Order Code IB98014
CRS Issue Brief for Congress
Received through the CRS Web
China’s Economic Conditions
Updated March 17, 2006
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: 1979-2005
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
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
foreign direct investment (FDI) into China,
in 1979, China has become one of the world’s
which totaled $60 billion in 2005. Over half
fastest-growing economies. From 1979 to
of China’s trade is accounted for by foreign-
2005 China’s real GDP grew at an average
invested firms in China.
annual rate of 9.7%; it grew by 9.9% in 2005.
Many economists speculate that China could
China’s economy continues to be a con-
become the world’s largest exporter within the
cern to U.S. policymakers. On the one hand,
next few years and the largest economy within
China’s economic growth presents huge
a few decades, provided that the government
opportunities for U.S. exporters. On the other
is able to continue and deepen economic
hand, the surge in Chinese exports to the
reforms, particularly in regard to its inefficient
United States has put competitive pressures on
state-owned enterprises (SOEs) and the state
various U.S. industries. Many U.S. policy-
banking system. In addition, China faces
makers have argued that greater efforts should
several other difficult challenges, such as
be made to pressure China to fully implement
pollution and growing income inequality, that
its WTO commitments (especially in terms of
threaten social stability.
protecting U.S. intellectual property rights)
and change various economic policies deemed
Trade continues to play a major role in
harmful to U.S. economic interests, such as its
China’s booming economy. In 2005, exports
currency policy and its use of subsidies to
rose by 28.4% to $762 billion, while imports
support its state-owned firms. In addition,
grew by 17.6% to $660 billion, producing a
recent bids by Chinese state-owned firms to
$102 billion trade surplus. China is now the
purchase various U.S. firms have raised con-
world’s third-largest trading economy after the
cerns among Members over the impact such
United States and Germany. China’s trade
acquisitions could have on U.S. national and
boom is largely the result of large inflows of
economic security.
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
On February 28, 2006, the Chinese government reported that GDP had grown by 9.9%.
On January 9, 2005, the Chinese National Bureau of Statistics made major revisions to
its estimates of China’s GDP from 1993-2004. The new revisions indicate that China’s
economy grew significantly faster than previously recorded.
On November 21, 2005, the International Monetary Fund urged China to adopt greater
flexibility in its currency policy in order to obtain balanced growth and development and to
help reduce global trade imbalances.
On July 21, 2005, the Chinese government announced major reforms to its currency
policy. It stated that China’s currency (the renminbi or yuan) would no longer be pegged to
the dollar but instead would be a managed float regime with reference to a basket of
currencies (including the dollar), and that the exchange rate of the U.S. dollar against the
yuan would be adjusted from 8.28 to 8.11 yuan per U.S. dollar, an appreciation of 2.1%.
On June 22, 2005, CNOOC, a Chinese company, made a $18.5 billion bid to purchase
Unocal, a U.S. energy company. News of the bid raised concern among several Members,
many of who contended that the deal threatened U.S. national security. On August 2, 2005,
CNOOC withdrew its bid, citing strong political opposition in the United States. On January
10, 2006, CNOOC announced it had reached $2.3 billion deal to purchase a 45% stake in a
block of offshore Nigerian oil fields.
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 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 according to centrally planned output targets. Private enterprises and
foreign-invested firms were nearly nonexistent. 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
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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 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 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: 1979-2005
Since the introduction of economic reforms, China’s economy has grown substantially
faster than during the pre-reform period (see Table 1). In January 2006, China made major
revisions to its GDP data for 1993-2004. The revisions indicated that, based on new
estimates of growth in the service sector, the size of China’s economy and its GDP growth
were significantly higher than previously estimated. For example, real GDP growth in 2004
had been originally measured at 9.5%, but the revised figure puts this rate at 10.1%. Overall,
the size of the economy in 2004 was estimated to be nearly 17% higher than previously
thought. Based on these revisions, China’s average annual real GDP grew by 9.7% between
1979 and 2005; it grew by 9.9% in 2005.
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Table 1. China’s Average Annual Real GDP Growth Rates, 1960-2005
Average
annual
Time period
% growth
1960-1978 (pre-reform)
5.3
1979-2005 (post-reform)
9.7
1990
3.8
1991
9.3
1992
14.2
1993
14.0
1994
13.1
1995
10.9
1996
10.0
1997
9.3
1998 7.8
1999 7.6
2000
8.4
2001 8.3
2002 9.1
2003
10.0
2004 10.1
2005
9.9
Source: Official Chinese government data.
