimated at $1.3 trillion,
making it one of the world’s largest destinations of FDI. The largest sources of cumulative FDI in
China for 1979-2012 were Hong Kong (45.4%), the British Virgin Islands, Japan, the United
States, and Taiwan (see Table 3).27
24
China’s official data on its FDI inflows and outflows exclude data on financial services.
Much of the FDI originating from Hong Kong may originate from other foreign investors, such as Taiwan. 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.
26
United Nations, Global Investment Trends Monitor, No. 11, January 11, 2013.
27
Cumulative values are totals of the data collected each year, are not adjusted for inflation, and do not reflect
divestment that may have occurred.
25
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China’s Economic Rise: History, Trends, Challenges, and Implications for the U.S.
According 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 2012, they were $3.1 billion or 2.8% of total FDI in China (see Figure
11).28 The stock of U.S. FDI in China (based on Chinese data) is estimated at $71.2 billion (or
5.3% of total).
Figure 9. Annual FDI Flows to China: 1985-2012
($ billions)
140
120
100
80
60
40
20
0
Source: United Nations Conference on Trade and Investment and Invest in China.
Note: Excludes FDI in financial services.
28
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.
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Figure 10. Major Recipients of Global FDI Inflows in 2011
($ billions)
250
U.S.
200
150
China
100
Hong Kong
UK
Brazil Ireland
RussianBelgium
SingaporeFrance
50
0
Source: United Nations Conference on Trade and Investment and Invest and Chinese Ministry of Commerce.
Table 3. Major Sources of FDI in China: 1979-2012
($ billions and % of total)
Estimated Cumulative Utilized
FDI: 1979-2012
Country
Total
Amount
% of Total
Utilized FDI in 2012
Amount
% of Total
1,335.7
100.0
111.7
100.0
Hong Kong
604.5
45.3
71.3
63.8
British Virgin Islands*
111.8
9.1
NA
Japan
87.3
6.5
7.4
6.6
United States
71.2
5.3
3.1
2.8
Taiwan
64.9
4.9
6.1
5.5
Singapore
59.9
4.5
6.5
5.8
South Korea
53.0
4.0
3.1
2.8
NA
Source: Chinese Ministry of Commerce and Chinese Statistical Yearbook.
Note: Ranked by cumulative top seven sources of FDI in China through 2012. *Data for the British Virgin
Islands are through 2010. China’s cumulative data are the sum of annual data and do not reflect disinvestment.
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Figure 11. Annual U.S. FDI Flows to China: 1985-2012
($ millions)
6,000
5,000
4,000
3,000
2,000
1,000
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.
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, a significant level of those reserves has 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.2129 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
21
See, CRS Report RL34337, China’s Sovereign Wealth Fund, by Michael F. Martin.
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China’s Economic Conditions
government as necessary to sustain China’s rapid economic growth.2230 In June 2005, the China
National Offshore Oil Corporation (CNOOC), through its Hong Kong subsidiary (CNOOC Ltd.),
29
30
See CRS Report RL34337, China’s Sovereign Wealth Fund, by Michael F. Martin.
Chinese oil and mineral companies are dominated by SOEs.
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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.2331 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 $67.677.2 billion in 20112012 (see Figure 10). In 201112). According to the United Nations, China ranked as
the ninth-largest source
of global FDI, according to the United Nations in 2011 (see Figure 11).2413).32 The stock of China’s outward
FDI through 2011 is estimated at $384.9over $400 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 seventh). 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 seventh).25
According to China’s Ministry of Commerce, 4 out of 10 of the biggest overseas Chinese
corporate investors were oil companies (based on FDI stock through 2010).26four
destinations of its FDI outflows in 2011were the European Union ($7.6 billion), ASEAN ($5.9
billion), the United States ($1.8 billion), and Russia ($716 million).33
According to A Capital Dragon Index, a firm that tracks China’s FDI, 56% of China’s outbound
FDI in 2011 was 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
2011.2734 A Capital Dragon Index estimates that China’s first quarter 2012 outbound FDI was $21.4
billion and that SOEs accounted for 98% of mergers and acquisitions, which were largely in
resources.28
22
Chinese oil and mineral companies are dominated by SOEs.
The Chinese government is believed to be Lenovo’s largest shareholder.
24
United Nations Conference on Trade and Development, Global Investment Trade Monitor, April 12, 2012.
