Order Code IB98014
Issue Brief for Congress
Received through the CRS Web
China’s Economic Conditions
Updated January 6, 2003
Wayne M. Morrison
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
An Overview of China’s Economic Development
China’s Economy Prior to Reforms
The Introduction of Economic Reforms
China’s Economic Growth Since Reforms: 1979-2002
Causes of China’s Economic Growth
Measuring the Size of China’s Economy
China’s Trade Patterns
China’s Major Trading Partners
Major Chinese Trade Commodities
Major Challenges Facing the Chinese Economy
Reform of State Owned Enterprises
Reform of the Banking System
Infrastructure Development
Major Issues in China-U.S. Economic Relations
China’s Accession to the World Trade Organization
China’s Normal Trade Relations Status
Outlook for China’s Economy

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China’s Economic Conditions
SUMMARY
Since the initiation of economic reforms
Chinese trade protectionism will be greatly
in 1979, China has become one of the world’s
diminished over then next few years, and
fastest growing economies. From 1979-2002,
nearly all sectors of China’s economy (includ-
China’s real GDP rose at an average annual
ing agriculture, manufacturing, and services)
rate of 9.3%; it rose by an estimated 8.0% in
will be subject to increased competition (or in
2002. Many economists speculate that China
some cases, competition for the first time)
could become the world’s largest economy at
from foreign firms. Several of China’s heavi-
some point in the near future, provided that
ly protected industries, such as autos, and
the government is able to continue and deepen
certain agricultural sectors, could be nega-
economic reforms, particularly in regards to
tively affected by China’s WTO membership.
its efficient state-owned enterprises (SOEs)
China’s labor-intensive industries, especially
and state banking system. Progress in reform-
textiles and apparel, will benefit significantly
ing these sectors in recent years has been
with China’s WTO accession.
somewhat mixed.
Although Chinese government leaders
After many years of negotiations, China
have stated that WTO accession will force
became a member of World Trade Organiza-
Chinese firms to become more productive and
tion (WTO) on December 11, 2001.WTO
competitive (and hence boost China’s long-
accession commits China to significantly
term economic growth), they have also ex-
reducing a wide variety of tariff and non-tariff
pressed concern that required reforms will
barriers over the next few years. Legislation
cause employment disruptions in several
(H.R. 4444) authorizing the President to grant
sectors, which could result in social unrest. A
permanent normal trade relations (PNTR)
major challenge for the government is to
status to China (once it joined the WTO) was
develop an adequate social safety net to assist
enacted into law on October 10, 2000 (P.L.
laid-off workers.
106-286). Following China’s WTO accession
in December 2001, President Bush extended
China’s economy remained relatively
PNTR to China which became effective in
healthy in 2002, despite economic slowdowns
January 2002. A main concern for Congress is
in other parts of the world. Foreign invest-
to ensure that China fully complies with its
ment continued to pour into China, and the
WTO commitments.
Chinese government has effectively used
public spending to boost the economy. How-
If fully implemented, the terms of Chi-
ever, painful economic reforms will be neces-
na’s WTO accession will likely have a signifi-
sary to keep the economic strong in 2003 and
cant impact on China’s economy. The level of
beyond.
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
On November 8, 2002, Chinese President Jiang Zemin formally proposed at the 16th
National Congress of the Chinese Communist Party that the Party constitution be amended
to allow private entrepreneurs to join the Party (based on Jiang’s “Three Represents”
theory). The amendment was adopted on November 11.
On November 4, 2002, China and the Association of Southeast Asian Nations (ASEAN)
formally agreed to begin negotiations to create a free trade area.
BACKGROUND AND ANALYSIS
An Overview of China’s Economic Development
China’s Economy Prior to Reforms
Prior to 1979, China maintained a centrally planned, or command, economy. A large
share of the country’s economic output was directed and controlled by the state, which set
production goals, controlled prices, and allocated resources throughout most of the economy.
During the 1950s, all of China’s individual household farms were collectivized into large
communes. To support rapid industrialization, the central government during the 1960s and
1970s undertook large-scale investments in physical and human capital. As a result, by 1978
nearly three-fourths of industrial production was produced by centrally controlled state-
owned enterprises (SOEs) according to centrally planned output targets. Private enterprises
and foreign invested firms were nearly non-existent. 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 there were few profit incentives for firms and farmers, competition was
virtually nonexistent, 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 hoped that gradual reform would
significantly increase economic growth and raise living standards.
