Order Code IB98014
CRS Issue Brief for Congress
Received through the CRS Web
China’s Economic Conditions
Updated December 14, 2004
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: 1979-2004
Causes of China’s Economic Growth
Measuring the Size of China’s Economy
Foreign Direct Investment in China
China’s Trade Patterns
China’s Major Trading Partners
Major Chinese Trade Commodities
China’s Accession to the World Trade Organization
Major Long-Term Challenges Facing the Chinese Economy
Outlook for China’s Economy and Implications for the United States

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China’s Economic Conditions
SUMMARY
Since the initiation of economic reforms
tural sectors, could be negatively affected by
in 1979, China has become one of the world’s
China’s WTO membership. China’s labor-
fastest growing economies. From 1979-2003,
intensive industries, especially textiles and
China’s real annual GDP averaged 9.3%.
apparel, will likely benefit significantly with
Chinese officials estimate that real GDP rose
China’s WTO accession. A major challenge
by 9.1% in 2003. Many economists speculate
for the government is to develop an adequate
that China could become the world’s largest
social safety net to assist laid-off workers.
economy at some point in the near future,
provided that the government is able to con-
China’s economy continued to grow
tinue and deepen economic reforms, particu-
sharply in 2004, with real GDP growth pro-
larly in regards to its efficient state-owned
jected at 9.1%. Foreign investment continued
enterprises (SOEs) and state banking system.
to pour into China, and trade grew rapidly.
Progress in reforming these sectors in recent
However, China experienced some inflation-
years has been somewhat mixed.
ary pressures in 2004, fueled in part by specu-
lation in real estate, over-investment in certain
After many years of difficult negotia-
industries, and rising costs for energy and raw
tions, China became a member of World
materials.
Trade Organization (WTO) on December 11,
2001. WTO accession commits China to
China’s economy continues to be a con-
significantly reducing a wide variety of tariff
cern to U.S. policymakers. On the one hand,
and non-tariff barriers over the next few years.
China’s economic growth presents huge
If fully implemented, the terms of China’s
opportunities for U.S. exporters. On the other
WTO accession will likely have a significant
hand, the surge in Chinese exports to the
impact on China’s economy. The level of
United States has put competitive pressures on
Chinese trade protectionism will be greatly
many U.S. industries. Many U.S. policy-
diminished over then next few years, and
makers have charged that greater efforts
nearly all sectors of China’s economy (includ-
should be made to pressure China to change
ing agriculture, manufacturing, and services)
various economic policies deemed harmful to
will increasingly be subject to great competi-
U.S. economic interests, such as its pegging of
tion. Several of China’s heavily protected
its currency (the yuan) to the U.S. dollar.
industries, such as autos, and certain agricul-
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
On December 7, 2004, IBM Corp. announced that would sell its personal computer
division for $1.75 billion to Lenovo Group Limited, a computer company primarily owned
by the Chinese government.
On November 29, 2004, China and the 10 countries that make up the Association of
Southeast Asian Nations (ASEAN) signed a free trade agreement covering goods.

In an effort to fight rising inflation, the Chinese Central Bank, on October 28, 2004,
raised its one-year lending rate by a 0.27 percentage point, the first rate hike by the bank in
more than nine years.
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.
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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 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: 1979-2004
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 2003 growing at an average annual rate of 9.3%, making China one of the
world’s fastest-growing economies.1 Real GDP is projected to grow by 9.1% in 2004. The
World Bank estimates that China’s economic reforms and resulting economic growth have
help raise 400 million people out of extreme poverty.
Table 1. China’s Average Annual Real GDP Growth Rates,
1960-2004
Time Period
Average Annual
% Growth
1960-1978 (pre-reform)
5.3
1979-2003 (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 8.0
2003
9.1
2004 (projected)
9.1
Sources: Official Chinese government data. Projection made by Global Insight.
1 China’s statistical methods and standards have come under criticism by various international
agencies, especially regarding how China measures its GDP growth, which, many analysts contend,
is often overstated.
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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 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 42% in 2002, among the highest savings rates
in the world.
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
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, foreign direct investment (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 2003
was about $1.5 trillion; its per capita GDP (a commonly used living-standards measurement)
was $1,130. Such data would indicate that China’s economy and living standards are
significantly lower than those of the United States and Japan, considered to be the number
one and number two largest economies, respectively (see Table 2).