25
It is likely that a significant level of Chinese FDI in the British Virgin Islands, the Cayman Islands, and Hong Kong
are re-directed elsewhere.
26
Chinese Ministry of Commerce, 2010 Statistical Bulletin of China’s Outward Foreign Direct Investment, October
2011.
2735
31
The Chinese government is believed to be Lenovo’s largest shareholder. For additional information on China’s FDI
flows to the United States, see CRS Report RL33536, China-U.S. Trade Issues, by Wayne M. Morrison
32
United Nations Conference on Trade and Development, Global Investment Trade Monitor, April 12, 2012.
33
Chinese Ministry of Commerce, News Release, September 2012, at http://english.mofcom.gov.cn/aarticle/
newsrelease/significantnews/201209/20120908320386.html.
34
A Capital Dragon Index, 2011 Full Year, available at http://www.acapital.hk/dragonindex/datasheets.
2835
A Capital Dragon Index, 2012 Q1, available at http://www.acapital.hk/dragonindex/datasheets.
23
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Figure 10Rise: History, Trends, Challenges, and Implications for the U.S.
Figure 12. China’s Annual FDI Outflows: 2002-20112012
($ billions)
90
77.2
80
70
60
55.9
56.3
2008
2009
68.8
67.6
2010
2011
50
40
26.5
30
20
10
12.3
17.6
5.510
2.7
2.9
2002
2003
0
2004
5.5
2002
2003
2004
17.6
0
2005
2006
2007
2012
Source: Ministry of Commerce, 2011 Statistical Bulletin of China’s Outward Foreign Direct Investment, 2011.
Data for 2011 are from the United Nations.
Note: Data excludes investment in financial sectors.
Figure 13
Figure 11. Major Sources of Global FDI Outflows in 2011
$billions($ 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.
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China’s Economic ConditionsRise: History, Trends, Challenges, and Implications for the U.S.
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 $1.92.1 trillion
in 20112012, while merchandise imports over this period grew from $1618 billion to $1.7 trillion (see
Table 4 and Figure 1214). From 1990 to 20112012, the annual growth of China’s exports and imports
averaged 19.518.1% and 18.417.1%, 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 to
October 2012, China’s exports and imports grew by only 7.4% and 5.o%, respectively, over the
same period in 201115).36 China’s exports and imports in 2012
grew by 7.9% and 4.4% respectively over the previous year, due in part to the lingering effects of
the global economic slowdown. 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-October 2012 trade data, China’s
trade surplus for the full year could increase to about $212.5 billion.
China overtook Germany in 2009 to become
2008, rising from $32 billion to $297 billion. China’s trade surplus fell each year from 2009 to
2011, dropping to $158 billion. However, in 2012, China’s trade surplus rose to $233 billion.
In 2009, China overtook Germany to become both the world’s largest merchandise exporter and the
the second-largest merchandise importer (after the United States). In 2012, China overtook the
United States as the world’s largest trading economyimporter (see Figure 14 and Figure 15). As indicated in Figure 16, China’s share
of of
global exports nearly tripled from 2000 to 2012, rising from 3.9% to 11.5% 2000 to 10.4% in
2011;29 the;37the World Bank
projects this figure could increase to 20% by 2030.3038 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 become by far the
world’s largest holder of
foreign exchange reserves at $3.2931 trillion at the end of September 2012.
Table 4. China’s Merchandise World Trade: 1979-2011 and 2012 Estimates2012
($ 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
29
Economist Intelligence Unit, Data Tools.
2006
969.1
791.5
177.6
36
Chinese exports and imports dropped sharply in 2009 (over 2008 levels) because of the global economic slowdown.
By 2010, China’s trade exceeded pre-crisis levels. In 2011, China’s exports and imports rose by 20.3% and 24.9%,
respectively.
37
Economist Intelligence Unit, Data Tools.
38
The World Bank, China 2030, Building a Modern, Harmonious, and Creative High-Income Society, 2012, p. 14.
HereafterHereinafter referred to as World Bank, China 2030.
30
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China’s Economic Conditions
Year
Exports
Imports
Trade Balance
2006
969.1
791.5
177.6Rise: History, Trends, Challenges, and Implications for the U.S.
Year
Exports
Imports
Trade Balance
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
2012 estimate
2,040.2
1,827.7
212.5
2,050.1
1,817.3
232.8
Source: Global Trade Atlas.
Note: Data for 2012 are estimates using actual data for January-October 2012.
