China’s Economic Conditions
Wayne M. Morrison
Specialist in Asian Trade and Finance
June 26, 2012
Congressional Research Service
7-5700
www.crs.gov
RL33534
CRS Report for Congress
Pr
epared for Members and Committees of Congress

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China’s Economic Conditions

Summary
Prior to the initiation of economic reforms and trade liberalization 33 years ago, China
maintained policies that kept the economy very poor, stagnant, centrally controlled, vastly
inefficient, and relatively isolated from the global economy. Since opening up to foreign trade and
investment and implementing free market reforms in 1979, China has been among the world’s
fastest growing economies, with real annual gross domestic product (GDP) averaging nearly10%
through 2011. In recent years, China has emerged as a major global economic and trade power. It
is currently the world’s second largest economy, largest merchandise exporter, second largest
merchandise importer, second largest destination of foreign direct investment (FDI), largest
manufacturer, largest holder of foreign exchange reserves, and largest creditor nation.
The global economic crisis that began in 2008 significantly affected China’s economy. China’s
exports, imports, and FDI inflows declined, GDP growth slowed, and millions of Chinese
workers reportedly lost their jobs. The Chinese government responded by implementing a $586
billion economic stimulus package, loosening monetary policies to increase bank lending, and
providing various incentives to boost domestic consumption. Such policies enabled China to
effectively weather the effects of the sharp global fall in demand for Chinese products, while
several of the world’s leading economies experienced negative or stagnant economic growth.
From 2008 to 2011, China’s real GDP growth averaged 9.6%.
Some economic forecasters project that China will overtake the United States as the world’s
largest economy within a few years, although U.S. per capita GDP levels are expected to remain
much larger than that of China for many years to come. However, the ability of China to maintain
a rapidly growing economy in the long run will depend largely on the ability of the Chinese
government to implement comprehensive economic reforms that more quickly hasten China’s
transition to a free market economy; rebalance the Chinese economy by making consumer
demand, rather than exporting and fixed investment, the main engine of economic growth; and
boosting productivity and innovation. China faces numerous other challenges as well that could
affect its future economic growth, such as widespread pollution, growing income disparities, an
undeveloped social safety net, and extensive involvement of the state in the economy. The
Chinese government has acknowledged that its current economic growth model needs to be
altered. In October 2006, the Chinese government formally outlined a goal of building a
“harmonious socialist society” by taking steps (by 2020) to lessen income inequality, improve the
rule of law, enhance environmental protection, reduce corruption, and improve the country’s
social safety net (such as expanding health care and pension coverage to rural areas). In addition,
the government announced plans to rebalance the economy and boost innovation.
China’s economic rise has significant implications for the United States and hence is of major
interest to Congress. On the one hand, China is a large (and potentially huge) export market for
the United States. Many U.S. firms use China as the final point of assembly in their global supply
chain networks. China’s large holdings of U.S. Treasury securities help the federal government
finance its budget deficits and keep U.S. interest rates low. However, some analysts contend that
China maintains a number of distortive economic policies (such as an undervalued currency and
protectionist industrial policies) that undermine U.S. economic interests. They warn that efforts
by the Chinese government to promote innovation could mean that Chinese firms will
increasingly pose a “competitive challenge” to many leading U.S. industries. This report surveys
the rise of China’s economy, describes major economic challenges facing China, and discusses
the challenges, opportunities, and implications of China’s economic rise for the United States.
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Contents
The History of China’s Economic Development ............................................................................. 2
China’s Economy Prior to Reforms........................................................................................... 2
The Introduction of Economic Reforms.................................................................................... 2
China’s Economic Growth Since Reforms: 1979-2012............................................................. 3
Causes of China’s Economic Growth........................................................................................ 5
Measuring the Size of China’s Economy......................................................................................... 8
Foreign Direct Investment (FDI) in China..................................................................................... 10
China’s Growing FDI Outflows..................................................................................................... 15
China’s Merchandise Trade Patterns.............................................................................................. 17
China’s Major Trading Partners............................................................................................... 21
Major Chinese Trade Commodities......................................................................................... 22
China’s Growing Appetite for Energy ..................................................................................... 24
China’s Regional and Bilateral Free Trade Agreements.......................................................... 25
Major Long-Term Challenges Facing the Chinese Economy........................................................ 26
China’s Incomplete Transition to a Market Economy ............................................................. 26
Industrial Policies and SOEs ............................................................................................. 26
The Banking System ......................................................................................................... 27
An Undervalued Currency ................................................................................................ 27
Implications of China’s “Unbalanced” Economic Growth Model .......................................... 28
Overdependence on Exporting and Fixed Investment....................................................... 28
Growing Pollution............................................................................................................. 30
Other Challenges............................................................................................................... 31
Plans Announced by the Chinese Government to Reform and Restructure the Economy ............ 32
The Central Government Five-Year Plans............................................................................... 32
The Drive for “Indigenous Innovation”................................................................................... 33
Challenges to U.S. Policy of China’s Economic Rise ................................................................... 34