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
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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 Japan are higher), the PPP
exchange rate raises the estimated size of Chinese economy to about $6.6 trillion,
significantly higher than Japan’s GDP in PPPs ($3.5 trillion), and about 60% the size of the
U.S. economy. PPP data also raise China’s per capita GDP to $5,120. The PPP figures
indicates that, while the size of China’s economy is substantial, its living standards fall far
below those of the U.S. and Japan. The International Monetary Fund estimates that (using
PPP measurements) China could surpass the United States as the world’s largest economy
as early as the year 2007. Yet, even if that were to occur, it would take China significantly
longer to achieve U.S. standard of living levels.
Table 2. Comparisons of U.S., Japanese, and Chinese GDP and Per
Capita GDP In Nominal U.S. Dollars and PPP, 2003
Nominal GDP
GDP in PPP
Nominal Per
Per Capita GDP
Country
($ billions)
($ billions)
Capita GDP
in PPP
U.S.
10,978
10,978
37,810
37,810
Japan 4,318
3,512
33,940
27,600
China
1,467
6,631
1,130
5,120
Sources: Economist Intelligence Unit Data Services. Data are estimates.
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.
Foreign Direct Investment in China
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.2 Annual utilized
FDI in China grew from $636 million in 1983 to nearly $52.7 billion in 2002. China’s FDI
is estimated to have grown to about $53.5 billion in 2003 (up by 1.5% over 2002 levels), an
indicator that SARS may have temporarily slowed the growth of FDI in China.3 However,
contracted FDI for 2003 was up by 39% over the same period in 2002, an indicator that
actual FDI will likely pick up in the near term.4 Actual FDI going into China during the first
six months of 2004 ($33.9 billion) was 12% higher over the same period in 2003. The
Economist Intelligence Unit projects FDI in China will rise to $57 billion in 2004. Analysts
2 It is estimated that in 2003, there were over 465,000 foreign-funded enterprises in China, with a
cumulative level of FDI of over $500 billion.
3 Despite the slowdown, China was the world’s largest recipient of FDI in 2003.
4 Contracted investment is an indicator of new investment that is pledged for the future, while actual
FDI indicates the amount of investment flows going to China in a given year
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predict that FDI will continue to pour into China as investment barriers are reduced under
China’s WTO commitments and Chinese demand for imports continue to increase.
Based on cumulative FDI (1979-2003), about 45% of FDI in China has come from
Hong Kong. The United States is the second-largest investor in China, accounting for 8.8%
($44 billion) of total FDI, followed by Japan, the European Union, and Taiwan (see Table
3). U.S. FDI in China for 2002 was $4.2 billion, accounting for 7.9% of FDI for that year.

Table 3. Major Foreign Investors in China: 1979-2003
($ billions and % of total)
Cumulative Utilized FDI:
Utilized FDI in 2003
1979-2003
Country
Amount
Amount
% of Total
% of Total
($ billions)
($ billions)
Total
501.7
100.0
53.5
100.0
Hong Kong
223.4
44.5
17.8
22.1
United States
44.0
8.8
4.2
7.9
Japan
41.7
8.3
5.1
9.5
European Union
37.2
7.4
3.9
7.3
Taiwan
36.6
7.3
3.4
6.4
Source: Chinese government statistics. Top five investors according to cumulative FDI from 1979 to 2003.
China’s Trade Patterns
Economic reforms have transferred China into a major trading power. Chinese exports
rose from $14 billion in 1979 to $438 billion in 2003, while imports over this period grew
from $16 billion to $413 billion (see Table 4). According to the World Trade Organization,
China is now the world’s fourth-largest trading nation (based on 2003 data), the fourth-
largest exporter, and the third-largest importer. China’s trade continues to grow
dramatically: In 2003, exports rose by 35%, while imports grew by 40%, over 2002 levels.
During the first 10 months of 2004, China’s trade continued to boom: exports and imports
were up by 35% and 37%, respectively over the same period in 2003.