Figure 122012 exports were up 7.9%, imports up 4.4%
Figure 14. China’s Merchandise Trade: 2000-2011 and 2012 Estimates2012
($ billions)
2,500
2,000
1,500
1,000
500
24.1
22.6
30.4
25.6
32
101.9
177.6
262.2 297.4
198.2 184.5 157.9 212.5232.8
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Trade Balance
Exports
Imports
Source: Economist Intelligence Unit.
Note: Data for 2012 are estimates based on actual data for January-October 2012.
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China’s Economic Conditions
Figure 13Rise: History, Trends, Challenges, and Implications for the U.S.
Figure 15. Annual Change in China’s Merchandise Exports and Imports: 1990-2011
and
1990-2012 Estimates
(percent)
50.0
40.0
30.0
20.0
10.0
0.0
-10.0
Exports
2012
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.
Note: Data for 2012 are estimates based on actual data for January-October 2012.
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
China
1999
2002
Germany
2005
2008
2011
United States
Source: Economist Intelligence Unit.
Note: Top three global importers in 2011.
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China’s Economic Conditions
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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China’s Economic Conditions
Figure 16. China’s Global Share of Merchandise Exports: 1990-2011and 2012
Estimate
Figure 16. China’s Global Share of Merchandise Exports: 1990-2012
($ billions)
14.0
12.0
9.8
10.0
8.8
11.5
10.7
10.6
9.1
8.1
8.0
7.4
6.6
5.9
6.0
5.1
4.0
2.0
2.3 2.5
1.8 2.1
2.8 2.9 2.8
3.3 3.4 3.3
3.9
4.4
0.0
1990
1993
1996
1999
2002
2005
2008
2011
Source: Economist Intelligence Unit.
Note: Data for 2012 is estimated1992
1994
1996
1998
2000
2002
2004
2006
2008 2010
2012
Source: Economist Intelligence Unit.
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China’s Major Trading Partners
Table 5 lists official Chinese trade data on its major trading partners in 20112012 (based on total
trade), 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).31, and
Japan.39 China’s largest export
markets were the EU27, the United States, Hong KongEU27, and ASEANHong Kong, while its
top sources for
imports were the EU27, Japan, ASEAN, and South KoreaJapan. 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 $22.1 billion trade deficit with China. These differences appear to be
largely caused by how China’s trade via Hong Kong is counted in official trade data. China treats
a large share of its exports through Hong Kong as Chinese exports to Hong Kong for statistical
31
ASEAN members include Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the Philippines,
Singapore, Thailand, and Vietnam.
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China’s Economic Conditions
purposes, while many countries that import Chinese products through Hong Kong generally
attribute their origin to China for statistical purposes, including the United States.32
Table 5. China’s Major Trading Partners in 2011
($ 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
--large trade surpluses with Hong Kong ($306 billion) the United States ($224 billion),
and the EU27($122 billion, and reported large deficits with Taiwan ($95 billion) and South Korea
($79 billion). China’s trade data differ significantly from that of many of its trading partners. For
example, the United States and the EU27 reported trade deficits with China of $315 billion and
$187 billion, respectively, while Hong Kong reported a $27 billion trade surplus with China.
These differences appear to be largely caused by how China’s trade via Hong Kong is counted in
official Chinese trade data. China treats a large share of its exports through Hong Kong as
Chinese exports to Hong Kong for statistical purposes, while many countries that import Chinese
products through Hong Kong generally attribute their origin to China for statistical purposes,
including the United States.40
Table 5. China’s Major Trading Partners in 2012
($ billions)
Country
Total Trade
Chinese
Exports
Chinese
Imports
China’s Trade
Balance
European Union
546.5
334.0
212.5
121.5
United States
479.6
351.9
127.8
224.1
ASEAN
399.6
203.9
195.7
8.2
Japan
329.2
151.5
177.7
-26.2
Hong Kong
341.6
323.7
18.0
305.7
South Korea
254.2
87.6
166.6
-79.0
Taiwan
169.0
36.8
132.2
-95.4
3,868.4
2,050.1
1,817.3
232.8
Total Chinese
Trade
Source: Global Trade Atlas and World Trade Atlas.
Note: Rankings according to China’s total trade in 20112012. China’s bilateral trade data often differ substantially
from that of its trading partners.
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).33 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 2011As 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
39
ASEAN members include Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the Philippines,
Singapore, Thailand, and Vietnam.
40
See CRS Report RS22640, What’s the Difference?—Comparing U.S. and Chinese Trade Data, by Michael F.