Causes of China’s Economic Growth
Economists generally attribute much of China’s rapid economic growth to two main
factors: large-scale capital investment (financed by large domestic savings and foreign
investment) and rapid productivity growth. These two factors appear to have gone together
hand in hand. Economic reforms led to higher efficiency in the economy, which boosted
output and increased resources for additional investment in the economy.
China has historically maintained a high rate of savings. When reforms were initiated
in 1979, domestic savings as a percentage of GDP stood at 32%. However, most Chinese
savings during this period were generated by the profits of state-owned enterprises (SOEs),
which were used by the central government for domestic investment. Economic reforms,
which included the decentralization of economic production, led to substantial growth in
Chinese household savings (these now account for half of Chinese domestic savings). As
a result, savings as a percentage of GDP has steadily risen; it reached nearly 50% in 2005,
among the highest savings rates in the world.1
1 In comparison, the U.S. savings rate was about 10% in 2005. Savings defined as aggregate
national savings by the public and private sector as a percentage of nominal GDP. (Economist
Intelligence Unit database.)
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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 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 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 nonstate
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 2005
is estimated at about $2.3 trillion; its per capita GDP (a commonly used living-standards
measurement) was $1,700. Such data would indicate that China’s economy and living
standards are significantly lower than those of the United States and Japan, respectively
considered to be the number-one and number-two largest economies (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 on the basis of the actual
purchasing power of such currency (based on surveys of the prices of various goods and
services) in each respective country. This PPP exchange rate is then used to convert foreign
economic data in national currencies into U.S. dollars.
Because prices for many goods and services are significantly lower in China than in the
United States and other developed countries (while prices in Japan are higher), the PPP
exchange rate raises the estimated size of Chinese economy from $2.3 trillion (nominal
dollars) to $8.4 trillion (PPP dollars), significantly larger than Japan’s GDP in PPPs ($3.9
trillion), and about 67% the size of the U.S. economy. PPP data also raise China’s per capita
GDP to $6,386. The PPP figures indicate that, while the size of China’s economy is
substantial, its living standards fall far below those of the U.S. and Japan. China’s per capita
GDP on a PPP basis is only 15.2% of U.S. levels. Thus, even if China’s GDP were to
overtake that of the United States in the next few decades, its living standards would remain
substantially below those of the United States for many years to come.
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Table 2. Comparisons of United States, Japanese, and Chinese GDP
and Per Capita GDP in Nominal U.S. Dollars and PPP, 2005
Nominal GDP ($
GDP in PPP
Nominal Per
Per Capita
Country
billions)
($ billions)
Capita GDP
GDP in PPP
United States
12,458
12,458
42,130
42,130
Japan
4,571
3,914
35,880
30,720
China
2,262
8,359
1,700
6,386
Source: Economist Intelligence Unit Data Services and Global Insight.
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. Annual utilized
FDI in China grew from $636 million in 1983 to $60 billion in 2005 The cumulative level
of FDI in China stood at about $621 billion at the end of 2005. Analysts predict that FDI will
continue to pour into China as investment barriers are reduced under China’s WTO
commitments and Chinese demand for imports continues to increase.
Based on cumulative FDI for 1979-2005 about 42%of FDI in China has come from
Hong Kong. In 2005, Japan replaced the United States as second largest overall investor in
China. The United States ranked third accounting for 8.2% ($51.1 billion) of total FDI.
Other major investors include the British Virgin Islands, Taiwan, and South Korea (see
Table 3).2 U.S. FDI in China for 2005 was $3.1 billion (compared to $3.9 billion in 2004),
accounting for 5.1% of FDI for that year, and ranked 5th after Hong Kong, the British Virgin
Islands, Japan, and South Korea.3
2 According to the Chinese Ministry of Commerce, major U.S. investors in China (based on 2003
sales volumes) include Motorola ($5.8 billion in sales volume), General Motors ($2.2 billion), Dell
Computer ($2.1 billion), Hewlett Packard ($1.3 billion), and Kodak ($0.6 billion).