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Table 4. China’s Merchandise World Trade, 1979-2004($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
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 325.6
295.2
30.4
2003 438.4
412.8
25.6
2004
589.6
566.4
23.2
(projection)
Source: International Monetary Fund, Direction of Trade Statistics and official Chinese statistics.
Projection based on actual data for January-October 2004.
Historically, China has run trade deficits in some years and surpluses in others.
However, over the past nine years, China has run trade surpluses; in 2003 that surplus was
$25.6 billion. Merchandise trade surpluses and large-scale foreign investment have enabled
China to accumulate the world’s second-largest foreign exchange reserves (after Japan),
estimated to have reached $515 billion at the end of September 2004. As seen in Figure 1,
China’s accumulation of foreign exchange reserves has been particularly acute over the past
three years.
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Figure 1. China’s Foreign Exchange Reserves, 1990-2004
($ billions)
Data for 2004 estimated, based on actual data for January-September 2004.
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 2003 were Japan, the United States, the European Union,
Hong Kong, and the 10 nations that make up the Association of Southeast Asian Nations
(ASEAN)(see Table 5). Its largest export markets were Japan, the United States, and Hong
Kong, while its top sources for imports were Japan, the Europan Union, and Taiwan (the
United States ranked sixth).
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
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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 37.4% in 2003.
A growing level of Chinese exports are from foreign funded enterprises (FFEs) in
China. According to Chinese data, about half of its trade in 2002 was conducted by FFEs.
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. Chinese data indicate that the share of China’s exports produced by foreign-invested
enterprises in China has risen from 2% in 1986, to 41% in 1996, to 55% in 2003.
Table 5. China’s Top 5 Trading Partners: 2003
($ billions)
China’s Trade
Country
Total Trade
Chinese Exports
Chinese Imports
Balance
Japan 133.6
59.4
74.2
-14.8
United States
126.3
92.4
33.9
58.5
European Union
125.2
72.1
53.1
19.0
Hong Kong
87.4
76.3
11.1
65.2
ASEAN*
78.3
31.0
47.3
-16.3
*Association of Southeast Asian Nations (ASEAN) member countries include Indonesia, Malaysia, the
Philippines, Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar, and Vietnam.
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.
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 92% in 2003, while manufactured imports as a share
of total imports rose from 65% to 82%. A large share of China’s manufactured imports are
comprised of intermediates (e.g., steel, electronic components, and textile machinery) used
in manufacturing products in China.
China’s top five imports in 2003 included electrical machinery and parts, petroleum and
petroleum products, computers and parts, iron and steel, and specialized machinery (see Table
6). China’s top five exports in 2003 included computers and parts, articles of apparel and clothing,
telecommunications equipment, electrical machinery and parts, and miscellaneous manufactured arti-
cles (toys, games, dolls, etc) (see Table 7).
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Table 6. Major Chinese Imports: 2003
Commodity
Total
% of Total
% Change over
($ billions)
Imports
2002 Levels
Electrical machinery, apparatus and
77.9
18.9
42.9
appliances, and parts
Petroleum and petroleum products
26.2
6.3
53.3
Office machines and automatic data
23.6
5.7
40.8
processing machines (mainly computers
and parts)
Iron and steel
21.9
5.3
62.9
Machinery specialized for particular
20.6
5.0
35.1
industries
Total top 5
170.2
41.2
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Estimated, based on actual data for January-November 2003.
Source: Official Chinese trade data.
Table 7. Major Chinese Exports: 2003
Total
% of Total
% Change over
Commodity
($ billions)
Exports
2002 Levels
Office machines and automatic data
60.3
13.8
71.6
processing machines (mainly computers
and parts)
Articles of apparel and clothing
51.4
11.7
25.2
accessories
Telecommunication & sound record &
43.0
9.8
37.2
reproduce app. & equip.
Electrical machinery, apparatus and
41.1
9.4
30.3
appliances, and parts
Miscellaneous manufactured articles
31.3
7.1
16.3
(e.g., toys, games, etc.)
Total top 5
227.1
51.8
—
Estimated, based on actual data for January-November 2003.
Source: Official Chinese trade statistics.
China’s Accession to the World Trade Organization
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
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
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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 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. U.S. government and business representatives have argued that
China’s record on implementing its WTO obligations has been mixed (see CRS Issue Brief
IB91121).
