Order Code RL33534
China’s Economic Conditions
Updated July 13, 2007
Wayne M. Morrison
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

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China’s Economic Conditions
Summary
Since the initiation of economic reforms in 1979, China has become one of the
world’s fastest-growing economies. From 1979 to 2005 China’s real gross domestic
product (GDP) grew at an average annual rate of 9.7%. Real GDP grew by 11.1%
in 2006, and during the first quarter of 2007, it rose by 11.1% over the same period
in 2006. China is expected to continue to enjoy rapid economic growth over the next
several years, provided that it continues to implement needed reforms, particularly
in regard to its inefficient state-owned enterprises and the state banking system. If
projected growth levels continue, China could become the world’s largest economy
within a decade or so.
Trade and foreign investment continues to play a major role in China’s booming
economy. In 2006, exports rose by 27% to $969 billion, while imports were up by
20% to $792 billion. This produced an trade surplus of about $177 billion. From
2003 to 2006, the value of total Chinese trade doubled. On the basis of current
trends, China could surpass the United States in 2007 to become the second largest
merchandise exporter (after the European Union). Well over half of China’s trade
is conducted by foreign firms operating in China. The combination of trade
surpluses, foreign direct investment flows, and large-scale purchases of foreign
currency have helped make China the world’s largest holder of foreign exchange
reserves at $1.3 trillion as of June 2007.
Although the economy has shown remarkable growth in recent years, Chinese
officials have expressed concern over a number of areas that they perceive as
threatening future growth, including rising inflation, over-dependence on exports and
fixed investment for growth, widening income gaps, and growing pollution. The
government has indicated its goal over the coming years to create a “harmonious
society” that would promote more economic balanced growth and address a number
of economic and social issues.
China’s economy continues to be a concern to many U.S. policymakers. On the
one hand, U.S. consumers, exporters, and investors have greatly benefitted from
China’s rapid economic and trade growth. On the other hand, the surge in Chinese
exports to the United States has put competitive pressures on various U.S. industries.
Many U.S. policymakers have argued that China often does not play by the rules
when it comes to trade and they have called for greater efforts to pressure China to
fully implement its World Trade Organization (WTO) commitments and to change
various economic policies deemed harmful to U.S. economic interests, such as its
currency policy, its use of subsidies to support state-owned firms, and trade and
investment barriers to U.S. goods and services. In addition, China’s rising demand
for energy and raw materials has raised prices for such commodities and has sharply
increased pollution levels, which may have important global implications.
This report provides an overview of China’s economic development, challenges
China faces to maintain growth, and the implications of China’s rise as a major
economic power for the United States. This report will be updated as events warrant.

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Contents
Most Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
An Overview of China’s Economic Development . . . . . . . . . . . . . . . . . . . . . . . . 2
China’s Economy Prior to Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Introduction of Economic Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
China’s Economic Growth Since Reforms: 1979-Present . . . . . . . . . . . . . . 3
Causes of China’s Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
China’s Industrial Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Measuring the Size of China’s Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Foreign Direct Investment in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
China’s Trade Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
China’s Major Trading Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Major Chinese Trade Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
China’s Growing Trade with Africa and Latin America . . . . . . . . . . . . . . . 15
Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
China’s Trade with North Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Major Long-Term Challenges Facing the Chinese Economy . . . . . . . . . . . . . . . 20
Outlook for China’s Economy and Implications for the United States . . . . . . . . 23
List of Figures
Figure 1. China’s Foreign Exchange Reserves: 1996-June 2007 . . . . . . . . . . . . 10
List of Tables
Table 1. China’s Average Annual Real GDP Growth: 1960-2007 . . . . . . . . . . . 4
Table 2. Major Chinese Industries Based on Value-Added Output:
1995 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 3. Comparisons of U.S., Japanese, and Chinese GDP and Per Capita
GDP in Nominal U.S. Dollars and PPP, 2006 . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 4. Major Foreign Investors in China: 1979-2006 . . . . . . . . . . . . . . . . . . . . 8
Table 5. Foreign Direct Investment by Sectors in 2006 . . . . . . . . . . . . . . . . . . . . . 8
Table 6. China’s Merchandise World Trade, 1979-2006 . . . . . . . . . . . . . . . . . . . 9
Table 7. Monthly U.S. and Chinese Total Merchandise Exports:
August 2006-May 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Table 8. China’s Major Trading Partners: 2006 . . . . . . . . . . . . . . . . . . . . . . . . 12
Table 9. Top 10 Chinese Exports: 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Table 10. Top 10 Chinese Imports: 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Table 11. Top 5 African Sources of Chinese Imports: 2004-2006 . . . . . . . . . . . 16

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Table 12. Top Five Chinese Imports from Africa: 2004-2006 . . . . . . . . . . . . . . 16
Table 13. China’s Top 5 Export Markets: 2004-2006 . . . . . . . . . . . . . . . . . . . . 16
Table 14. Top 5 Chinese Exports to Africa: 2004-2006 . . . . . . . . . . . . . . . . . . 17
Table 15. China’s Top 5 Latin American Import Partners: 2004-2006 . . . . . . . 18
Table 16. China’s Top Five Imports From Latin America: 2004-2006 . . . . . . . 18
Table 17. China’s Top 5 Latin American Export Markets: 2004-2006 . . . . . . . 18
Table 18. China’s Top 5 Imports From Latin America: 2004-2006 . . . . . . . . . . 19
Table 19. Major Chinese Exports to North Korea: 2003-2006 . . . . . . . . . . . . . 20
Table 20. Major Chinese Imports From North Korea: 2003-2006 . . . . . . . . . . . 20