Figures
Figure 1. Average Real GDP Growth Among Major Global Economies: 2008-2011 ..................... 5
Figure 2. Comparison of Annual Changes in Total Factor Productivity in China and the
United States: 2000-2011.............................................................................................................. 7
Figure 3. Projections of U.S. and Chinese Annual Real GDP Growth: 2012-2030......................... 8
Figure 4. Chinese and U.S. GDP as a Percent of Global Total: 1990-2011 and Projections
through 2016............................................................................................................................... 10
Figure 5. Industrial Output by Foreign-Invested Firms in China as a Share of National
Total: 1990-2010......................................................................................................................... 11
Figure 6. Share of China’s Exports and Imports Attributed to Foreign-Invested
Enterprises in China: 1990-2012* .............................................................................................. 12
Figure 7. Annual FDI Flows to China: 1985-2011 ........................................................................ 13
Figure 8. Major Recipients of Global FDI Inflows in 2011........................................................... 13
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Figure 9. Annual U.S. FDI Flows to China: 1985-2011 ................................................................ 14
Figure 10. China’s Annual FDI Outflows: 2002-2011................................................................... 16
Figure 11. Major Sources of Global FDI Outflows in 2011 .......................................................... 17
Figure 12. China’s Merchandise Trade: 2000-2011....................................................................... 19
Figure 13. Annual Change in China’s Merchandise Exports and Imports: 1990-2011.................. 19
Figure 14. Merchandise Exports by China, Germany and the United States: 1990-2011 ............. 20
Figure 15. Merchandise Imports by China, Germany, and the United States: 1990-2011............. 20
Figure 16. China’s Global Share of Merchandise Exports: 1990-2011 ......................................... 21
Figure 17. China’s Net Oil Imports: 1997-2011 ............................................................................ 25
Figure 18. Chinese Gross Savings, Gross Fixed Investment, and Private Consumption as
a Percent of GDP: 1990-2011..................................................................................................... 29
Figure 19. Chinese Disposable Personal Income as a Percent of GDP: 2000-2011 ...................... 30
Figure 20. Current Account Balances as a Percent of GDP for China and the United
States: 2000-2011 ....................................................................................................................... 35
Figure 21. Sources of China’s GDP Growth: 2007-2011............................................................... 36

Tables
Table 1. China’s Average Annual Real GDP Growth: 1979-2012 ................................................... 4
Table 2. Comparisons of Chinese, Japanese, and U.S. GDP and Per Capita GDP in
Nominal U.S. Dollars and a Purchasing Power Parity Basis: 2011............................................ 10
Table 3. Major Sources of FDI in China: 1979-2011..................................................................... 14
Table 4. China’s Merchandise World Trade: 1979-2011................................................................ 18
Table 5. China’s Major Trading Partners in 2011 .......................................................................... 22
Table 6. Major Chinese Exports: 2011........................................................................................... 23
Table 7. Major Chinese Imports: 2011........................................................................................... 23

Contacts
Author Contact Information........................................................................................................... 37

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he rapid rise of China as a major economic power within a time span of about three
decades is often described by analysts as one of the greatest economic success stories in
T modern times. From 1979 (when economic reforms began) to 2011, China’s real gross
domestic product (GDP) grew at an average annual rate of nearly 10%.1 From 1980 to 2011, real
GDP grew 19-fold in real terms, real per capita GDP increased 14-fold, and an estimated 500
million of people were raised out of extreme poverty. China is now the world’s second largest
economy and some analysts predict it could become the largest within a few years. Yet, on a per
capita basis, China remains a relatively poor country.
China’s economic rise has led to a substantial increase in U.S.-China economic ties. According to
U.S. trade data, total trade between the two countries surged from $5 billion in 1980 to $503
billion in 2011. China is currently the United States’ second largest trading partner, its third
largest export market, and its largest source of imports. Many U.S. companies have extensive
operations in China in order to sell their products in the booming Chinese market and to take
advantage of lower-cost labor for export-oriented manufacturing.2 These operations have helped
some U.S. firms to remain internationally competitive and have supplied U.S. consumers with a
variety of low-cost goods. China’s large-scale purchases of U.S. Treasury securities (which
totaled nearly $1.2 trillion at the end of 2011) have enabled the federal government to fund its
budget deficits, which help keep U.S. interest rates relatively low.
However, the emergence of China as a major economic superpower has raised concern among
many U.S. policymakers. Some claim that China uses unfair trade practices (such as an
undervalued currency and subsidies given to domestic producers) to flood U.S. markets with low-
cost goods, and that such practices threaten American jobs, wages, and living standards. Others
contend that China’s growing use of industrial policies to promote and protect certain domestic
Chinese industries firms favored by the government, and its failure to take effective action against
widespread infringement of U.S. intellectual property rights (IPR) in China, threaten to
undermine the competitiveness of U.S. IP-intensive industries. In addition, while China has
become a large and growing market for U.S. exports, critics contend that numerous trade and
investment barriers limit opportunities for U.S. firms to sell in China, or force them to set up
production facilities in China as the price of doing business there. Other concerns relating to
China’s economic growth include its growing demand for energy and raw materials and its
emergence as the world’s largest emitter of greenhouse gasses.
The Chinese government views a growing economy as vital to maintaining social stability.
However, China faces a number of major economic challenges which could undermine future
growth, including distortive economic policies that have resulted in over-reliance on fixed
investment and exports for economic growth (rather than on consumer demand), government
support for state-owned firms, a weak banking system, widening income gaps, growing pollution,
and the relative lack of the rule of law in China. Many economists warn that such problems could
undermine China’s future economic growth. The Chinese government has acknowledged these
problems and has pledged to address them by implementing policies to boost consumer spending,
expand social safety net coverage, and encourage the development of less-polluting industries.