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 for the purpose of attracting foreign investment, boosting exports, and importing high
technology products into China. Additional reforms followed in stages that sought to
decentralize economic policymaking in several economic sectors, especially trade.
Economic control of various enterprises was given to provincial and local governments,
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which were generally allowed to operate and compete on free market principles, rather than
under the direction and guidance of state planning. 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.
China’s Economic Growth Since Reforms: 1979-2002
Since the introduction of economic reforms, China’s economy has grown substantially
faster than during the pre-reform period (see Table 1). Chinese statistics show real GDP
from 1979 to 2002 growing at an average annual rate of 9.3%, making China one the world’s
fastest growing economies. The World Bank estimates that China’s economic reforms have
raised nearly 200 million people out of extreme poverty. The Chinese government estimates
that real GDP rose by 8.0% in 2002. DRI-WEFA, an economic consulting firm, projects
China’s real GDP growth at 7.8.% in 2003.
Table 1. China’s Average Annual Real GDP Growth Rates: 1960-2002
Time Period
Average Annual % Growth
1960-1978 (pre-reform)
5.3
1979-2002 (post-reform)
9.3
1990
3.8
1991
9.3
1992
14.2
1993
13.5
1994
12.7
1995
10.5
1996
9.7
1997
8.8
1998 7.8
1999 7.1
2000
8.0
2001 7.3
2002 (estimate)
8.0
Sources: Official Chinese government data reported by the World Bank, World Development Report (various
issues).
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.
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China has historically maintained a high rate of savings. When reforms were begun 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 (which now account for half of Chinese domestic savings). As a result, savings as
a percentage of GDP has steadily risen; it was 40.1% in 2001, among the highest savings
rates in the world.
China’s trade and investment reforms and incentives led to a surge in foreign direct
investment (FDI), which has been a major source of China’s capital growth. Annual utilized
FDI in China grew from $636 million in 1983 to $47 billion in 2001, making China, in recent
years, the second largest destination of FDI (after the United States). There are now over
390,000 foreign-invested firms in China; the cumulative level of FDI in China at the end of
2001 reached $400 billion.
Nearly half of FDI in China has come from Hong Kong. The United States is the
second largest investor in China, accounting for 8.7% ($34.4 billion) of total FDI in China
from 1979 to 2001 (see Table 2). U.S. FDI in China for 2001 was $4.4 billion, accounting
for 9.4% of FDI for that year.
Table 2. Major Foreign Investors in China: 1979-2001
($ billions and % of total)
Cumulative Utilized FDI: 1979-2001
Utilized FDI in 2001
Country
Amount
Amount ($billions)
% of Total
% of Total
($billions)
Total
395.5
100.0
46.9
100.0
Hong Kong
187.7
47.5
16.7
35.6
United States
34.4
8.7
4.4
9.4
Japan
32.4
8.2
4.3
9.2
Taiwan
29.2
7.4
3.0
6.4
Singapore
13.0
3.3
2.1
4.5
Source: Chinese government statistics. Top 5 investors according to cumulative FDI from 1979-2001.
Several economists have concluded that productivity gains (i.e., increases in efficiency
in which inputs are used) were another major factor in China’s rapid economic growth. The
improvements to productivity were largely caused by a reallocation of resources to more
productive uses, especially in sectors that were formally heavily controlled by the central
government, such as agriculture, trade, and services. For example, agricultural reforms
boosted production, freeing workers to pursue employment in more productive activities in
the manufacturing sector. China’s decentralization of the economy led to the rise of non-
state enterprises, which tended to pursue more productive activities than the centrally
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controlled SOEs. 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.
Measuring the Size of China’s Economy
The actual size of the 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 2000
was $1.0 trillion; its per capita GDP (a commonly used living-standards measurement) was
$875. Such data would indicate that China’s economy and living standards were
significantly lower than those of the United States, Japan, and Germany (see Table 3).
Many economists, however, contend that using nominal exchange rates to convert
Chinese data into U.S. dollars substantially underestimates the size of China’s economy.
This is because prices in China for many goods and services are significantly lower than
those in the United States and other developed countries. Economists have attempted to
factor in these price differentials by using a purchasing power parity (PPP) measurement,
which attempts to convert foreign currencies into U.S. dollars based on the actual purchasing
power of such currency (based on surveys of the prices of various goods and services) in each
respective country. This PPP exchange rate is then used to convert foreign economic data
in national currencies into U.S. dollars.