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China’s Economic Conditions
The rapid rise of China as a major economic power within a time span of about
28 years is often described by analysts as one of the greatest economic success stories
in modern times. From 1979 (when economic reforms were first introduced) to
2006, China’s real gross domestic product (GDP) grew at an average annual rate of
over 9.7%. In 2006, real GDP it grew by about 11.1%. The Chinese economy in real
terms was 11 times larger in 2006 than it was in 1979, and real per capita GDP was
8 times larger. By some measurements, China is now the world’s second largest
economy and some analysts predict China could become the largest within a decade.
China’s economic rise has led to a substantial increase in U.S.-China economic
relations. Total trade between the two countries has surged from $5 billion in 1980
to an estimated $343 billion in 2006. For the United States, China is now its 2nd
largest trading partner (2006), its 4th largest export market, and its 2nd largest source
of imports. Many U.S. companies have extensive manufacturing operations in China
in order to sell their products in the booming Chinese market and to take advantage
of low cost labor for manufacturing products for export. These operations have
helped U.S. firms remain internationally competitive and have supplied U.S.
consumers with a variety of low cost goods. China’s large-scale purchases of U.S.
Treasury securities have enabled the Federal government to fund its budget deficits
and keep U.S. interest rates relatively low.
However, the emergence of China as a major economic superpower has raised
concern among many U.S. policymakers. Some express concern over the large and
growing U.S. trade deficits with China, which have risen from $10.4 billion in 1990
to $233 billion in 2006, and are viewed by many Members as an indicator that U.S.-
Chinese commercial relations are imbalanced or unfair. Others claim that China uses
unfair trade practices (such as an undervalued currency and subsidies to domestic
producers) to flood U.S. markets with low cost goods, and that such practices
threaten American jobs, wages, and living standards. Congressional concerns over
perceived negative China’s economic practices have led to the introduction of
numerous bills in the 110th Congress, some of which would impose restrictions on
imported Chinese products.
While most economists content China will continue to experience rapid
economic growth over the next several years, they note that it faces a number of
significant challenges, including a weak banking system, widening income gaps,
growing pollution, unbalanced economic growth (through over-reliance on exports),
and widespread economic efficiencies resulting from non-market policies.
This report provides background on China’s economic rise and current
economic structure and the challenges China faces to keep its economy growing
strong, and describes Chinese economic policies that are of concern to U.S.
policymakers.

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Most Recent Developments
! On July 11, 2007, China revised its estimate of 2006 real GDP
growth from 10.7% to 11.1%; it also reported that its foreign
exchange reserves topped $1.33 trillion at the end of June 2007.
! On July 10, 2007, the government reported that during the first six
five six months of 2007, exports surged by 29% while imports
increased by 18.3%, over the same period in 2006. The trade
surplus during this period hit $113 billion.
! On June 29, 2007, the Chinese National People’s Congress passed
a new contract labor law intended to improve labor rights and stop
abuses (such as unpaid labor and forced overtime). The law passed
two weeks after the Chinese media reported that government raids
had uncovered evidence that hundreds of people (including many
children) had been forced to work as virtual slaves in illegal brick
kilns and coal mines in northern China. China’s Xinhua News
Agency stated that reports of such abuses have “sparked a
nationwide outcry.”1
! On June 22, 2007, the Netherlands Environmental Assessment
Agency announced that, according to its estimates, China in 2006
became the world’s largest emitter of CO , surpassing the United
2
States by 8%.
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
1 Xinhua News Agency, July 9, 2007.

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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 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-Present
Since the introduction of economic reforms, China’s economy has grown
substantially faster than during the pre-reform period (see Table 1).2 From 1960 to
1978, real annual GDP growth was estimated at 5.3% (a figure many analysts claim
is overestimated, based on several economic disasters that befell the country during
this time, such as the Great Leap Forward from 1958-1960 and the Cultural
Revolution from 1966-1976). During the reform period (1979-the present), China’s
average annual real GDP grew by 9.7%; it grew by an estimated 10.7% in 2006 over
the previous year. Since economic reforms were begun, the size of the economy in
real terms has increased eleven-fold, and real per capita GDP (a common
measurement of living standards) has gone up eight-fold. Data for the first quarter
of 2007 indicate that real GDP grew by 11.1% over the previous period in 2006.
2 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%, and the overall size of the economy in 2004 was
estimated to be nearly 17% bigger.

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Table 1. China’s Average Annual Real GDP Growth: 1960-2007
Average annual
Time period
% growth
1960-1978 (pre-reform)
5.3
1979-2006 (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
2006 11.1
First Quarter 2007*
11.1
Source: Official Chinese government data and Economist Intelligence Unit.
* Percent change over same period in 2006.
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.