1 The beginning of China’s economic reform process began in December 1978 when the Third Plenum of the Eleventh
Central Committee of the Communist Party adopted Deng Xiaoping’s economic proposals. Implementation of the
reforms began in 1979.
2 Some companies use China as part of their global supply chain for manufactured parts, which are then exported and
assembled elsewhere. Other firms have shifted the production of finished products from other countries (mainly in
Asia) to China; they import parts and materials into China for final assembly.
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This report provides background on China’s economic rise, describes its current economic
structure, identifies the challenges China faces to keep its economy growing strong, and discusses
the challenges, opportunities, and implications of China’s economic rise for the United States.
The History of China’s Economic Development
China’s Economy Prior to Reforms
Prior to 1979, China, under the leadership of Chairman Mao Zedong, maintained a centrally
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 (SOEs), according to centrally planned output
targets. Private enterprises and foreign-invested firms were generally barred. A central goal of the
Chinese government was to make China’s economy relatively self-sufficient. Foreign trade was
generally limited to obtaining only those goods that could not be made or obtained in China.
Government policies kept the Chinese economy relatively stagnant and inefficient, mainly
because most aspects of the economy were managed and run by the central government (and thus
there were few profit incentives for firms, workers, and farmers), competition was virtually
nonexistent, foreign trade and investment flows were mainly limited to Soviet bloc countries, and
price and production controls caused widespread distortions in the economy. Chinese living
standards were substantially lower than those of many other developing countries. The Chinese
government in 1978 (shortly after the death of Chairman Mao in 1976) decided to break with its
Soviet-style economic policies by gradually reforming the economy according to free market
principles and opening up trade and investment with the West, in the hope that this would
significantly increase economic growth and raise living standards. As Chinese leader Deng
Xiaoping, the architect of China’s economic reforms, put it: “Black cat, white cat, what does it
matter what color the cat is as long as it catches mice?”3
The Introduction of Economic Reforms
Beginning in 1979, China launched several economic reforms. The central government initiated
price and ownership incentives for farmers, which enabled them to sell a portion of their crops on
the free market. In addition, the government established four special economic zones along the
coast for the purpose of attracting foreign investment, boosting exports, and importing high
technology products into China. Additional reforms, which followed in stages, sought to
decentralize economic policymaking in several sectors, especially trade. Economic control of
various enterprises was given to provincial and local governments, which were generally allowed
to operate and compete on free market principles, rather than under the direction and guidance of

3 This reference appears to have meant that it did not matter whether an economic policy was considered to be capitalist
or socialist, what really mattered was whether that policy boosted the economy.
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state planning. In addition, citizens were encouraged to start their own businesses. Additional
coastal regions and cities were designated as open cities and development zones, which allowed
them to experiment with free market reforms and to offer tax and trade incentives to attract
foreign investment. In addition, state price controls on a wide range of products were gradually
eliminated. Trade liberalization was also a major key to China’s economic success. Removing
trade barriers encouraged greater competition and attracted foreign direct investment (FDI)
inflows.4 China’s gradual implementation of economic reforms sought to identify which policies
produced favorable economic outcomes (and which did not) so that they could be implemented in
other parts of the country, a process Deng Xiaoping reportedly referred to as “crossing the river
by touching the stones.”5
China’s Economic Growth Since Reforms: 1979-2012
Since the introduction of economic reforms, China’s economy has grown substantially faster than
during the pre-reform period (see Table 1). According to the Chinese government, from 1953 to
1978, real annual GDP growth was estimated at 6.7%,6 although many analysts claim that
Chinese economic data during this period are highly questionable because government officials
often exaggerated production levels for a variety of political reasons.7 Agnus Maddison estimates
China’s average annual real GDP during this period at 4.4%.8
China’s economy suffered economic downturns during the leadership of Chairman Mao Zedong,
including during the Great Leap Forward from 1958-1960 (which led to a massive famine and
reportedly the death of tens of millions of people) and the Cultural Revolution from 1966-1976
(which caused political chaos and greatly disrupted the economy). During the reform period
(1979-2011), China’s average annual real GDP grew by 9.9%. This essentially has meant that, on
average China has been able to double the size of its economy in real terms every eight years.
The global economic slowdown, which began in 2008, impacted the Chinese economy (especially
the export sector). China’s real GDP growth fell from 14.2% in 2007 to 9.6% in 2008 to 9.2% in
2009. In response, the Chinese government implemented a large economic stimulus package and
an expansive monetary policy. These measures boosted domestic investment and consumption
and helped prevent a sharp economic slowdown in China. In 2010, China’s real GDP grew by
10.4%, and in 2011 it rose by 9.2%. During the first quarter of 2012, real GDP growth was 8.1%
on a year-on-year basis.

4 For example, China’s accession to the World Trade Organization in December 2001, which required it to reduce a
wide range of trade and investment barriers, helped to accelerate GDP growth and led to a sharp increase in FDI flows
to China.
5 Many analysts contend that Deng’s push to implement economic reforms was largely motivated by a belief that the
resulting economic growth would ensure that the Communist Party stayed in power.
6 Chinability, GDP Growth in China, 1952-2011, at http://www.chinability.com/GDP.htm.
7 During the Great Leap Forward, local Chinese officials are believed to have often exaggerated agricultural production
to prove their ability to implement Mao’s economic policies in order to advance their careers or to avoid getting into
political trouble with Beijing. Central government officials may have also exaggerated China’s economic statistics in
order to illustrate the “success” of the government’s economic policies.
8 The Organization for Economic Cooperation and Development, Chinese Economic Performance in the Long Run,
960-2030, by Angus Maddison, 2007.
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Table 1. China’s Average Annual Real GDP Growth: 1979-2012
Year
Real Growth Rate (%)
1979 7.6
1980 7.9
1981 5.3
1982 9.0
1983 10.9
1984 15.2
1985 13.5
1986 8.9
1987 11.6
1988 11.3
1989 4.1
1990 3.8
1991 9.2
1992 14.2
1993 13.9
1994 13.1
1995 10.9
1996 10.0
1997 9.3
1998 7.8
1999 7.6
2000 8.4
2001 8.3
2002 9.1
2003 10.0
2004 10.1
2005 11.3
2006 12.7
2007 14.2
2008 9.6
2009 9.2
2010 10.4
2011 9.2
2012 First Quarter
8.1
Source: Economist Intelligence Unit, based on official Chinese government data.
Note: Data for 2012 are year-on-year.
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Figure 1. Average Real GDP Growth Among Major Global Economies: 2008-2011
(percent)
12.0
10.0
China
8.0
India
6.0
Brazil
4.0
2.0
Russia
Germany U.S. France
0.0
UK
Japan
Italy
-2.0