Martin.
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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 2012 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,41 machinery (including computers), knit apparel, and woven apparel,furniture and bedding while
major imports included electrical machinery, mineral fuel, machinery, and ores.
32
See CRS Report RS22640, What’s the Difference?—Comparing U.S. and Chinese Trade Data, by Michael F.
Martin.
33
In addition, the overall average monthly wage in China, at $539 (nominal U.S. dollars) in 2011, was about 13% U.S.
levels (although the disparity would lessen if purchasing power data were used). Source: Economist Intelligence Unit
data tool.
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China’s Economic Conditions
Table 6. Major Chinese Exports: 20112012
($ billions)
HS Code
Description
World
$ billions
Percent of
Total
2012/2011
% Change
2,050.1
100.0
7.9
85
Electrical machinery
487.5
23.8
9.4
84
Machinery
376.0
18.3
6.3
61
Knit apparel
87.1
4.4
8.6
94
Furniture and bedding
77.9
3.8
31.2
90
Optical, photographic, cinematographic, measuring
checking, precision, medical or surgical instruments
and apparatus; parts and accessories thereof
72.8
3.6
19.9
62
Woven apparel
61.2
3.0
-2.9
73
Iron and steel products
56.2
2.7
9.7
39
Plastic
55.2
2.7
21.5
$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
8.555.2
2.7
11.2
64
Footwear
46.8
2.3
12.2
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
39.52012, two-digit level, harmonized tariff system.
41
This 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.
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China’s Economic Rise: History, Trends, Challenges, and Implications for the U.S.
Table 7. Major Chinese Imports: 2012
($ billions)
HS Code
Description
$ billions
World
1,817.3
Percent of
Total
2012/2011
% change
100
4.4
85
Electrical machinery
381.6
21.0
8.7
27
Mineral fuel, oil etc.
311.6
17.2
14.0
84
Machinery
181.9
10.0
-8.8
26
Ores, slag, and ash
133.6
7.5
-11.3
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
31.0106.4
5.9
7.4
87
Vehicles, not railway (mainly autos and parts)
70.6
3.9
8.1
39
Plastic
69.5
3.8
-1.0
98
Special Classification
68.7
3.8
38.9
29
Organic chemicals
60.9
3.4
-36.1
74
Copper and articles thereof
54.3
3.1
18.0
98
Special Classification
49.5
2.8
168.56
3.0
0.6
Source: World Trade Atlas, using official Chinese statistics.
Notes: Top 10 imports in 20112012, two-digit level, harmonized tariff schedule.
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China’s Economic Conditions
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 the U.S. Energy Information Administration
(EIA), China’s oil consumption growth accounted for half of the world’s oil consumption growth
in 2011.42 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).3443
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
is
projected to rise to 16.9 million bpd by 2035.3544 China became a net oil importer (i.e., imports
minus exports) in 1993.
Net oil imports grew from 632,000 bpd in 1997 to about 5.07 million bpd in 2010
in 2012 (see Figure 17),
making it the world’s second-largest net oil importer after the United States.36 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.37
34
42
EIA, Country Analysis Brief, China, September 2012, at http://www.eia.gov/countries/cab.cfm?fips=CH.
International Energy Agency, 20112012 World Energy Outlook, November 20112012, available at http://www.iea.org/weo.
.
44
U.S. Energy Information Administration, Forecasts and Analysis, at http://www.eia.doe.gov/oiaf/forecasting.html.
36
China overtook Japan as the second largest net oil importer in 2009.
37
EIA, International Energy Outlook, September 19, 2011, available at http://www.eia.gov/forecasts/ieo.
35
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China’s Economic Conditions
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 from43
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China’s Economic Rise: History, Trends, Challenges, and Implications for the U.S.
States.45 China is projected to become the largest net oil importer by 2020 (due in part to
projected increases to U.S. domestic oil production). By 2035, China’s net oil imports per day are
projected to exceed 13 million bpd.46
Figure 17. China’s Net Oil Imports: 1997-2012
(Millions BPD)
6.0
5.7
5.1
4.7
5.0
4.1
4.0
4.4
3.7
3.4
2.8
3.0
2.0
2.0
1.0
2.9
1.4 1.5
0.6
0.8
1.6
1.0
0.0
Source: U.S. Energy Administration, China Energy Newswire, and 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 South Africa, 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.38
38
Chinese Ministry of Commerce, China FTA Network, available at
http://fta.mofcom.gov.cn/english/fta_qianshu.shtml45
46
China overtook Japan as the second largest net oil importer in 2009.