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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.
China’s Industrial Sector
China’s rapid economic growth has largely come from the expansion of its
industrial manufacturing. As seen in Table 2, the total value-added output of all
manufacturing rose by over 178% between 1995 and 2003. In 2003, the industries
with the largest value-added output were electrical machinery, industrial chemicals,
transport equipment, iron and steel, and non-electrical machinery (such as
computers). An important factor in China’s rapid economic rise has been the decline
of the state-owned or controlled enterprises relative to the private sector and foreign-
owned enterprises. Before the 1979 reforms, state-owned enterprises (SOEs)
accounted for about three-fourths of total industrial value-added output. In 2005, that
share had declined to about 38%. About 28% of the valued-added industrial output
came from foreign-invested firms in China and 18% from private Chinese
companies. The rest came from locally owned town and village enterprises and
various enterprises jointly owned by the state and private companies. According to
the Economist Intelligence Unit (EIU), the number of SOEs fell from 118,000 in
1995 to 27,477 in 2005.3 According to some estimates, Chinese SOEs have shed
over 60 million of workers since 1998. Many SOEs have been transferred into state
holding companies, which, while mainly state-owned, are run like private companies
(and many of which are listed in various stock exchanges overseas, including in the
United States).
According to the Organization for Economic Cooperation and Development
(OECD), the industries in China still dominated by SOEs (in 2003) include tobacco
processing (SOEs control 98.6% of value added output), petroleum and natural gas
extraction (93.8%), coal mining (81.4%), petroleum processing and coking (77.3%),
smelting and pressing of ferrous metals (63.1%), and transport equipment (63.1%).4
3 EIU, Business, Industry Overview, China Manufacturing, January 12, 2007.
4 OECD, OECD Economic Surveys, China, 2005, p. 39.

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Table 2. Major Chinese Industries Based on Value-Added
Output: 1995 and 2003
($ millions and % Change)
1995
2003
1995/2003
% change
Total manufacturing
148,059
411,846
178.2
Electrical machinery
14,834
66,521
348.4
Industrial chemicals
16,888
45,727
170.8
Transport equipment
9,641
35,000
263.0
Iron and steel
12,612
34,119
170.5
Non-electrical machinery
13,401
31,395
134.3
Food products
8,476
25,776
204.1
Textiles
10,758 23,036
114.1
Tobacco
7,335
19,010
159.2
Other non-metallic mineral products
10,776 16,334
51.6
(such as china, pottery, earthenware, and
glass products)
Petroleum refineries
6,721
15,554
131.4
Source: 2006 China Statistical Yearbook.
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 2006 is estimated at about $2.7 trillion; its per capita GDP (a commonly used
living-standards measurement) was $2,070. 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 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 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

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$2.7 trillion (nominal dollars) to $9.9 trillion (PPP dollars), significantly larger than
Japan’s GDP in PPPs ($4.0 trillion), and nearly three-fourths the size of the U.S.
economy. PPP data also raise China’s per capita GDP from $2,070 (nominal) to
$7,530. The PPP figures indicate that, while the size of China’s economy is
substantial, its living standards fall far below those of the U.S. and Japan. China’s
per capita GDP on a PPP basis was only 17% of U.S. levels. Thus, even if China’s
GDP were to overtake that of the United States in the next few decades, its living
standards would likely remain substantially below those of the United States for
many years to come.
Table 3. Comparisons of U.S., Japanese, and Chinese GDP and
Per Capita GDP in Nominal U.S. Dollars and PPP, 2006
Nominal GDP
GDP in PPP
Nominal Per
Per Capita
Country
($ billions)
($ billions)
Capita GDP
GDP in PPP
United States
13,247
13,247
44,244
44,244
Japan
4,365
3,963
34,247
31,095
China
2,720
9,904
2,070
7,530
Source: Economist Intelligence Unit.
Notes: 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.
Data do not reflect China’s GDP revisions made in July 2007.
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 about $70 billion
in 2006.5 The cumulative level of FDI in China at the end of 2006 stood at nearly
$698 billion, making China one of the world’s largest destinations of FDI.
Based on cumulative FDI for 1979-2006 about 40%of FDI in China has come
from Hong Kong, 8.3% from Japan, 8.2% from the British Virgin Islands,6 and 7.7%
from the United States (see Table 4). As of 2006, the United States was the 4th
5 In 2006, the Chinese government revised its 2005 FDI total from $60.3 billion to 72.4
billion, claiming previous estimates excluded FDI in the banking, insurance, and securities
sectors.
6 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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CRS-8
largest overall (cumulative) investor in China (at $54 billion).7 It was the 5th largest
investor for the year 2006 and accounted for 4.6% ($2.9 billion) of total. U.S. FDI
flows to China peaked at $5.4 billion in 2002, but have declined each year since. The
largest sector for FDI flows to China in 2006 was manufacturing, which accounted
for about 58% of total (see Table 5).
Table 4. Major Foreign Investors in China: 1979-2006
($ billions and % of total)
Cumulative Utilized FDI:
1979-2006
Utilized FDI in 2006
Country
Amount
% of Total
Amount
% of Total
Total
697.5
100.0
63.0
100.0
Hong Kong
279.7
40.1
20.2
32.1
Japan
57.9
8.3
4.6
7.3
British Virgin Islands
57.2
8.2
11.3
17.9
United States
54.0
7.7
2.9
4.6
Taiwan 44.0
6.3
2.2
2.1
South Korea
36.3
5.2
5.2
3.9
Source: Chinese government statistics. Top six investors according to cumulative FDI from 1979
to 2006. Data for 2006 do not reflect FDI in the financial sector (these were included for 2005 data
only and are reflected in cumulative totals).
Note: Chinese data on FDI differ significantly from that of investor countries.
Table 5. Foreign Direct Investment by Sectors in 2006
($ billions and % of total)
Utilized
Percent of
Sectors
FDI
Total
Total
$69.5 100%
Manufacturing
40.1
57.7
Real Estate Development
8.2
12.0
Financial Intermediation
6.7
9.6
Leasing and Business Services
4.2
6.0
Transport, Storage, Post, and Telecommunication Services
2.0
2.9
Source: Chinese National Bureau of Statistics.
7 According to the Chinese government , 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).