Source: EIU database.
Causes of China’s Economic Growth
Economists generally attribute much of China’s rapid economic growth to two main factors:
large-scale capital investment (financed by large domestic savings and foreign investment) and
rapid productivity growth. These two factors appear to have gone together hand in hand.
Economic reforms led to higher efficiency in the economy, which boosted output and increased
resources for additional investment in the economy.
China has historically maintained a high rate of savings. When reforms were initiated in 1979,
domestic savings as a percentage of GDP stood at 32%. However, most Chinese savings during
this period were generated by the profits of SOEs, which were used by the central government for
domestic investment. Economic reforms, which included the decentralization of economic
production, led to substantial growth in Chinese household savings as well as corporate savings.
As a result, China’s gross savings as a percentage of GDP has steadily risen, reaching 53.9% in
2010 (compared to a U.S. rate of 9.3%), and is among the highest savings rates in the world.9 The
large level of savings has enabled China to boost domestic investment. In fact, its gross domestic
savings levels far exceed its domestic investment levels, meaning that China is a large net global
lender.
Several economists have concluded that productivity gains (i.e., increases in efficiency) have
been another major factor in China’s rapid economic growth. The improvements to productivity
were caused largely by a reallocation of resources to more productive uses, especially in sectors
that were formerly heavily controlled by the central government, such as agriculture, trade, and

9 Source: Economist Intelligence Unit Database.
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services. For example, agricultural reforms boosted production, freeing workers to pursue
employment in the more productive manufacturing sector. China’s decentralization of the
economy led to the rise of non-state enterprises (such as private firms), which tended to pursue
more productive activities than the centrally controlled SOEs and were more market-oriented, and
hence, more efficient. Additionally, a greater share of the economy (mainly the export sector) was
exposed to competitive forces. Local and provincial governments were allowed to establish and
operate various enterprises on market principles, without interference from the central
government. In addition, FDI in China brought with it new technology and processes that boosted
efficiency. As indicated in Figure 2, China has achieved high rates of total factor productivity
(TFP) growth relative to the United States. TFP represents an estimate of the part of economic
output growth not accounted for by the growth in inputs (such as labor and capital), and is often
attributed to the effects of technological change and efficiency gains. China experiences faster
TFP growth than most developed countries such as the United States because of its ability to
access and utilize existing foreign technology and know-how. High TFP growth rates have been a
major factor behind China’s rapid economic growth rate. However, as China’s technological
development begins to approach that of major developed countries, its level of productivity gains,
and thus, real GDP growth, could slow significantly from its historic 10% average, unless China
becomes a major center for new technology and innovation and/or implements new
comprehensive economic reforms.10 As indicated in Figure 3, the EIU currently projects that
China’s real GDP growth will slow considerably in the years ahead, averaging 7.0% from 2012 to
2020, and falling to 3.7% from 2021 to 2030.11
The Chinese government has indicated its desire to move away from its current economic model
of fast growth at any cost to more “smart” economic growth, which seeks to reduce reliance on
energy-intensive and high-polluting industries and rely more on high technology, green energy,
and services. China also has indicated it wants to obtain more balanced economic growth. (These
issues are discussed in more detail later in the report.)

10 Like China, Japan experienced rapid economic growth during the early stages of its development in the post-WWII
era, with real GDP averaging 11.0% from 1960-1970. However, from 1970-1980 real GDP averaged 5.4%; it was 4.1%
from 1980-1990, 1.1% from 1990-2000. Japan has continued to experience relatively stagnant economic growth, in part
because of its inability to address a number of structural economic problems. See CRS Report RL30176, Japan's
"Economic Miracle": What Happened?, by William H. Cooper
11 Note, long-term economic projections should be viewed with caution.
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Figure 2. Comparison of Annual Changes in Total Factor Productivity in China and
the United States: 2000-2011
(percent)
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
China
United States

Source: Estimated by the Economist Intelligence Unit.
Note: Total factor productivity represents the part of economic output growth not accounted for by the
growth in inputs, such as labor and capital, and is often used to estimate the effects of technological change.


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Figure 3. Projections of U.S. and Chinese Annual Real GDP Growth: 2012-2030
%
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
China
U.S.