EIA, International Energy Outlook, September 19, 2011, available at http://www.eia.gov/forecasts/ieo.
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China’s Economic ConditionsRise: History, Trends, Challenges, and Implications for the U.S.
date.47 In December 2012, China joined with the 10 members of ASEAN, Japan, South Korea,
Australia, and New Zealand in agreement to begin negotiations toward a Regional
Comprehensive Economic Partnership (RCEP), which, if concluded, could constitute the world’s
largest free trade bloc.48
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.”3949 According to one estimate, China’s SOEs may account
for up of 50% of non-agriculture GDP.4050 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.4151 One study found that SOEs constituted 50% of the 500 largest
manufacturing companies in China and 61% of the top 500 service sector enterprises.42 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.43 Of the 58 Chinese firms on the 2011 Fortune Global 500 list, 54 were
39
The World Bank, China:2030, p. 114.
47
Chinese Ministry of Commerce, China FTA Network, available at http://fta.mofcom.gov.cn/english/
fta_qianshu.shtml.
48
The RCEP would include more than 3 billion people, have a combined GDP of $17 trillion
49
The World Bank, China:2030, p. 114.
50
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.
4151
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.
42
Xiao Geng, Xiuke Yang, and Anna Janus, State-owned Enterprises in China, Reform Dynamics and Impacts, 2009,
p.155.
43
The World Bank, State-Owned Enterprises in China: How Big Are They?, January 19, 2010.
40
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identified as having government ownership of 50% or more.44
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manufacturing companies in China and 61% of the top 500 service sector enterprises.52 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.53 Of the 58 Chinese firms on the 2011 Fortune Global 500 list, 54 were
identified as having government ownership of 50% or more.54 The World Bank estimates that
more than one in four SOEs lose money.4555
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 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 2009.4656 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.4757 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, some analysts contend that it remains highly undervalued.4858 China’s undervalued currency makes
makes its exports less expensive, and its imports more expensive, than would occur under a floating
floating exchange rate system. In order to maintain its exchange rate target, the government must purchase
purchase 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.49
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
44
Global 500, The World's Largest Corporations," Fortune, July 25, 2011, available at
http://money.cnn.com/magazines/fortune/global500/2011/index.html.
45
World Bank, China 2030, p.25.
4659
52
Xiao Geng, Xiuke Yang, and Anna Janus, State-owned Enterprises in China, Reform Dynamics and Impacts, 2009,
p.155.
53
The World Bank, State-Owned Enterprises in China: How Big Are They?, January 19, 2010.
54
Global 500, The World’s Largest Corporations,” Fortune, July 25, 2011, available at http://money.cnn.com/
magazines/fortune/global500/2011/index.html.
55
World Bank, China 2030, p.25.
56
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.
4757
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.
4858
See CRS Report RS21625, China's Currency Policy: An Analysis of the Economic Issues, by Wayne M. Morrison
and Marc Labonte.
4959
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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(continued...)
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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
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 the past
3334 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 IMF estimates 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 48.545.4% in 20112012. On the other hand, during the
same period, private consumption as a percent of GDP fell from 48.8% to 33.9%.50 China’s
36.3% (was 35.4% in
2011).60 China’s private consumption as a share of GDP is the lowest of any major economy.51 In 61 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 47.648.8% in 2000 to 42.2% in 2011.5246.8% in 2012 (up from
45.5% in 2011).62 China’s overall
savings rate as a percent of GDP in 2011 was 52.1%2012 was 46.5% (down
from 49.2% in 2011), 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 2009.53 Corporations are also a major contributor to the high savings rate
in China. Many Chinese firms, especially SOEs, do not pay out dividends and thus are able to
50(...continued)
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.
60
Private consumption in China has been rising rapidly over the past several years, but not as fast as over parts of the
economy.
5161
In comparison, the U.S. figure was 71.1%.
52
That rate was 43.4% in 1990.
53
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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62
That rate was 43.4% in 1990.
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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 2009.63 Corporations are also a major contributor to the high savings rate
in China. Many Chinese firms, especially SOEs, do not pay out dividends and thus are able to
retain 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: 1990-20112012
(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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1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0.0
Private consumption
Gross fixed investment
Gross national savings
Source: Economist Intelligence Unit.