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China’s Trade Patterns
Economic reforms have transferred China into a major trading power. Chinese
exports rose from $14 billion in 1979 to $969 billion, while imports over this period
grew from $16 billion to $792 billion (see Table 6). In 2004, China surpassed Japan
as the world’s third-largest trading economy (after the European Union and the
United States ). China’s trade has grown dramatically in recent years, doubling in
size from 2003 to 2006. China’s trade surplus, which totaled $32 billion in 2004,
surged to $178 billion in 2006. In July 2007, the government reported that during the
first six months of 2007, exports surged by 29%, while imports increased by 18.3%,
over the same period in 2006. The trade surplus during this period hit $113 billion.
At this rate of growth, China’s merchandise exports in 2007 could exceed U.S.
exports for the first time.8
Table 6. China’s Merchandise World Trade, 1979-2006
($ billions)
Trade
Year
Exports
Imports
balance
1979
13.7
15.7
-2.0
1980
18.1
19.5
-1.4
1985
27.3
42.5
-15.3
1990
62.9
53.9
9.0
1995
148.8
132.1
16.7
2000 249.2
225.1
24.1
2001 266.2
243.6
22.6
2002 325.6
295.2
30.4
2003 438.4
412.8
25.6
2004
593.4
561.4
32.0
2005
762.0
660.1
101.9
2006 969.1
791.5
177.6
Source: International Monetary Fund, Direction of Trade Statistics,
and official Chinese statistics.
The rapid growth of China’s exports over the past few months indicates that
China may surpass the United States as the world’s second largest exporter in 2007.
As indicated in Table 7, Chinese exports in August, September, November, and
December 2006, and in January and April 2007, were larger than U.S. exports. From
January-May 2007, U.S. exports were 3.9% higher than Chinese exports. However,
during this period, U.S. exports were up by 10.8% (over the same period in 2006),
while Chinese exports were up by 27.8%.
8 U.S. total merchandise exports were $1,037.1 billion in 2006.

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Table 7. Monthly U.S. and Chinese Total Merchandise Exports:
August 2006-May 2007
($ billions)
2006
2007
Total
Jan-
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
May
2007
U.S.
89.3
88.4
92.4
91.2
89.2
85.8
85.0
100.1
91.8
97.9
460.6
China
90.7
91.6
88.1
95.8
94.1
86.6
82.1
83.4
97.5
94.1
443.5
Sources: USITC Dataweb and Chinese Ministry of Commerce.
Merchandise trade surpluses, large-scale foreign investment, and large purchases
of foreign currencies to maintain its exchange rate with the dollar and other
currencies have enabled China to accumulate the world’s largest foreign exchange
reserves. 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 $1,330
billion at the end of June 2007. During the first six months of 2007, reserves rose by
$266.3 billion, which was more than the amount of added reserves for the entire year
in 2006 ($247.3 billion).
Figure 1. China’s Foreign Exchange Reserves: 1996-June 2007
($ in billions)
$1400
$1330
$1200
$1066
$1000
$818.9
$800
$609.9
$600
$408.2
$400
$291.1
$215.6
$200
$132.8
$149.2
$157.7
$168.3
$107
0
1997
1999
2001
2003
2005
June 2007
1996
1998
2000
2002
2004
2006
Source: Official Chinese government data.
Note: End of year data unless otherwise specified.

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CRS-11
China’s Major Trading Partners
China’s trade data often differ significantly from those of its major trading
partners, especially with the United States. This is largely due to the large share of
China’s trade (both exports and imports) passing 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 2006 were the
European Union (EU),Hong Kong, the United States, Japan, and the 10 nations that
constitute the Association of Southeast Asian Nations (ASEAN) (see Table 8).
China’s largest export markets were the United States, the EU, and Hong Kong,
while its top sources for imports were Japan, Hong Kong, and the EU (the United
States ranked 7th). China maintained substantial trade surpluses with the United
States, the EU, and Hong Kong, but had large deficits with Taiwan, South Korea and
Japan. China reported that it had a $144 billion trade surplus with the United States
(U.S. data show that surplus at about $233 billion).
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 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 nearly 30.0% in 2006. 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
2006 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 large share
of the products made by such firms is likely exported to the United States.

---

CRS-12
Table 8. China’s Major Trading Partners: 2006
($ billions)
China’s
Chinese
Chinese
trade
Country
Total trade
exports
imports
balance
European Union
272.3
182.0
90.3
91.7
Hong Kong
262.8
155.4
107.4
48.0
United States
262.7
203.5
59.2
144.3
Japan 207.6
91.8
115.8
-24.0
ASEANa
160.8
71.3
89.5
-18.2
South Korea
134.5
44.5
89.8
-45.3
Taiwan
107.8
20.7
87.1
-66.4
Source: China Monthly Statistics.
Note: Chinese data on its bilateral trade often differ substantially from the official trade data of many
of its trading partners.
a. Association of Southeast Asian Nations (ASEAN) member countries are Indonesia, Malaysia, the
Philippines, Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar (Burma), and Vietnam.
Major Chinese Trade Commodities
China’s abundance of cheap labor (the average labor cost per hour in China was
$1.35, compared with $24.50 in the United States in 2006)9 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 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 10 exports and imports in 2006
are listed in Tables 9 and 10, respectively.10
9 EIU Industry Wire, April 4, 2007.
10 Based on the Harmonized Tariff Schedule, 4 digit level.