3 The British Virgin Islands is a large source of FDI because of its status as a tax haven. Much of
the FDI originating from Hong Kong comes from non-Hong Kong investors, such as Taiwanese.
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Table 3. Major Foreign Investors in China: 1979-2004
($ billions and % of total)
Cumulative Utilized FDI:
1979-2005
Utilized FDI in 2005
Amount
Amount
Country
($ billions)
% of Total
($ billions)
% of Total
Total
620.7
100.0
60.3
100.0
Hong Kong
259.5
41.8
17.9
29.7
Japan
53.3
8.6
6.5
10.8
United States
51.1
8.2
3.1
5.1
British Virgin Islands
45.9
7.4
9.0
14.9
Taiwan 41.8
6.7
2.2
3.3
South Korea
31.1
5.0
5.2
8.6
Source: Chinese government statistics. Top six investors according to cumulative FDI from 1979 to 2005.
China’s Trade Patterns
Economic reforms have transferred China into a major trading power. Chinese exports
rose from $14 billion in 1979 to $762 billion in 2005, while imports over this period grew
from $16 billion to $660 billion (see Table 4). In 2004, China surpassed Japan as the
world’s third-largest trading economy (after the United States and Germany). China’s trade
continues to grow dramatically: From 2002 to 2005, the size of China’s exports and imports
more than doubled. In 2005, exports and imports rose by 28.4% and 17.6%, respectively.
China’s trade surplus, which totaled $32 billion in 2004, tripled to $102 billion.
Table 4. China’s Merchandise World Trade, 1979-2005
($ billions)
Trade
Year
Exports
Imports
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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Trade
Year
Exports
Imports
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 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
Source: International Monetary Fund, Direction of Trade Statistics, and official Chinese statistics.
Merchandise trade surpluses, large-scale foreign investment, and its peg to the U.S.
dollar have enabled China to accumulate the world’s second largest foreign exchange (after
Japan). As seen in Figure 1, China’s accumulation of foreign exchange reserves has been
particularly acute over the past few years. China’s total reserves reached $819 billion at the
end of 2005, up by $210 billion, or 34%, over the same period in 2004.
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Figure 1. China’s Foreign Exchange Reserves,
1990-2005
($ in billions)
$1000
$818.9
$800
$609.9
$600
$408.2
$400
$291.1
$215.6
$200
$149.2 $157.7 $168.3
$132.8
$107
$76.4
29.6
34.7
$20.6 $22.4 $32.9
0
1991
1993
1995
1997
1999
2001
2003
2005
1990
1992
1994
1996
1998
2000
2002
2004
Source: Official Chinese government data.
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 2004 were the European Union (EU), the United States,
Japan, Hong Kong, and the 10 nations that constitute the Association of Southeast Asian
Nations (ASEAN) (see Table 5). China’s largest export markets were the United States,
Hong Kong, and the EU, while its top sources for imports were Japan, the EU, 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
exports to the United States (which, as noted, do not agree with Chinese data), and Chinese
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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 32.0% in 2005.
A growing level of Chinese exports is from foreign-funded enterprises (FFEs) in China.
According to Chinese data, FFEs were responsible for 58% of Chinese exports in 2005,
compared with 41% in 1996. A large share of these FFEs are owned by Hong Kong and
Taiwan investors, many of whom have shifted their labor-intensive, export-oriented, firms
to China to take advantage of low-cost labor. A significant share of the products made by
such firms is likely exported to the United States.
Table 5. China’s Top Five Trading Partners: 2005
($ billions)
Trade
Balance as
Total
Chinese
Chinese
China’s trade
Reported by
Country
trade
exports
imports
balance
Partner
Hong Kong
246.8
124.5
122.3
2.2
-4.7
European Union
219.3
143.7
75.6
68.1
-132
United States
211.6
162.9
48.7
114.2
-201.6
Japan 184.5
84.0
100.5
-16.5
-28.5
ASEAN*
130.4
55.4
75.0
-19.6
N/A
Sources: Official Chinese trade data and Global Trade Atlas.
Note: Chinese data on its bilateral trade often differ substantially from the official trade data of other countries
on their trade with China.
* Association of Southeast Asian Nations (ASEAN) member countries are Indonesia, Malaysia, the Philippines,
Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar, and Vietnam.