Source: Economist Intelligence Unit.
Note: Long-term economic projections should be interpreted with caution
Measuring the Size of China’s Economy
The rapid growth of the Chinese economy has led many analysts to speculate if and when China
will overtake the United States as the “world’s largest economic power.” The “actual” size of
China’s economy has been a subject of extensive debate among economists. Measured in U.S.
dollars using nominal exchange rates, China’s GDP in 2011 was $7.2 trillion, less than half the
size of the U.S. economy.12 The per capita GDP (a common measurement of a country’s living
standards) of China was $5,460, which was 12% the size of Japan’s level and 11% that of the
United States (see Table 2).
Many economists contend that using nominal exchange rates to convert Chinese data (or that of
other countries) into U.S. dollars fails to reflect the true size of China’s economy and living
standards relative to the United States. Nominal exchange rates simply reflect the prices of
foreign currencies vis-à-vis the U.S. dollar and such measurements exclude differences in the
prices for goods and services across countries. To illustrate, one U.S. dollar exchanged for local
currency in China would buy more goods and services there than it would in the United States.
This is because prices for goods and services in China are generally lower than they are in the
United States. Conversely, prices for goods and services in Japan are generally higher than they
are in the United States (and China). Thus, one dollar exchanged for local Japanese currency
would buy fewer goods and services there than it would in the United States. Economists attempt

12 On a nominal dollar basis, China overtook Japan in 2010 to become the world’s second largest economy (after the
United States).
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to develop estimates of exchange rates based on their actual purchasing power relative to the
dollar in order to make more accurate comparisons of economic data across countries, usually
referred to as a purchasing power parity (PPP) basis.
The PPP exchange rate increases the (estimated) measurement of China’s economy and its per
capita GDP. According the Economist Intelligence Unit, (EIU), which utilizes World Bank data,
prices for goods and services in China are 41.5% the level they are in the United States. Adjusting
for this price differential raises the value of China’s 2011 GDP from $7.2 trillion (nominal
dollars) to $11.4 trillion (on a PPP basis).13 This would indicate that China’s economy is 76.0%
the size of the U.S. economy. China’s share of global GDP on a PPP basis rose from 3.7% in 1990
to 14.3% in 2011 (the U.S. share of global GDP peaked at 24.3% in 1999 and declined to 18.9%
in 2011), see Figure 4.
Many economic analysts predict that a PPP basis China will soon overtake the United States as
the world’s largest economy. EIU, for example, projects this will occur by 2016, and that by 2030,
China’s economy could be 30% larger than that of the United States.14 This would not be the first
time in history that China was the world’s largest economy (see text box).

The Decline and Rise of China’s Economy
According to a study by economist Angus Maddison, China was the world’s largest economy in 1820, accounting for
an estimated 32.9% of global GDP. However, foreign and civil wars, internal strife, weak and ineffective governments,
natural disasters (some of which were man-made) and distortive economic policies caused China’s share of global
GDP on a PPP basis to shrink significantly. By 1952, China’s share of global GDP had fallen to 5.2%, and by1978, it slid
to 4.9%.15 The adoption of economic reforms by China in the late 1970s led to a surge in China’s economic growth
and has help restore China as major a global economic power.
Source: The Organization for Economic Cooperation and Development, Chinese Economic Performance in the Long Run,
960-2030, by Angus Maddison, 2007.

The PPP measurement also raises China’s 2011 per capita GDP (from $5,460) to $8,650, which
was 17.9% of the U.S. level. The EIU projects this level will rise to 34.3% by 2030. Thus,
although China will likely become the world’s largest economy in a few years on a PPP basis, it
will likely take many years for its living standards to approach U.S. levels.16

13 In other words, the PPP data reflect what the value of China’s goods and services would be if they were sold in the
United States.
14 However, such long-term economic projections should be viewed with caution.
15 In comparison, the U.S. share of global GDP rose from 1.8% in 1820 to 27.5% in 1952, but declined to 21.6% by
1978.
16 EIU database, surveyed on May 22, 2012.
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Table 2. Comparisons of Chinese, Japanese, and U.S. GDP and Per Capita GDP in
Nominal U.S. Dollars and a Purchasing Power Parity Basis: 2011
China
Japan
United
States
Nominal GDP ($ billions)
7,208
5,871
15,094
GDP in PPP ($ billions)
11,425
4,384
15,094
Nominal Per Capita GDP ($)
5,460
46,420
48,410
Per Capita GDP in PPP ($)
8,650
34,660
48,410
Source: Economist Intelligence Unit estimates using World Bank PPP data.
Figure 4. Chinese and U.S. GDP as a Percent of Global Total: 1990-2011 and
Projections through 2016
(percent)
25.00
20.00
15.00
10.00
5.00
0.00
0
92
4
6
98
0
2
04
6
8
10
12
4
16
199
19
199
199
19
200
200
20
200
200
20
20
201
20
China
United States of America

Source: Economist Intelligence Unit
Note: Based on estimates of GDP on a PPP basis.
Foreign Direct Investment (FDI) in China
China’s trade and investment reforms and incentives led to a surge in FDI beginning in the early
1990s. Such flows have been a major source of China’s productivity gains and rapid economic
and trade growth. There were reportedly 445,244 foreign-invested enterprises (FIEs) registered in
China in 2010, employing 55.2 million workers or 15.9% of the urban workforce.17 As indicated
in Figure 5, FIEs account for a significant share of China’s industrial output. That level rose from

17 China 2011 Statistical Yearbook.
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2.3% in 1990 to a high of 35.9% in 2003, but fell to 27.1% by 2010.18 In addition, FIE’s are
responsible for a significant level of China’s foreign trade. In 2011, FIEs in China accounted for
52.4% of China’s exports and 49.6% of its imports, although this level was down from its peak in
2006 when FIEs’ share of Chinese exports and imports was 58.2% and 59.7%, respectively, as
indicated in Figure 6. FIEs in China dominate China’s high technology exports. From 2002 to
2010, the share of China’s high tech exports by FIEs rose from 79% to 82%. During the same
period, the share of China’s high tech exports by wholly owned foreign firms (which excludes
foreign joint ventures with Chinese firms), rose from 55% to 67%.
Figure 5. Industrial Output by Foreign-Invested Firms in China as a Share of
National Total: 1990-2010
(percent)
40
35
30
25
20
15
10
5
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Invest in China (www.fdi.gov.cn)