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CRS-13
Table 9. Top 10 Chinese Exports: 2006
As a % of
2006-2006
Exports
Total
Percent
HS #
Description
($billions)
Exports
Change (%)
Total Exports
969.3
100.0
27.2
8471
Automatic data processing
machines and units thereof;
magnetic or optical readers,
machines for transcribing and
processing coded data, NESOI
93.1
9.6
21.8
8525
Transmission apparatus for
radiotelephony, radiotelegraphy,
radio broadcasting or tv; tv
cameras; still image video
cameras and recorders
44.2
4.6
42.8
8473
Parts etc for typewriters & other
office machines
33.0
3.4
15.5
8529
Parts for television, radio and
radar apparatus
25.2
2.6
38.8
8542
Electronic integrated circuits and
micro-assemblies; parts thereof
21.6
2.2
47.6
9013
Liquid crystal devices nesoi;
lasers; opt appl; pt
13.8
1.4
20.8
8528
Television receivers, including
video monitors and video
projectors
13.0
1.3
54.2
6110
Sweaters, pullovers, vests etc,
knit or crocheted
12.9
1.3
36.7
6204
Women’s or girls’ suits,
ensembles, suit-type jackets,
dresses, skirts, divided skirts,
trousers, etc.
12.5
1.3
18.0
8517
Electric apparatus for line
telephony etc, parts
11.8
1.2
25.1
Source: World Trade Atlas.
Notes: Harmonized Tariff, four-digit level. NESOI means not elsewhere specified or included.

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CRS-14
Table 10. Top 10 Chinese Imports: 2006
2005-2006
Percent
Value
Percent of
Change
HS #
Description
($billions)
Total (%)
(%)
Total
791.8
100.0
19.9
8542
Electronic integrated circuits and
micro-assemblies; parts thereof
107.2
13.5
30.4
2709
Crude oil from petroleum and
bituminous minerals
66.4
8.4
38.7
9013
Liquid crystal devices NESOI;
lasers; optical appliances and
instruments NESOI; parts and
accessories thereof
35.9
4.5
17.3
2601
Iron ores & concentrates
20.8
2.6
13.6
8471
Automatic data processing machines
and units thereof; magnetic or
optical readers, machines for
transcribing and processing coded
data, NESOI
19.9
2.5
10.6
8529
Parts for television, radio and radar
apparatus
19.7
2.5
18.8
8473
Parts etc for typewriters & other
office machines
19.1
2.4
16.3
2710
Oil (not crude) from petrol &
bituminous mineral etc.
15.6
2.0
49.0
8541
Diodes, transistors and similar
devices; photosensitive
semiconductor devices;
light-emitting diodes; mounted
piezoelectric crystals; parts thereof
13.2
1.7
17.1
8479
Machines and mechanical
appliances having individual
functions, NESOI, and parts
10.0
1.3
16.4
Source: World Trade Atlas.
Notes: Harmonized Tariff, four-digit level. NESOI means not elsewhere specified or included.

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CRS-15
China’s Growing Trade with Africa and Latin America11
China has sought to expand its trade with countries around the world, especially
those that posses energy and raw materials China needs to sustain its rapid economic
growth, such as those in Africa and Latin America. Although China’s trade with
these countries is relatively small, it is growing rapidly and at a faster clip than its
total trade with the world. Many Members of Congress have expressed concern over
China’s growing economic influence in Africa and Latin America.
Africa. China’s imports from Africa as a percent of its total imports grew from
2.8% in 2004 to 3.6% in 2006 (to $28.8 billion).12 China’s imports from Africa grew
by 36.2% over the previous year (compared to total Chinese imports growth of
19.9%). Mineral fuel was by far China’s largest import from Africa, accounting for
73.3% of total imports.13 Angola was China’s largest source of imports from Africa,
accounting for 37.9% of those imports in 2006, followed by South Africa, the Congo,
Equatorial Guinea, and Sudan (see Tables 11 and 12).
The share of Chinese exports going to Africa rose from 2.3% in 2004 to 2.8%
in 2006 (to $26.7 billion).14 Exports to Africa grew by 42.9% over the previous year
(compared to China’s total exports which rose by 27.1%). Major exports to Africa
in 2006 included electrical machinery, machinery (such as computers and
components), vehicles (mainly motorcycles and trucks), apparel, and iron and steel
products. The top 5 African destinations of Chinese exports in 2006 were South
Africa, Egypt, Nigeria, Algeria, and Morocco (see Tables 13 and 14).
11 See CRS Report RS22119, China’s Growing Interest in Latin America, by Kerry
Dumbaugh and Mark P. Sullivan; and CRS Report RL33055, China and Sub-Saharan
Africa, by Raymond W. Copson, Kerry Dumbaugh, and Michelle Weijing Lau.
12 In comparison, U.S. imports from Africa in 2006 were $80.4 billion. Note, the United
States reports import trade data on a customs basis, while China reports imports on a cost,
insurance, and freight (C.I.F.) basis. The C.I.F. basis differs from the customs basis in that
the former includes the cost of insurance and freight and thus raises the value of imports
(which the customs basis does not), by about 10%.
13 In 2006, 23.7% of China’s mineral fuel imports (and 31.6% of its crude oil imports) came
from Africa.
14 In comparison, total U.S. exports to Africa in 2006 were only $19.0