63
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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Figure 19. Chinese Disposable Personal Income as a Percent of GDP: 2000-20112012
(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
50
49
48
47
46
45
44
43
42
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Economist Intelligence Unit.
Figure 20. Sources of Chinese GDP Growth: 2006-2012
(percent)
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
2006
2007
2008
2009
2010
2011
2012
-4.0
-6.0
Stockbuilding
Private consumption
Government consumption
Gross fixed investment
External balance
Source: Economist Intelligence Unit.
Notes: Real GDP growth for 2006-2012 was as follows: 12.7% in 2006, 14.2% in 2007, 9.6% in 2008, 9.2% in
2009, 10.4% in 2010, 9.2% in 2011, and 7.8% in 2012.
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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. China’s environmental
challenges are illustrated by the following incidents and reports:
•
According to a 2008According to the World Bank, 20
report, 16 out of 3020 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
polluted cities (in terms of air pollution) are in China.64
•
According to one Chinese government official estimate in 2006, environmental
damage costs the country $226 billion, or 10% of the
country’s GDP, each year.54 65
•
The Chinese government estimated that in 2004 there were over 300
million million
people living in rural areas who drank unsafe water (caused by chemicals and other
contaminants).
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.
54
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.55 A study by ExxonMobil found that, by 2030, China’s CO2 emissions could equal
the level in the United States and EU combined.56
•
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.
•
The World Health Organization estimated that air pollution in China caused the
death of 470,649 people in 2008.66
•
In February 2013, China’s Geological Survey reportedly estimated that 90% of
all Chinese cities had polluted groundwater, with two-thirds having “severely
polluted” water.67
•
The U.S. Entergy Information Administration (EIA) projects that by 2035,
China’s carbon dioxide emissions (CO2) could be nearly double its current
levels.68 A study by ExxonMobil projects that, by 2030, China’s CO2 emissions
could equal the level in the United States and EU combined.69
•
The U.S. Embassy in Beijing, which monitors and reports air quality in China
based on an air quality index of particle matter (developed by the U.S.
Environmental Protection Agency) considered to pose a health concern, reported
that the air quality in Beijing for a majority of the days in January 2013 ranged
from “unhealthy” to “hazardous” (based on 24-hour exposure) and, on a few
days, it recorded high readings that were “beyond index.”70 The recent level of
poor air quality in Beijing has been termed by some in China as “Airpocalypse,
64
The World Bank, World Development Indicators, 2008, table 3.14.
China Daily, June 6, 2006.
66
World Health Organization chart at http://gamapserver.who.int/gho/interactive_charts/phe/oap_mbd/atlas.html.
67
The New York Times, Concerns Grow About ‘Severely Polluted’ Water in China’s Cities, February 20, 2013.
68
EIA, International Energy Outlook, September 19, 2011, available at http://www.eia.gov/forecasts/ieo.
69
ExxonMobil, The Outlook for Energy, A View to 2030, December 29, 2009, p. 4.
70
Hazardous is the worst category for air quality used by the U.S. embassy, based on a numerical value of its index
ranging from 301 to 500. On several occasions, the air quality index in Beijing has surpassed 500. On January 12,
2013, it reportedly hit 755. A measurement of below 50 less is considered good.
65
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and reportedly forced the government to shut down some factories and reduce the
level of official cars on the road.71
The Chinese government has sharply criticized foreign governments for reporting air quality in
China, calling their readings inaccurate and complaining that releasing such data violates
international conventions and Chinese laws.72 At the same time, China’s media has boosted its
reporting of China’s environmental problems in response to public anger, prompting central
government officials to promise new steps to reduce emissions. However, the central government
has often 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.
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.5773 It is estimated that 300 million
people in China (mainly in rural areas) lackedlack health insurance, and many that do
have basic insurance must pay a significant amount of medical expenses out of
their own pocket.5874
•
The relative 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.
A New
York Times article reported that Chinese Premier Wen Jiabao’s family controlled
assets worth at least $2.7 billion.75 One study estimates that between 2001 and
71
National Public Radio, Beijing’s “Airpocalypse” Spurs Pollution Controls, Public Pressure, January 14, 2013.
See Xinhua, Foreign Embassies' Air Data Issuing Inaccurate, Unlawful: Official, June 5, 2012, at
http://news.xinhuanet.com/english/china/2012-06/05/c_131633044.htm
73
China’s Human Development Report 2005.