18 Industrial output is defined by the Chinese government as the total volume of final industrial products produced and
industrial services provided during a given period. Source: China 2011 Statistical Yearbook.
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Figure 6. Share of China’s Exports and Imports Attributed to Foreign-Invested
Enterprises in China: 1990-2012*
(percent)
70
60
50
40
30
20
10
0
00
01
03
04
07
10
11
1990
1995 20
20
2002 20
20
2005
2006 20
2008
2009 20
20
012
Apr 2
n-
Exports
Imports
Ja

Source: “Invest in China (http://www.fdi.gov.cn/pub/FDI_EN/default.htm)
Note: Data for 2012 are January-April 2012.
According to the Chinese government, annual FDI inflows into China grew from $2 billion in
1985 to $108 billion in 2008. Due to the effects of the global economic slowdown, FDI flows to
China fell by 12.2% to $90 billion in 2009. They totaled $106 billion in 2010 and $116 billion in
2011 (see Figure 7). Chinese data for January-May 2012 indicate that FDI fell by 1.9% on a year-
on-year basis. Hong Kong was reported as the largest source of FDI flows to China in 2011
(63.9% of total), followed by Taiwan, Japan, and Singapore, and the United States. Accoroding to
Chinese data, annual U.S. FDI flows to China peaked at $5.4 billion in 2002 (10.2% of total FDI
in China). In 2011, they were $3.0 billion or 2.6% of total (see Figure 9).19
The cumulative level (or stock) of FDI in China at the end of 2011 is estimated at $1.2 trillion,
making it one of the world’s largest destinations of FDI. According to the United Nations
Conference on Trade and Development, China was the world’s second largest destination for FDI
flows in 2011, after the United States (see Figure 8). The largest sources of cumulative FDI in
China for 1979-2011 were Hong Kong (43.5% of total), the British Virgin Islands, Japan, the
United States, and Taiwan (see Table 3).20

19 U.S. data on bilateral FDI flows with China differ significantly with Chinese data. For additional info on bilateral
FDI flows based on U.S. data, see CRS Report RL33536, China-U.S. Trade Issues, by Wayne M. Morrison.
20 Much of the FDI originating from the British Virgin Islands and Hong Kong may originate from other foreign
investors. In addition, some Chinese investors might be using these locations to shift funds overseas in order to re-
invest in China to take advantage of preferential investment policies (this practice is often referred to as “round-
tipping”). Thus, the actual level of FDI in China may be overstated.
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Figure 7. Annual FDI Flows to China: 1985-2011
($ billions)
140
120
100
80
60
40
20
0
19851990199119921993199419951996199719981999200020012002200320042005200620072008200920102011

Source: United Nations Conference on Trade and Investment and Invest China.
Figure 8. Major Recipients of Global FDI Inflows in 2011
($ billions)
250
U.S.
200
150
China
100
Hong Kong
UK
Brazil IrelandRussian Belgium
50
SingaporeFrance
0

Source: United Nations Conference on Trade and Investment and Invest and Chinese Ministry of Commerce
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Note: Data for China are official Chinese data; all are estimates by the United Nations.
Table 3. Major Sources of FDI in China: 1979-2011
($ billions and % of total)
Estimated Cumulative Utilized
FDI: 1979-2011
Utilized FDI in 2011
Country
Amount
% of Total
Amount
% of Total
Total 1,224.0
100.0
116.1
100.0
Hong Kong
533.2
43.5
77.0
66.3
British Virgin Islands*
111.8
9.1
NA
NA
Japan
79.9 6.5 6.3
5.4
United
States
68.1 5.6 3.0
2.6
Taiwan

58.7 4.8 6.7
5.8
Singapore
53.4 4.5 6.3
5.4
South
Korea
49.9 4.1 2.6
2.2
Source: Chinese Ministry of Commerce and Chinese Statistical Yearbook.
Notes: Ranked by cumulative top seven sources of FDI in China through 2011. *Data for the British Virgin
Islands are through 2010.
Figure 9. Annual U.S. FDI Flows to China: 1985-2011
($ millions)
6,000
5,000
4,000
3,000
2,000
1,000
0
1985 1990 1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Chinese Ministry of Commerce and Chinese Yearbook, various years.
Note: Chinese and U.S. data on bilateral FDI flows differ sharply because of different methodologies used.
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China’s Growing FDI Outflows
A key aspect of China’s economic modernization and growth strategy during the 1980s and 1990s
was to attract FDI into China to help boost the development of domestic firms. Investment by
Chinese firms abroad was sharply restricted. However, in 2000, China’s leaders initiated a new
“go global” strategy, which sought to encourage Chinese firms (primarily SOEs) to invest
overseas. One key factor driving this investment is China’s massive accumulation of foreign
exchange reserves, Traditionally much of those reserves have been invested in relatively safe, but
low-yielding, assets, such as U.S. Treasury securities. On September 29, 2007, the Chinese
government officially launched the China Investment Corporation (CIC) in an effort to seek more
profitable returns on its foreign exchange reserves and diversify away from its U.S. dollar
holdings. The CIC was originally funded at $200 billion, making it one of the world’s largest
sovereign wealth funds.21 Another factor behind the government’s drive to encourage more
outward FDI flows has been to obtain natural resources, such as oil and minerals, deemed by the
government as necessary to sustain China’s rapid economic growth.22 In June 2005, the China
National Offshore Oil Corporation (CNOOC), through its Hong Kong subsidiary (CNOOC Ltd.),
made a bid to buy a U.S. energy company, UNOCAL, for $18.5 billion, although CNOOC later
withdrew its bid due to opposition by several congressional Members. Finally, the Chinese
government has indicated its goal of developing globally competitive Chinese firms with their
own brands. Investing in foreign firms, or acquiring them, is viewed as a method for Chinese
firms to obtain technology, management skills, and often, internationally recognized brands,
needed to help Chinese firms become more globally competitive. For example, in April 2005
Lenovo Group Limited, a Chinese computer company, purchased IBM Corporation’s personal
computer division for $1.75 billion.23 Similarly, overseas FDI in new plants and businesses is
viewed as developing multinational Chinese firms with production facilities and R&D operations
around the world.
China has become a significant source of global FDI outflows, which rose from $2.7 billion in
2002 to $67.6 billion in 2011 (see Figure 10). In 2011, China ranked as the 9th largest source of
global FDI, according to the United Nations (see Figure 11).24 The stock of China’s outward FDI
through 2011 is estimated at $384.9 billion.
China’s data indicate that the top five destinations of its FDI outflows in 2010 were Hong Kong
(which accounted for 56.5% of total), the British Virgin Islands, the Cayman Islands,
Luxembourg, and Australia (the United States ranked 7th). In terms of the stock of Chinese FDI
outflows, the largest destinations were Hong Kong (62.8% of total), the British Virgin Islands, the
Cayman Islands, Australia, and Singapore (the United States ranked 7th).25 According to China’s
Ministry of Commerce, four out of 10 of biggest overseas Chinese corporate investors were oil
companies (based on FDI stock through 2010).26