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 constitute an
increasingly larger share of China’s trade. A large share of China’s imports, such as raw
materials, components and parts, and production machinery is used to manufacture products
for export. For example, China imports cotton and textile-production machinery (and
cotton) to produce textile and apparel items. A substantial amount of China’s imports is
comprised of parts and components that are assembled in Chinese factories (major products
include consumer electronic products and computers), then exported. China’s top five
exports in 2005 were (1) automatic data processing machines and units, (2) garments and
clothing accessories, (3) textile products, (4) parts of data processing machines, and (5) radio
telephone handsets (see Table 6). China’s top imports were (1) electronic integrated circuits
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and micro-assemblies, (2) crude oil, (3) liquid crystal display panels, (4) steel products, and
(5) plastics (see Table 7).4
Table 6. Major Chinese Exports, 2005
($billions and % change over previous year)
Amount
Percent Increase over 2004
Automatic data processing machines and units
74.5
28.6
Garments and clothing accessories
73.4
20.0
Textile products
40.9
23.9
Parts of data processing machines
27.7
20.4
Radio telephone handsets
19.7
44.8
Source: China’s Customs Statistics. Estimated, based on January-November 2005 data.
Table 7. Major Chinese Imports, 2005
($ billions and % change over previous year)
Amount
Percent Change over 2004
Electronic integrated circuits
79.3
32.0
and micro-assemblies
Crude oil
47.2
43.5
Liquid crystal display panels
26.8
27.5
Steel products
25.0
20.7
Plastics
24.1
18.6
Source: China’s Customs Statistics. Estimated, based on January-November 2005 data.
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.
4 Rankings differ according to which trade classification is used and at what digit level.
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! State-owned enterprises (SOEs), which account for about one-third of
Chinese industrial production, put a 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 condition of many SOEs makes it difficult for
the government to reduce trade barriers out of fear that doing so would lead
to widespread bankruptcies among many SOEs.
! The banking system faces several major difficulties due to its financial
support of SOEs and its failure to operate solely on market-based principles.
China’s banking system is regulated and controlled by the central
government, which sets interest rates and attempts to allocate credit to
certain Chinese firms. The central government has used the banking system
to keep afloat money-losing SOEs by pressuring state banks to provide low-
interest loans, without which a large number of the SOEs would likely go
bankrupt. 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
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 the banking
sector to foreign competition. Corruption poses another problem for
China’s banking system because loans are often made on the basis of
political connections. This system promotes widespread inefficiency in the
economy because savings are generally not allocated on the basis of
obtaining the highest possible returns.
! Public unrest over pollution, government corruption, and growing
income inequality poses threats to social stability. The Chinese
government reported that there were over 74,000 protests (many of which
became violent) involving 3.8 million people in 2004 (up from 53,000
protests in 2003) over such issues as pollution, government corruption, and
land seizures. Pollution in China continues to worsen, posing series health
risks to the population. The Chinese government often disregards its own
environmental laws in order to promote rapid economic growth. According
to the World Bank, 16 out of 20 of the world’s most polluted cities are in
China, and the direct costs to the economy (such as health problems, crop
failures and water shortages) is estimated to be hundreds of billions of
dollars yearly. The Chinese government estimates that there are over 300
million people living in rural areas that drink unsafe water (caused by
chemicals and other contaminants). Toxic spills in China in recent months
have threatened the water supply of millions of people. Rising income
inequality, particularly between people living in the urban coastal and those
5 Ernst & Young Asia Pacific Financial Solutions, Nonperforming Loan Report, Asia, 2002.
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living in the inner rural regions of China, has become another source of
tension. A number of protests in China have stemmed in part from
frustrations among many Chinese (especially peasants) that they are not
benefitting from China’s economic reforms and rapid growth, and
perceptions that those who are getting rich are doing so because they have
connections with government officials. Protests have broken out over
government land seizures and plant shutdowns in large part due to
perceptions that these actions benefitted a select group with connections. A
2005 United Nations report stated that the income gap between the urban
and rural areas was among the highest in the world and warned that this gap
threatens social stability. The report urged China to take greater steps to
improve conditions for the rural poor, and bolster education, health care, and
the social security system.
! The lack of the rule of law in China has led to widespread government
corruption, financial speculation, and misallocation of investment funds. In
many cases, government “connections,” not market forces, are the main
determinant of successful firms in China. Many U.S. firms find it difficult
to do business in China because rules and regulations are generally not
consistent or transparent, contracts are not easily enforced, and intellectual
property rights are not protected (due to the lack of an independent judicial
system). The lack of the rule of law in China limits competition and
undermines the efficient allocation of goods and services in the economy.