Because prices for many goods and services are significantly lower in China than in the
United States and other developed countries (while prices in Germany and Japan are higher
than those in the United States), the PPP exchange rate raises the estimated size of Chinese
economy to $5.7 trillion, significantly higher than Japan’s GDP in PPP ($3.0 trillion) and
Germany’s ($1.8 trillion), and slightly over half the size of the U.S. economy. PPP data also
raise China’s per capita GDP to $4,743; however, this figure falls far below the PPP per
capita GDP levels of the major developed countries.
The PPP data appear to indicate that, while the size of China’s economy as a whole is
quite large and currently could be the world’s second largest, its living standards are quite
low. (To illustrate, the World Bank estimates that nearly 30% of China’s population live
below the international poverty level of $1 per day.) The International Monetary Fund
estimates that (using PPP measurements) China could surpass the United States as the
world’s largest economy as early as the year 2007. Yet, even if that were to occur, it would
take China significantly longer to achieve U.S. standard of living levels.
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Table 3. Comparisons of U.S., Japanese, German, and Chinese GDP
and Per Capita GDP In Nominal U.S. Dollars and PPP: 2000
Nominal GDP
GDP in PPP
Nominal Per
Per Capita GDP
Country
($Billions)
($Billions)
Capita GDP
in PPP
U.S.
9,966
9,966
36,148
36,148
Japan 4,614
2,953
36,372
24,463
Germany
1,867
1,748
22,678
231,248
China
1,006
5,694
875
4,743
Source: Standard & Poor’s DRI, World Outlook, Volume I First Quarter, 2001, p.A27-A28.
Note: PPP data for China should be interpreted with caution. China is not a fully developed market economy;
the prices of many goods and services are distorted due to price controls and government subsidies.
China’s Trade Patterns
Economic reforms have transferred China into a major trading power. Chinese exports
rose from $14 billion in 1979 to$266 billion in 2001, while imports over this period grew
from $16 billion to $244 billion (see Table 4). China’s ranking as a trading power rose from
27th in 1979 to 6th in 2001. In 2001, China’s exports rose 6.8% (compared to 28% in 2000),
while imports increased by 8.2% (compared to 36% in 2000). During the first eight months
of 2002, China’s exports and imports rose by 18% and 15%, respectively, over the same
period in 2001.
Historically, China has run trade deficits in some years and surpluses in others.
However, over the past 8 years, China has run trade surpluses; in 2001 that surplus was $22.6
billion Merchandise trade surpluses and large-scale foreign investment have enabled China
to accumulate the world’s second largest foreign exchange reserves, estimated to have
reached $243 billion in June 2002.
Table 4. China’s Merchandise World Trade: 1979-2002
($ billions)
Exports
Imports
Trade Balance
1979
13.7
15.7
-2.0
1980
18.1
19.5
-1.4
1981
21.5
21.6
-0.1
1982
21.9
18.9
2.9
1983
22.1
21.3
0.8
1984
24.8
26.0
-1.1
1985
27.3
42.5
-15.3
1986
31.4
43.2
-11.9
1987
39.4
43.2
-3.8
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Exports
Imports
Trade Balance
1988
47.6
55.3
-7.7
1989
52.9
59.1
-6.2
1990
62.9
53.9
9.0
1991
71.9
63.9
8.1
1992
85.5
81.8
3.6
1993
91.6
103.6
-11.9
1994
120.8
115.6
5.2
1995
148.8
132.1
16.7
1996
151.1
138.8
12.3
1997 182.7
142.2
40.5
1998
183.8
140.2
43.6
1999 194.9
165.8
29.1
2000 249.2
225.1
24.1
2001 266.2
243.6
22.6
2002 (projection)
301.5
274.2
27.3
Source: International Monetary Fund, Direction of Trade Statistics and official Chinese statistics.
Note: Projections for 2002 made by CRS based on actual data for January-August 2002.
China’s Major Trading Partners
China’s trade data often differ significantly from those of its major trading partners.
This is due to the fact that a large share of China’s trade (both exports and imports) passes
through Hong Kong (which reverted back to Chinese rule in July 1997, but is treated as a
separate customs area by most countries, including China and the United States). China
treats a large share of its exports through Hong Kong as Chinese exports to Hong Kong for
statistical purposes, while many countries that import Chinese products through Hong Kong
generally attribute their origin to China for statistical purposes.