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CRS-16
Table 11. Top 5 African Sources of Chinese Imports: 2004-2006
($ millions)
2005-2006 %
2004
2005
2006
change
Africa total
15,640.9
21,114.1
28,767.6
36.3
Angola
4,717.7
6,580.7
10,930.9
66.1
South Africa
2,955.3
3,443.6
4,095.3
18.9
Congo
1,568.9
2,278.0
2,784.6
22.2
Equatorial Guinea
995.3
1,486.1
2,537.6
70.8
Sudan
1,705.5
2,614.7
1,941.4
-25.8
Source: World Trade Atlas. Official Chinese statistics.
Table 12. Top Five Chinese Imports from Africa: 2004-2006
($ millions and %)
Percent
2005-
HS 2 Commodity
2004
2005
2006
of Total
2006 %
Description
2006
change
Mineral fuel, oil etc
10,135.3
14,676.2
21,083.3
73.3
43.7
Ores, slag, ash
1,393.4
1,577.2
2,115.7
7.4
34.1
Precious stones and
metals
742.4 967.1
1,196.2
4.2
23.7
Cotton+Yarn
fabric
663.0 678.4 727.6
2.5
7.2
Wood
472.5 523.9 704.7
2.4
34.5
Source: World Trade Atlas. Official Chinese statistics.
Table 13. China’s Top 5 Export Markets: 2004-2006
($ millions)
2005-2006
Country
2004
2005
2006
% Change
Africa total
13,815.1
18,686.8
26,704.9
42.9
South Africa
2,951.9
3,825.9
5,768.8
50.8
Egypt
1,389.0
1,935.3
2,976.3
53.8
Nigeria
1,719.3
2,305.3
2,855.7
23.9
Algeria
980.5
1,404.7
1,951.6
38.9
Morocco
944.3
1,206.0
1,569.6
30.2
Source: World Trade Atlas. Official Chinese statistics.

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CRS-17
Table 14. Top 5 Chinese Exports to Africa: 2004-2006
($ millions)
Percent
HS 2 Commodity
2005- 2006
2004
2005
2006
of total
Description
% change
2006
Electrical machinery and
1,905.3
2,799.3
4,122.3
15.4
47.3
parts*
Machinery, mechanical
1,373.7
2,140.9
3,220.1
12.1
50.4
appliances, and parts
Vehicles (excluding
935.5
1,448.3
2,023.4
7.6
39.7
railway)
Knit apparel
828.3
937.8
1,536.9
5.8
63.9
Iron/steel products
653.6
903.3
1,225.4
4.6
35.7
Source: World Trade Atlas. Official Chinese statistics.
*Includes, electrical machinery and equipment and parts thereof; sound recorders and reproducers,
television image and sound recorders and reproducers, and parts and accessories of such articles.
Latin America. The share of China’s imports from Latin America rose from
3.5% in 2004 to 4.0% in 2006 (to $31.4 billion).15 Chinese imports from Latin
America rose by 28.9% in 2006 over the previous year. China’s top 5 import
partners in 2006 were Brazil (which accounted for 41.0% of total), Chile, Argentina,
Peru, and Venezuela. China’s top 5 import commodities from the region were ores,
grains (mainly soybeans), mineral fuel (which rose by over 190% in 2006), cooper
articles, and electrical machinery (mainly printed circuits) (see Tables 15 and 16).
The share of Chinese exports going to Latin America rose from 2.2% in 2004
to 2.8% in 2006. Chinese exports to the region rose by 50.2% over the previous year
(to $26.9 billion).16 China’s top 5 Latin American export markets were Brazil
(which accounted for 27.4% of imports), Panama, Chile, Argentina, and Venezuela.
China’s top 5 exports to Latin America were electrical machinery, machinery (such
as computers), apparel,vehicles, and organic chemicals (see Tables 17 and 18).
15 U.S. imports from Latin America in 2006 were $133.7 billion.
16 U.S. exports to Latin America in 2006 were $89.0 billion.

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CRS-18
Table 15. China’s Top 5 Latin American Import Partners:
2004-2006
($ millions)
2005-2006
Country
2004
2005
2006
% Change
Latin America total
19,519.4
24,361.6
31,393.1
28.9
Brazil
8,656.1
9,981.8
12,907.2
29.3
Chile
3,672.0
4,942.7
5,688.9
15.1
Argentina
3,255.5
3,799.7
3,696.2
-2.7
Peru
1,523.1
2,264.7
2,875.4
27.0
Venezuela
738.3
1,230.7
2,651.4
115.4
Source: World Trade Atlas. Official Chinese statistics.
Table 16. China’s Top Five Imports From Latin America:
2004-2006
($ millions)
Percent
2005-2006
HS 2 Commodity
2004
2005
2006
of total in
Percent
Description
2006
Change
Ores, slag, ash
4,979.3
7,533.9
10,031.5
32.0
33.2
Misc, grain, seed, fruit
3,614.2
4,625.5
4,783.2
15.2
3.4
Mineral fuel, oil etc
1,026.3
1,624.6
4,712.4
15.0
190.1
Copper+articles thereof
2,185.1
2,400.4
2,442.1
7.8
1.7
Electrical machinery &
697.2
975.9
1,839.8
5.9
88.5
parts
Source: World Trade Atlas. Official Chinese statistics.
Table 17. China’s Top 5 Latin American Export Markets:
2004-2006
($ millions)
2005-2006
Country
2004
2005
2006
%change
Latin America
13,163.2
17,940.8
26,945.0
50.2
Brazil
3,675.1
4,829.3
7,380.3
52.8
Panama
2,186.7
3,151.4
3,868.3
22.8
Chile
1,690.2
2,150.7
3,110.0
44.6
Argentina
852.0
1,325.5
2,003.3
51.1
Venezuela
595.6
907.9
1,699.1
87.2
Source: World Trade Atlas. Official Chinese statistics.