21 See, CRS Report RL34337, China’s Sovereign Wealth Fund, by Michael F. Martin.
22 Chinese oil and mineral companies are dominated by SOEs.
23 The Chinese government is believed to be Lenovo’s largest shareholder.
24 United Nations Conference on Trade and Development, Global Investment Trade Monitor, April 12, 2012.
25 It is likely that a significant level of Chinese FDI in the British Virgin Islands, the Cayman Islands, and Hong Kong
are re-directed elsewhere.
26 Chinese Ministry of Commerce, 2010 Statistical Bulletin of China’s Outward Foreign Direct Investment, October
2011.
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According to A Capital Dragon Index, a firm that tracks China’s FDI, 56% of China’s outbound
FDI in 2011was in greenfield projects (such as new plants and business facilities) and 44%
involved mergers and acquisitions. In terms of sectors, 51% of China’s 2011 FDI went to
resources (such as oil and minerals), 22% to chemicals, 14% to services, 12% to industry, and 1%
to automotive. SOEs accounted for 72% of Chinese FDI that involved mergers and acquisitions in
2011.27 A Capital Dragon Index estimates that China’s first quarter 2012 outbound FDI was $21.4
billion and that SOEs accounted for 98% of mergers and acquisitions, which were largely in
resources.28
Figure 10. China’s Annual FDI Outflows: 2002-2011
($ billions)
80
68.8
67.6
70
55.9
56.3
60
50
40
26.5
30
17.6
20
12.3
10
2.7
2.9
5.5
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

Source: Ministry of Commerce, 2011 Statistical Bul etin of China’s Outward Foreign Direct Investment, 2011.
Data for 2011 are from the United Nations.


27 A Capital Dragon Index, 2011 Full Year, available at http://www.acapital.hk/dragonindex/datasheets.
28 A Capital Dragon Index, 2012 Q1, available at http://www.acapital.hk/dragonindex/datasheets.
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Figure 11. Major Sources of Global FDI Outflows in 2011
$billions
450
400
U.S.
350
300
250
200
150
Japan
France
UK
Hong Kong
100
Belgium
Italy
Switzerland
China
Russia
50
0

Source: United Nations estimates.
China’s Merchandise Trade Patterns
Economic reforms and trade and investment liberalization have helped transform China into a
major trading power. Chinese merchandise exports rose from $14 billion in 1979 to $1.9 trillion
in 2011, while merchandise imports over this period grew from $16 billion to $1.7 trillion (see
Table 4 and Figure 12). From 1990 to 2011, the annual growth of China’s exports and imports
averaged 19.5% and 18.4%, respectively (see Figure 13).
Although Chinese exports and imports dropped sharply in 2009 (over 2008 levels) because of the
global economic slowdown, they both recovered in 2010 and exceeded pre-crisis levels. In 2011,
China’s exports and imports rose by 20.3% and 24.9%, respectively. However, from January-May
2012, China’s exports and imports grew by only 8.7% and 6.6%, respectively, over the same
period in 2011. China’s merchandise trade surplus grew sharply from 2004 to 2008, but fell
sharply in 2009-2011. China’s merchandise trade surplus fell from its peak of $297.4 billion in
2007 to $157.9 billion – a 46.9% decline. Based on January-May 2012 trade data, China’s trade
surplus for the full year could fall to about $90 billion.
China overtook Germany in 2009 to become the world’s largest merchandise exporter and the
second largest importer (see Figure 14 and Figure 15). As indicated in Figure 16, China’s share
of global exports increased from 3.3% in 2000 to 10.4% in 2011; the World Bank projects this
figure could increase to 20% by 2030.29 Merchandise trade surpluses, large-scale foreign