Outlook for China’s Economy and Implications
for the United States
The short-term outlook for the Chinese economy appears to be positive, but it 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, to 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, an economic forecasting firm, projects that China’s real
GDP will average 8.0% over the next five years, indicating that China could double the size
of its economy in less than 10 years.6 The Economist Intelligence Unit projects that China
will become the world’s largest exporter by 2010 and the world’s largest economy by 2020.
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. 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
6 Global Insight, China: Interim Forecast Analysis: Economic Growth, December 15, 2005.
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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).
Many analysts contend that China’s currency policy, despite reforms undertaken in July
2005, is having a negative impact on the economies of many of its trading partners by
artificially making its exports cheaper, and imports more expensive, than they would be
under a floating system. They have urged China to move toward a floating exchange rate
regime as soon as possible, contending that such a move would benefit China’s economy and
those of its trading partners.7 Chinese officials have expressed concern that further currency
reforms, if implemented too quickly, could prove disruptive to the economy. A number of
bills have been introduced in Congress to address Chinese currency policy, including some
that would impose a 27.5% tariff on Chinese goods unless China appreciated its currency to
market levels.8 Failure by China to implement further reforms to its currency regime could
prompt Congress to take up currency-related legislation. On the other hand, some analysts
have raised concerns that China’s move toward a managed float tied to a basket of currencies
may diminish China’s purchase of U.S. Treasury securities, which could affect U.S. interest
rates.
China is attempting to establish and promote companies that can compete globally,
especially in advanced technologies. In some cases, China has attempted to purchase large
foreign companies. For example, in December 2004, Lenovo Group Limited, a computer
company primarily owned by the Chinese government, purchased IBM’s personal computer
division. In June 2005, the China National Offshore Oil Corporation (CNOOC) made a bid
to buy a U.S. energy company, UNOCAL, for $18.5 billion, although strong opposition in
Congress forced CNOOC to withdraw its bid. China’s possession of large currency reserves
and desire to become a world leader in the production of a variety of goods and strategic
commodities will likely lead the Chinese government to expand efforts to take over major
international corporations. Many Members charge that China’s use of extensive subsidies
to support state-owned firms, especially to fund takeover bids, threatens U.S. economic
interests and may violate its WTO commitments.

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
important factor in determining world prices for such commodities. China is now the
world’s second largest consumer of oil products (after the United States) at 6.7 million
barrels per day, and that level is projected to double to 13.4 million barrels per day by 2025.9
According to the U.S. Energy Information Administration, around 40% of world oil demand
growth over the past four years came from China and this demand is “a very significant
7 For a discussion of this issue, see CRS Report RS21625: China’s Currency Peg: A Summary of
the Economic Issues, by Wayne Morrison and Marc Labonte.
8 For a listing of these bills, See CRS Issue Brief IB91121,China-U.S. Trade Issues, by Wayne M.
Morrison.
9 Global Insight, Global Petroleum Outlook Forecast Tables (Long-Term), January 2005.
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factor in world oil markets.”10 China has also reportedly become the largest consumer of
steel, cement, and copper.
Some U.S. policymakers have expressed concern over China’s rising ownership of U.S.
government debt, due to fears that China might attempt to use its holdings as leverage in its
dealings with the United States on economic and/or political matters. China is the second
largest foreign holder of Treasury securities (after Japan), and both the level of those
holdings and China’s share of total foreign holdings have increased sharply over the past few
years. These went from $51.8 billion in 1999 to $257 billion at end of 2005. China’s U.S.
Treasury securities holdings as a share of total foreign holdings over this period have grown
from 4.1% to 11.8%. Some have raised concerns that threats by China to halt future
purchases, or to sell existing holdings, could cause the value of the dollar to depreciate in
world markets (raising import prices), increase U.S. interest rates, lead to a decline in U.S.
stock and bond markets, and possibly cause the U.S. economy to slow. However, any such
disruption to the U.S. economy would also hurt China’s economy since about a third of
China’s exports go to the United States.
10 U.S. Energy Information Administration website at [http://www.eia.doe.gov/].
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