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CRS-19
Table 18. China’s Top 5 Imports From Latin America: 2004-2006
($ millions)
Percent
2005-
HS 2 Commodity
2004
2005
2006
of total
2006 %
description
2006
change
Electrical machinery and
2,150.7
3,286.0
5,381.6
20.0
63.8
parts
Machinery
1,270.1
2,023.7
3,489.2
13.0
72.4
Woven and knit apparel*
1,605.9
2,027.8
2,665.8
9.9
31.5
Vehicles (excluding
470.2
863.8
1,563.8
5.8
81.0
railway)
Organic Chemicals
569.7
733.6
1,047.7
3.9
42.8
Source: World Trade Atlas. Official Chinese statistics.
*Combines HS61 (woven apparel) and HS62 (knit apparel).
China’s Trade with North Korea
North Korea’s nuclear test on October 9, 2006, has led many U.S. policymakers
to call on China to impose economic sanctions against its neighbor in response to its
nuclear activities. China is North Korea’s largest trading partner and a major
supplier of foreign aid (largely in the form of food and fuel).17 In 2005, Chinese
exports to, and imports from, North Korea totaled $1.1 billion and $497 million,
respectively. China accounted for 37.3% of North Korea’s exports and 39.8% of its
imports. However, North Korea was China’s 57th largest export market (0.14% of
total) and its 59th largest source of its imports (0.08% of total).
Preliminary Chinese data for 2006 indicate that its imports from North Korea
fell by 5.8%, to $468 million, over the same period in 2005, while its exports rose by
13.6%, to $1.2 billion. North Korea’s ranking for Chinese imports and exports in
2006 fell to 64th and 65th, respectively. According to Chinese data, its top five exports
to North Korea (2006) were oil, meat, electrical machinery (such as TVs), machinery,
and plastics (see Table 19), while its top imports from North Korea were ores, coal,
woven apparel, fish, and iron and steel (see Table 20).
17 See CRS Report RL31785, Foreign Assistance to North Korea, by Mark E. Manyin; and
CRS Report RL32493, The North Korean Economy: Background and Policy Analysis, by
Dick K. Nanto and Emma Chanlett-Avery.

---

CRS-20
Table 19. Major Chinese Exports to North Korea: 2003-2006
($ millions and % change)
2005-/2006
2003
2004
2005
2006
% change
Total Exports
628.0
794.5
1,084.7
1,231.9
13.6
Mineral fuel, oil, etc.
180.7
204.4
285.7
347.5
21.6
(mainly oil)
Meat (mainly pork)
63.6
140.6
104.2
118.9
7.3
Electrical machinery (such
39.6
45.8
56.6
97.6
72.5
as TVs)
Machinery
27.0
39.6
77.1
83.0
7.8
Plastics
24.6
32.0
52.2
52.0
-0.4
Source: World Trade Atlas.
Table 20. Major Chinese Imports From North Korea: 2003-2006
($ millions and % change)
2005-2006
2003
2004
2005
2006
% change
Total Imports
395.5
582.2
496.5
467.7
-5.8
Ores, slag, and ash
15.0
58.9
92.3
118.4
28.3
Mineral fuel, oil, etc. (mainly
17.2
53.0
112.2
102.3
-8.8
coal)
Woven apparel
52.2
49.1
58.3
63.3
8.6
Fish and seafood
206.9
261.2
92.4
43.2
-53.2
Iron and steel
46.8
75.0
72.2
35.2
-51.2
Source: World Trade Atlas.
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.

---

CRS-21
! An inflexible currency policy. China does not allow its currency
to float and therefore must make large-scale purchases of dollars to
keep the exchange rate within certain target levels. Although the
yuan has appreciated someone since reforms were introduced in July
2005, analysts contend that it remains highly undervalued against the
dollar. Economists warn that China’s currency policy has made the
economy overly dependent on exports and fixed investment for
growth and has promoted easy credit policies by the banks. These
policies may undermine long-term economic stability by causing
overproduction in various sectors; they could increase the level of
non-performing loans held by the banks (see below) and could also
lead to inflationary pressures.18
! 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. 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.
! Growing public unrest. The Chinese government reported that
there were over 87,000 protests (many of which became violent) in
2005 (compared with 53,000 protests in 2003) over such issues as
18 For further information on the economic consequences of China’s currency policy, see
CRS Report RL32165, China’s Currency: Economic Issues and Options for U.S. Trade
Policy, by Wayne M. Morrison and Marc Labonte.

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CRS-22
pollution, government corruption, and land seizures.19 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.20
! 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. In addition, China’s poor regulation of health and safety
standards has raised serious concerns, both in China and abroad,
over the quality and safety of its food and consumer products.
Recent reports of slave labor in northern China has also raised public
anger over the lack of enforcement of labor laws.
! Growing pollution. The level of pollution in China continues to
worsen, posing series health risks to the population. The Chinese
government often disregards its own environmental laws in order to
promote rapid economic growth. According to the World Bank, 20
out of 30 of the world’s most polluted cities are in China, with
significant costs to the economy (such as health problems, crop
failures and water shortages). According to one government
estimate, environmental damage costs the country $226 billion, or
10% of the country’s GDP, each year. The Chinese government
estimates that there are over 300 million people living in rural areas
that drink unsafe water (caused by chemicals and other
contaminants). Toxic spills in 2005 and 2006 threatened the water
supply of millions of people.
19 See CRS Report RL33416, Social Unrest in China, by Thomas Lum.
20 China’s Human Development Report 2005.