According to Chinese trade
data, its top five trading partners in 2001 were Japan, the United States, the European Union
(EU), Hong Kong, and South Korea (see Table 5). Chinese data show the United States as
China’s largest destination for its exports and the fifth largest source of its imports.
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Table 5. China’s Top 10 Trading Partners: 2001
($ billions)
China’s Trade
Country
Total Trade
Chinese Exports
Chinese Imports
Balance
All Countries
509.8
266.2
243.6
22.6
Japan 87.8
45.0
42.8
2.2
U.S.
80.5
54.3
26.2
28.1
EU
76.6
40.9
35.7
5.2
Hong Kong
56.0
46.5
9.4
37.1
S. Korea
35.9
12.5
23.4
-10.9
Taiwan
32.3
5.0
27.3
-22.3
Singapore
10.9
5.8
5.1
0.7
Russia
10.7
2.7
8.0
-5.3
Malaysia
9.4
3.2
6.2
-3.0
Australia
9.0
3.6
5.4
-1.8
Source: Official Chinese trade data.
Note: Chinese data on its bilateral trade often differ substantially from the official trade data of other countries
on their trade with China.
U.S. trade data indicate that the importance of the U.S. market to China’s export sector
is likely much higher than is reflected in Chinese trade data. Based on U.S. data on Chinese
exports to the United States (which, as noted, do not agree with Chinese data), and Chinese
data on total Chinese exports, it is estimated that Chinese exports to the United States as a
share of total Chinese exports grew from 15.3% in 1986 to an estimated 38.4.% in 2001.
A growing level of Chinese exports are from foreign funded enterprises (FFEs) in
China. According to Chinese data, the share of total Chinese exports produced by FFEs
rose from 0.1% in 1980 to 47.9% in 2000. FFEs also accounted for 52.1% of total Chinese
imports. A large share of these FFEs are owned by Hong Kong and Taiwan investors, many
of whom have shifted their labor-intensive, export-oriented, firms to China to take advantage
of low-cost labor. A significant share of the products made by such firms are exported to the
United States.
Major Chinese Trade Commodities
China’s abundance of cheap labor has made it internationally competitive in many low
cost, labor-intensive, manufactures. As a result, manufactured products comprise an
increasingly larger share of China’s trade. The share of Chinese manufactured exports to
total exports rose from 50% in 1980 to 90% in 2000, while manufactured imports as a share
of total imports rose from 65% to 84%. A large share of China’s manufactured imports are
comprised of intermediates (e.g., chemicals, electronic components, and textile machinery)
used in manufacturing products in China.
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Major Chinese imports in 2001 included mechanical and electrical equipment, electronic
integrated circuits and micro-assemblies, crude oil, plastics, and steel products (see Table 6).
China’s major 2001 exports included mechanical and electrical products, electric and
electronic products, garments and clothing, computer and telecommunications products, and
textiles (see Table 7).
Table 6. Major Chinese Imports: 2001
Commodity
Total ($Billions)
% of Total Exports
Mechanical & electrical equipment
120.5
49.5
Electronic integrated circuits & micro-assemblies
16.6
6.8
Crude oil
11.7
4.8
Primary plastics
11.7
4.8
Steel & steel products
9.0
3.7
Total top 5
169.5
69.6
Source: Official Chinese trade data.
Table 7. Major Chinese Exports: 2001
Commodity
Total ($Billions)
% of Total Imports
Mechanical & electrical products
118.8
44.6
Electric & electronic products
51.3
19.3
Garments & clothing accessories
36.6
13.7
Computer & telecommunications products
36.2
13.6
Textiles, yarns, & fabrics
16.8
6.3
Total top 5
259.7
97.5
Source: Official Chinese trade statistics.
Major Challenges Facing the Chinese Economy
China’s economy has shown remarkable economic growth over the past several years,
and many economists project that it will enjoy fairly healthy growth in the near future. DRI-
WEFA, a private international forecasting firm, projects China’s GDP will grow at an
average annual rate of over 7.0% over the next 19 years. At this rate, China would be able
to double its GDP every 10 years. 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.
! State-owned enterprises (SOEs), which account for about one-quarter of
Chinese industrial production and employ nearly two-thirds of urban
workers, put an increasingly heavy strain on China’s economy. Over half
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are believed to lose money and must be supported by subsidies, mainly
through state banks. Government support of unprofitable SOEs diverts
resources away from potentially more efficient and profitable enterprises.