74
The Washington Post, October 29, 2009.
75
The New York Times, Billions in Hidden Riches for Family of Chinese Leader, October 25, 2012.
72
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2010, China was the world’s largest source of illicit capital outflows at $3.8
trillion.76 A 2012 survey by the Pew Research Center’s Global Attitudes Project
reported that 50% of respondents said that corrupt officials are a very big
problem (up from 39% in 2008).77 Chinese officials often identify government
corruption as the greatest threat to the Chinese Communist Party and the state.
The Chinese government’s anti-corruption watchdog reported that 106,000
officials were found guilty of corruption in 2009.78 However, many analysts
contend that government anti-corruption campaigns are mainly used to settle
political scores with out of favor officials and argue that meaningful progress
against government corruption cannot occur without greater government
transparency, a system of checks and balances, a free press, and an independent
judiciary.79
•
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 leadled 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.
55
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.
57
China’s Human Development Report 2005.
58
Washington Post, October 29, 2009.
56
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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.
76
Global Financial Integrity, Chinese Economy Lost $3.79 Trillion in Illicit Financial Outflows Since 2000, Reveals
New GFI Report, October 25, 2012. It is not known how much of the illicit financial outflows in China are directly
linked to government corruption.
77
Pew Research Global Attitudes Project, Growing Concerns in China about Inequality, Corruption, October 16, 2012.
78
BBC News, Corruption Up Among China Government Officials, January 8, 2010.
79
The New York Times, Chinese Officials Find Misbehavior Now Carries Cost, December 25, 2012.
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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 Plan59Plan80
China’s Five-Year Plans (FYPs) 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% of 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
59
"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
80
“Highlights of China's Draft 12th Five-Year Plan,” Xinhua, March 5, 2011.
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“indigenous innovation, leapfrogging in priority fields, enabling development, and leading the
future.”6081 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.6182
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 a 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, and discriminatory policies), which could
negatively affect U.S. IPintensiveIP-intensive firms. Failure by China to take meaningful steps to rebalance
its economy could
60 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 non81
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.”
6182
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
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China’s Economic Rise: History, Trends, Challenges, and Implications for the U.S.
market policies that give Chinese exports an unfair competitive advantage.6283 Some economists
contend that some
economic rebalancing by China appears to have 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 2.3% in 20112012 (see Figure 20). However, as indicated21). In addition, as noted in Figure 21, fixed investment has been the
20, in 2012,
private consumption was the largest contributor to China’s economic growth over the past five years, rather than private
consumption.
Figure 20GDP, overtaking fixed investment for
the first time in many years. However many economists contend that much of the reduction in
China’s current account surplus may be a reflection of sluggish global for Chinese products,
rather than a change in Chinese economic policies.
Figure 21. Current Account Balances as a Percent of GDP for China
and the United
States: 2000-20112012
(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
5.13
-4.7
-5.3
-5.9
-6.0
-5.1
-4.74.0
-3.2
-3.1
0
2.8
-3.1
2.3
-3.1
-4.7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
China
United States
Source: International Monetary Fund.
China
United States
Source: International Monetary Fund.
62
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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China’s Economic Conditions
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 at 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.”
Recent media reports of extensive cyber espionage
by Chinese entities (including the Chinese military) against U.S. firms has also raised concern in
the United States over how to respond what many see as a serious threat to U.S. economic
interests.84
83
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.
84
For example, see Mandiant, APT1, Exposing One of China’s Cyber Espionage Units, February 19, 2013. The report
documents cyber espionage by a Chinese entity (believed to be linked to the Chinese People’s Liberation) against more
(continued...)
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China’s Economic Rise: History, Trends, Challenges, and Implications for the U.S.
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.6385 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 United States 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? How will China’s upcoming leadership changes affect its
63
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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China’s Economic Conditions
economic policies?” Will its new leaders promote greater economic reforms and trade
liberalization or will they support greater control over the economy?64 and enhanced support of
SOEs?86
Author Contact Information
Wayne M. Morrison
Specialist in Asian Trade and Finance
wmorrison@crs.loc.gov, 7-7767
64
(...continued)
than 141 companies in 20 industries.
85
For additional information on these issues, see CRS Report R41108, U.S.-China Relations: Policy Issues, by Susan
V. Lawrence and David MacDonald.
86
For a discussion of China’s new leaders, see CRS Report R42786, A Guide to China’s Upcoming Leadership
Transitions, by Susan V. Lawrence.
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