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CRS-23
In October 2006, the Chinese government formally outlined its goal of building
a “harmonious socialist society” by taking steps (by 2020) to lessen income
inequality, improve the rule of law, beef up environmental protection, reduce
corruption, and improve the country’s social safety net (such as expanding health care
and pension coverage to rural areas). In March 2007, the Chinese National People’s
Congress (NPC) passed a law to strengthen property laws to help prevent local
governments from unfairly seizing land from farmers, and in June it passed a new
labor contract law to enhance labor rights. In addition, the government has
scrambled to improve health and safety laws and regulations.
Outlook for China’s Economy and Implications
for the United States21
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, increase the
flexibility of its exchange rate policy, 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 7.8% over
the next 10 years, indicating that China could double the size of its economy in less
than 10 years. Real GDP is projected to rise by 10.5% in 2007.22 China’s
merchandise exports will likely exceed those of the United States in 2007.
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 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
21 For further discussion of this issue, see CRS Report RL33604, Is China a Threat to the
U.S. Economy?, by Craig K. Elwell, Marc Labonte, and Wayne Morrison.
22 Global Insight, China: Interim Forecast Analysis: Economic Growth, May 23, 2007.

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floating exchange rate regime as soon as possible, contending that such a move
would benefit China’s economy and those of its trading partners.23 For example,
China’s accumulation of large foreign exchange reserves has forced it to increase the
money supply, which may eventually lead to inflationary pressures on the economy.
In addition, many analysts contend that easy money policies have led to over-
investment in certain economic sectors. However, Chinese officials have expressed
concern that further currency reforms, if implemented too quickly, could prove
disruptive to the economy. China announced on June 12th, 2007, that the consumer
price index in May rose by 3.4%, over the same period in 2006, an indicator that
inflation may be becoming a problem. In addition, the government reported that
China’s trade surplus for January-June totaled $113 billion, indicating China’s
surplus for the full year could be well over $200 billion. A number of bills have been
introduced in the 110th Congress to address Chinese currency policy, including some
that would impose sanctions against China unless it appreciated its currency to
market levels.
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. 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 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 6.9 million barrels per day (bpd) in 2006, and that level is projected to rise
to 13.4 million bpd by 2025.24 The U.S. Energy Information Administration (EIA)
predicted that nearly 40% of world oil demand growth in 2006 would come from
China.25 China’s net oil imports in 2006 totaled 2.8 million bpd (up 16.8% over the
previous year) and those imports are projected to rise to 10.9 million bpd by 2030.
China’s energy needs has become a central part of its foreign policy.
Obtaining energy supplies has become a major focus of China’s foreign policy.
This has increased concerns among U.S. policymakers for a number of reasons.
First, China is becoming increasingly dependent on oil producers in the Persian Gulf
region. Currently, China gets about 32% of its oil imports from the region, but by
2030, that level is projected to rise to 53%. This could induce China to become
increasingly involved in Middle East affairs. In addition, China is actively involved
in gaining greater access to energy in Africa, where it gets nearly a third of its oil
23 For a discussion of this issue, see CRS Report RS21625, China’s Currency: A Summary
of the Economic Issues, by Wayne M. Morrison and Marc Labonte.
24 Global Insight, Global Petroleum Outlook Forecast Tables (Long-Term), January 2005.
25 U.S. Energy Information Administration website at [http://www.eia.doe.gov/].

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imports. Angola was China’s 2nd largest source of oil in 2006. China has reportedly
invested $8 billion in Sudan’s energy sector. Second, instead of just buying oil in
international markets, China has increasingly sought to purchase or invest in foreign
oil companies, production facilities, pipelines, oil fields, and refineries around the
world.26 Finally, China’s thirst for oil has led it to obtain agreements with countries
the United States has major human rights and foreign policy concerns with (such as
Iran and Sudan). Many U.S. policymakers are concerned that China’s energy needs
will lead it to oppose U.S. foreign policy objectives and that this could result in
increased tensions between the United States and China.
A growing concern over China’s energy use and rising demand is the possible
global environmental consequences. According to one estimate, one-third of the air
pollution in the West Coast of the United States comes from China.27 China’s
pollution levels are expected to significantly worsen. For example, according to the
U.S. Energy Information Administration (EIA), China in 2004 was the world’s
second-largest emitter of carbon dioxide (CO ) emissions (at 4.7 billion metric tons)
2
after the United States, and constituted 17% of total world emissions (comparted to
22% for the United States). EIA predicts that by the year 2010, China will become
the world’s largest emitter, and that by the year 2030, China’s emissions will be 41%
greater than U.S. levels.28 The Netherlands Environmental Assessment Agency
estimates that China became the largest CO emitter in 2006.29
2
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
$420.2 billion at end of March 2007. China’s U.S. Treasury securities holdings as
a share of total foreign holdings over this period have grown from 4.1% to 28.7%.
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.
26 See the National Bureau of Asian Research, China’s Search for Energy Security:
Implications for the United States, by Kenneth Lieberthal and Mikkal Herberg April 2006.
27 The Aspen Institute, U.S.-China Relations, Eight Conference (April 9-15, 2006), China
Energy Issues, by Hal Harvey, M.S., p. 15.
28 EIA, Country Background, China, Environment, August 2006.
29 The Netherlands Environmental Assessment Agency, Chinese CO2 emissions in
Perspective: Country Intercomparison of CO2 Emissions, June 22, 2007, available at
[http://www.mnp.nl/en/index.html].

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