In addition, the poor financial state of many SOEs makes it difficult for the
government to reduce trade barriers out of fear that doing so would lead to
wide-spread bankruptcies of many SOEs.
! The banking system faces several major difficulties due to its financial
support of SOEs and failure to operate solely on market-based principles.
China’s banking system is regulated and controlled by the central
government, which sets interest rates and attempts to allocate credit to
certain Chinese firms. The central government has used the banking system
to keep afloat money-losing SOEs by pressuring state banks to provide low
interest loans, without which a large share of the SOEs would likely go
bankrupt. Currently, about 70% of state-owned bank loans now go to the
SOEs, even though a large share of loans are not likely to be repaid. The
high volume of bad loans now held by Chinese banks (estimated to total
$250 billion) poses a serious threat to China’s banking system. Three out
of the four state commercial banks are believed to be insolvent. The
precarious financial state of the Chinese banking system has made Chinese
reformers reluctant to open its banking sector to foreign competition
Corruption poses another problem for China’s banking system because loans
are often made on the basis of political connections. This system promotes
widespread inefficiency in the economy because savings are generally not
allocated on the basis of obtaining the highest possible returns.
! China’s agricultural system is highly inefficient due to government
policies that seek to maintain a 95% self-sufficiency rate in grains, mainly
through the extensive use of subsidies and restrictive trade barrier. These
policies divert resources from more productive economic sectors and keep
domestic prices for many agricultural products above world prices.
! Infrastructure bottlenecks, such as inadequate transportation and energy
systems, pose serious challenges to China’s ability to maintain rapid
economic growth. China’s investment in infrastructure development has
failed to keep pace with its economic growth The World Bank estimates
that transportation bottlenecks reduce China’s GDP growth by 1% annually.
Chronic power shortages are blamed for holding China’s industrial growth
to 80% of its potential. Transportation bottlenecks and energy shortages
also add inflationary strains to the economy because supply cannot keep up
with demand.
! The lack of the rule of law in China has led to widespread government
corruption, financial speculation, and mis-allocation 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
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system). The lack of rule of law in China limits competition and
undermines the efficient allocation of goods and services in the economy.
In addition, the Chinese government does not accept the concept of private
ownership of land and assets in China
! High trade barriers are maintained by the government in large part to
protect domestic firms from foreign competition. Such policies have several
negative effects. They prevent the most efficient utilization of resources in
the economy, give domestic firms less incentive to improve efficiency, and
raise prices for Chinese consumers.
! A wide variety of social problems have arisen from China’s rapid
economic growth and extensive reforms, including pollution, a widening of
income disparities between the coastal and inner regions of China, and a
growing number of bankruptcies and worker layoffs. This poses several
challenges to the government, such as enacting regulations to control
pollution, focusing resources on economic development in the hinterland,
and developing modern fiscal and tax systems to address various social
concerns (such as poverty alleviation, health care, education, worker
retraining, pensions, and social security). In addition, the United Nations
in a June 2002 report stated that China was on the verge of “catastrophe that
could result in unimaginable suffering, economic loss and social
devastation,” due to the rapid rise of HIV/AIDS in China.
Reform of State Owned Enterprises
The Chinese leadership has been talking about undertaking major reforms of
unprofitable SOEs for the past several years, but has been hesitant to act due to concerns that
reforms would lead to widespread bankruptcies and cause political instability. However, the
Chinese government has acknowledged that support of SOEs has put a heavy drain on the
economy and cannot be maintained indefinitely. As a result, reform of SOEs has been made
a top priority. In September 1997, Chinese President Jiang Zemin stated that China would
take steps which, if implemented, would essentially privatize (although referred to by the
Chinese as “public ownership”) all but 1,000 out of an estimated 308,000 SOEs by cutting
off most government aid and forcing them to compete on their own. This policy was re-
affirmed and expanded upon by Premier Zhu Rongji in March 1998. Under this plan, some
unprofitable SOEs would be closed, while others would be merged with more profitable
enterprises. Many firms would be allowed to issue stock in order to raise funds. SOEs
would also be released from the responsibility of providing subsidized housing. Finally, the
government announced that SOEs would no longer receive preferential treatment by state
banks for loans.