Major Long-Term 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.
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
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, over 50% of state-owned bank loans now go to the
SOEs, even though a large share of loans are not likely to be repaid. Ernst
& Young estimates that the level of nonperforming loans by Chinese banks
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in 2002 was $480 billion (equal to about 43% of China’s GDP).5 The high
volume of bad loans now held by Chinese banks 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
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
! 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
5 Ernst & Young Asia Pacific Financial Solutions, Nonperforming Loan Report, Asia, 2002.
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concerns (such as poverty alleviation, education, worker retraining, and
pensions). In addition to SARS, China faces a series HIV/AID crisis. A
2002 report by the United Nations 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.
Outlook for China’s Economy and Implications for the
United States
The short term outlook for the Chinese economy appears to be positive, but will likely
be strongly influenced by the government’s ability to reform the SOEs and banking system
to make them more responsive to market forces, fully implement its WTO commitments, and
to assist workers who lose their jobs due to economic reforms (in order to maintain social
stability). Global Insight, a private international forecasting firm, projects China’s GDP will
grow at an average annual rate of nearly 7.0% over the next several years. At this rate, China
would be able to double its GDP every 10 years.
China’s rise as an economic superpower is likely to pose both opportunities and
challenges for the United States and the world trading system. China’s rapid economic
growth has boosted incomes and is making China a huge market for a variety of goods and
services. The U.S. Commerce Department projects that by the year 2005, China will have
more than 230 million middle-income consumers (i.e., those earning $1,000 or more
annually), whose combined retail spending will exceed $900 billion. In addition, China’s
abundant low-cost labor has led multinational corporations to shift their export-oriented,
labor intensive manufacturing facilities to China. This process has lowered prices for
consumers, boosting their purchasing power. It has also lowered costs for firms that import
and use Chinese-made components and parts to produce manufactured goods, boosting their
competitiveness. Conversely, China’s role as a major international manufacturer has raised
a number of concerns. Many developing countries worry that growing FDI in China is
coming at the expense of FDI in their country. Policymakers in both developing and
developed countries have expressed concern over the loss of domestic manufacturing jobs
that have shifted to China (as well as the downward pressures on domestic wages and prices
that may occur from competing against low-cost Chinese-made goods). Japan has
complained that China’s currency peg and low-cost manufacturing has contributed to
deflationary pressures on the Japanese economy, which, they claim, has forced Japan to
intervene in currency markets to keep the yen weak against the dollar in order to stay
competitive with Chinese goods in U.S. markets.
China is attempting to establish and promote companies that can compete globally,
especially in advanced technologies. For example, on December 7, 2004, Lenovo Group
Limited, a computer company primarily owned by the Chinese government, purchased IBM’s
personal computer division. U.S. firms are likely to face increasing competitive pressures
from China in a variety of goods and services industries and not just those that are labor
intensive.

China’s rapid economic growth and continued expansion of its manufacturing base are
fueling a sharp demand for energy and raw materials, which is becoming an increasingly
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important factor in determining world prices for such commodities. According to the
International Energy Agency, China accounted for one-third of the rise in daily global oil
consumption in 2003 and is projected to account for one-third of the rise in consumption in
2004. China has become the world’s second-largest oil importer, and is reportedly the largest
consumer of steel, cement, and copper.
During the past year, the Chinese government has expressed concern that the economy
could be growing too quickly, which could ignite inflation and threaten future economic
growth.6 One major problem is that in order to maintain the currency peg, the government
has had to infuse large amounts of yuan into the economy. Many analysts charge that this
flood of money has substantially raised the level of speculative investments in the economy,
which has threatened to ignite inflation in some sectors. Analysts are also concerned that
banks are making poor lending decisions, which could increase the level of non-performing
loans. Chinese officials have sought to lower inflationary pressures by slowing down the
pace of investment in various industries (such as steel and construction) and raising interest
rates in order to obtain a “soft landing.” However, analysts warn that if inflation cannot be
effectively brought under control, stronger administrative and macroeconomic measures may
be implemented, which could lead to a significant slowdown in China’s economy (a “hard
landing”) and could negatively affect the world economy.
6 Global Insight projects the inflation rate in China in 2004 at 4.5%.
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