Reform of the SOEs over the past few years has been relatively uneven. On the one
hand, the government has sought to improve SOE efficiency by significantly reducing the
number of redundant workers and cutting back on the level of free services (such as
education, housing, and health care) given to remaining workers. As a result of these
policies, employment by SOEs has fallen sharply in recent years, from its peak of 112.6
million in 1996 to 90.6 million in 1998, to an estimated 81.2 million 1999. Workers who
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have been laid off from SOEs have been encouraged by the government to find jobs in the
private sector or to start their own businesses. On the other hand, the economic slowdown
experienced by China in 1998 and early 1999 (due to the Asian financial crisis) caused the
government to put additional pressure on state banks to extend loans to SOEs in order to
keep production from falling and to boost their competitiveness. In preparation for WTO
accession, the Chinese government announced plans to move ahead with further SOE reform
to make them even less reliant on government support. Several large and medium-sized
SOEs are being encouraged to raise funds on their own through the issuance of stock. In
addition, several sectors of the economy, traditionally dominated by SOEs, reportedly will
be opened up to the private sector and foreign firms.
Reform of the Banking System
Chinese officials have indicated a desire to strengthen and reform its banking system.
In January 1998, the central government announced it would implement new reforms to
enhance the power of the central bank over the provincial and state banks and to improve the
management systems of all Chinese banks. Such reforms would attempt to lessen the power
of local officials to pressure banks into making “bad loans.” In addition, the government has
indicated that banks will be allowed to make bank loan decisions based on commercial,
rather than political, considerations. Finally, on March 2, 1998, the government announced
plans to issue bonds to recapitalize the state banks to enable them to write off bad loans.
Chinese officials claim their long-term goal is to develop a modern banking system similar
to that of the U.S. Federal Reserve system. However, a slowdown in the economy caused
the central government to resume pressure on the state banks to continue to lend money to
money-losing enterprises. In preparation for WTO entry, the government reaffirmed its
commitment to making its banking system more responsive to market forces. It has
continued re-capitalizing the banks to enable them to write off bad loans.
Infrastructure Development
The Chinese government’s concerns over the disruptive effects of economic reforms
and sluggish domestic demand have led the government to significantly boost spending on
infrastructure spending. Chinese officials announced in February 1998 their intentions to
spend $750 billion on infrastructure development over the next 3 years; in September 1998,
Chinese officials indicated that $1.2 trillion would be spent. Many analysts, however, have
questioned China’s ability obtain funding for such a massive financial undertaking in such
a short period of time. The issuance of government bonds has become a major source of
finance for infrastructure, which has increased government budget deficits. It appears,
however, that infrastructure spending by the government has been a major contributor to
China’s economic growth over the past few years. However, the government is concerned
over the potentially destabilizing effects of increased debt. Efforts have been made in recent
years to improve tax collection with mixed success.
Major Issues in China-U.S. Economic Relations
China’s growth as a major economic and trading power has expanded U.S.-China
commercial ties, although disputes have arisen over a number of issues, such as trade
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investment barriers, China’s most-favored-nation (MFN), or normal trade relations (NTR),
status, and the terms for China’s accession to the World Trade Organization (WTO). The
World Bank projects that by the year 2020, China will be the world’s second largest trading
economy after the United States. China’s continued rapid growth has increased concerns
among U.S. policymakers that China’s trade regime must be brought in compliance with
multilateral rules to ensure that U.S. firms are given access to China’s growing markets.
China’s Accession to the World Trade Organization
China has made its accession to the World Trade Organization (WTO) a major priority.
On November 15, 1999, U.S. and Chinese officials reached a bilateral agreement on China’s
WTO bid. China completed its bilateral WTO negotiations when it signed an agreement
with Mexico on September 13, 2001, the last of the 37 WTO members that had requested
such an accord. On September 17, 2001, China completed negotiations with the WTO
Working Party handling its WTO application. China’s WTO membership was formally
approved by the WTO on November 10, 2001, and on November 11, China informed the
WTO that it had ratified the WTO agreements. As a result, China officially joined the WTO
on December 11, 2001.
China’s Normal Trade Relations Status
On July 22, 1998, President Clinton signed into law P.L. 105-206 (a bill to reform the
Internal Revenue Service), which contained a provision replacing the term “most-favored
nation (MFN) status” with the term “normal trade relations” (NTR) in U.S. trade law. This
change was made to help dispel the belief of some that the term “MFN status” indicates a
preferential trade status, when in fact it indicates the trade status afforded by the United
States to all but a handful of countries. Prior to January 2002, U.S. law (Title IV of the 1974
Trade Act, as amended) required China’s NTR status to be renewed on an annual basis
(based on freedom-of-emigration requirements of the Jackson-Vanik amendment).
From 1980 (when NTR status was restored to China after being suspended in 1951) to
1989, the renewal of China’s NTR status was relatively noncontroversial and was relatively
unopposed by Congress. However, congressional concern over the Tiananmen Square
incident in 1989 and subsequent crackdown on human rights led many Members to support
legislation terminating the extension of China’s NTR status or to condition that status on
additional requirements, mainly dealing with human rights. While none of these measures
were enacted, many Members sought to use the annual renewal of China’s NTR status as a
focal point to express concerns, as well as to pressure the executive branch, over a wide
range of Chinese trade (e.g., trade barriers and failure to protect intellectual property rights)
and non-trade (e.g., human rights, prison labor, Taiwan security, and weapons proliferation)
issues. Several members opposed such linkage, arguing that it had little effect on Chinese
policies, and that the often rancourous congressional debate over China’s trade status
undermined long-term U.S.-Chinese relations and added uncertainty to the trade relationship.
In order to ensure that the WTO agreements would apply between the United States and
China once China gained admittance to the WTO, Congress passed legislation (H.R. 4444,
P.L. 106-286) granting authority to the President to extend permanent normal trade relations
(PNTR) status to China upon its entry to the WTO. (Additionally, the law contains a number
of provisions dealing with such issues as human rights, Chinese prison labor exports, and
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Chinese compliance with WTO rules.) On December 27, 2001, President Bush issued a
proclamation extending PNTR status to China, effective January 1, 2002.
Outlook for China’s Economy
The short term outlook for the Chinese economy is difficult to predict, due largely to
uncertainties over the state of the global economy over the next few years. China’s economy
has held up remarkably well in the face of economic slowdowns in the United States and its
other major trading partners. Foreign investment has continues to pour into China, which
has helped boost Chinese exports. In addition, the Chinese government has continued a
policy of boosting the economy through public spending. As a result, China’s real GDP is
projected to rise by around 7.8% in 2003. Long term growth will be largely determined by
the government’s ability to reform the SOEs to make them profitable, and to reform the
banking system to make it more responsive to market forces.
China’s efforts to join the WTO appear to represent a major commitment on the part of
the Chinese government to significantly reform its economy and provide greater access to
its markets. Some China observers believe that the Chinese government considers accession
to the WTO as an important, though painful, step towards making Chinese firms more
efficient and able to compete in world markets. In addition, the government hopes that
liberalized trade rules will boost foreign investment in China, which has declined in recent
years. Economists argue that, over the long-run, greater market openness in China will boost
competition, improve productivity, and lower costs for consumers, as well as for firms using
imported goods as inputs for production. Economic resources will more likely be redirected
away from money-losing activities (such as SOEs) to more profitable ventures, especially
those in China’s growing private sector. As a result, China is likely experience more rapid
economic growth (than would occur under current economic policies). A study performed
by the Chinese government estimates that WTO membership would boost China’s GDP by
1.5% annually by 2005 and thereafter. On the other hand, however, the Chinese government
is deeply concerned with maintaining social stability. Many analysts warn that, if trade
liberalization were followed by a severe economic slowdown, leading to widespread
bankruptcies and layoffs, the Chinese government might choose to halt or delay certain
economic reforms, rather than risk possible political upheaval. An additional problem posed
by China’s WTO accession will be to get Chinese local and provincial governments to adhere
to WTO rules, since many of them impose a variety of protectionist policies to protect firms
under their jurisdiction.
On November 8, 2002, Chinese President Jiang Zemin formally proposed at the 16th
National Congress of the Chinese Communist Party that the Party constitution be amended
to allow private entrepreneurs to join the Party (based on Jiang’s “Three Represents” theory);
the amendment was adopted on November 11. This step reflects the Chinese Communist
Party recognition of the growing importance of the private sector to China’s economy, but
also poses a dilemma for the Party since private firms may pose a competitive threat to state-
owned firms (and could become a significant political force as well). Many economists
argue that increased competition from foreign firms, as well as from China’s domestic
private sector, may force the Chinese government to eventually choose between privatization
and bankruptcy to keep many unprofitable SOEs afloat.
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