29 The World Bank, China 2030, Building a Modern, Harmonious, and Creative High-Income Society, 2012, p. 14.
Hereafter referred to as World Bank, China 2030.
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investment, and large purchases of foreign currencies to maintain its exchange rate with the dollar
and other currencies have enabled China to become by far the world’s largest holder foreign
exchange reserves at $3.2 trillion at the end of 2011.
Table 4. China’s Merchandise World Trade: 1979-2011
($ billions)
Year Exports
Imports
Trade
Balance
1979 13.7
15.7
–2.0
1980 18.1
19.5
–1.4
1985 27.3
42.5
–15.3
1990 62.9
53.9
9.0
1995 148.8
132.1
16.7
2000 249.2
225.1
24.1
2001 266.2
243.6
22.6
2002 325.6
295.2
30.4
2003 438.4
412.8
25.6
2004 593.4
561.4
32.0
2005 762.0
660.1
101.9
2006 969.1
791.5
177.6
2007 1,218.0
955.8
262.2
2008
1,428.9
1,131.5
297.4
2009 1,202.0
1,003.9
198.2
2010 1,578.4
1,393.9
184.5
2011 1,899.3
1,741.4
157.9
Source: Global Trade Atlas.
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Figure 12. China’s Merchandise Trade: 2000-2011
($ billions)
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
262.2 297.4
177.6
198.2 184.5 157.9
200
101.9
24.1
22.6
30.4
25.6
32
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Trade Balance
Exports
Imports

Source: Economist Intelligence Unit.

Figure 13. Annual Change in China’s Merchandise Exports and Imports: 1990-2011
(percent)
50.0
40.0
30.0
20.0
10.0
0.0
-10.0
-20.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Exports
Imports

Source: Global Trade Atlas using official Chinese data.
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Figure 14. Merchandise Exports by China, Germany and the United States: 1990-
2011
($ billions)
2000
1800
1600
1400
1200
1000
800
600
400
200
0
1990
1993
1996
1999
2002
2005
2008
2011
China
Germany
United States

Source: Economist Intelligence Unit.
Note: Top three global importers in 2011.
Figure 15. Merchandise Imports by China, Germany, and the United States: 1990-
2011
($ billions)
2,500
2,000
1,500
1,000
500
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
China
Germany
United States

Source: Economist Intelligence Unit.
Note: Top three global importers in 2011.
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Figure 16. China’s Global Share of Merchandise Exports: 1990-2011
($ billions)
12.0
10.4
10.1
10.0
9.5
8.6 8.8
7.8
8.0
7.1
6.3
5.7
6.0
4.9
4.2
3.8
4.0
3.3 3.4 3.3
2.8 2.9 2.8
1.8 2.1 2.3 2.5
2.0
0.0
1990
1993
1996
1999
2002
2005
2008
2011

Source: Economist Intelligence Unit.
China’s Major Trading Partners
Table 5 lists Chinese trade data on its major trading partners in 2011, which included the 27
countries that make up the European Union (EU27), the United States, Japan, and the 10 nations
that constitute the Association of Southeast Asian Nations (ASEAN).30 China’s largest export
markets were the EU27, the United States, Hong Kong, and ASEAN, while its top sources for
imports were the EU27, Japan, ASEAN, and South Korea. According to Chinese data, it
maintained substantial trade surpluses with the United States, the EU27, and Hong Kong, but
reported large deficits with Taiwan, South Korea, and Japan. China reported that it had a $206.2
billion trade surplus with the United States, but U.S. data show that it had a $295.5 billion deficit
with China. These trade imbalance data disparities occur with many of China’s other major
trading partners as well. China reported that it had a $46.7 billion trade deficit with Japan, while
Japan reported that it had a $22.1 billion trade deficit with China. These differences appear to be
largely caused by how China’s trade via Hong Kong is counted in official trade data. China treats
a large share of its exports through Hong Kong as Chinese exports to Hong Kong for statistical

30 ASEAN members include Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the Philippines,
Singapore, Thailand, and Vietnam.
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purposes, while many countries that import Chinese products through Hong Kong generally
attribute their origin to China for statistical purposes, including the United States.31
Table 5. China’s Major Trading Partners in 2011
($ billions)
Foreign
Partner’s
Reported
Chinese
Chinese
China’s Trade
Trade Balance
Country Total
Trade Exports
Imports
Balance
with China
European
Union
567.2 356.0 211.2 144.8 -217.6
United
States
442.4 324.3 118.1 206.2 -295.5
Japan

342.1 147.7 194.4 -46.7 -22.1
ASEAN
362.4 169.9 192.5 -22.6 NA
Hong
Kong 277.9 267.5 10.4 257.1 26.6
South Korea
250.6
82.9
167.7
-84.8
47.8
Taiwan 155.0
30.1
124.9
-94.8
34.7
Total Chinese
3,640.7 1,899.3 1,741.4 157.9
--
Trade
Source: Global Trade Atlas and World Trade Atlas.
Note: Rankings according to China’s total trade in 2011.
Major Chinese Trade Commodities
China’s abundance of low-cost labor has made it internationally competitive in many low-cost,
labor-intensive manufactures. The average hourly labor cost for manufacturing in China in 2010
(at $2) was 5.7% the cost in the United States (at $35). 32 As a result, manufactured products
constitute a significant share of China’s trade. A substantial amount of China’s imports is
comprised of parts and components that are assembled into finished products, such as consumer
electronic products and computers, and then exported. Often, the value-added to such products in
China by Chinese workers is relatively small compared to the total value of the product when it is
shipped abroad.
China’s top 10 exports and imports in 2011 are listed in Table 6 and Table 7, respectively, using
the harmonized tariff system (HTS) on a two-digit level. Major exports included electrical
machinery (such as computers and parts), machinery, knit apparel, and woven apparel, while
major imports included electrical machinery, mineral fuel, machinery, and ores.


31 See CRS Report RS22640, What’s the Difference?—Comparing U.S. and Chinese Trade Data, by Michael F.
Martin.
32 In addition, the overall average monthly wage in China, at $539 (nominal U.S. dollars) in 2011, was about 13% U.S.
levels (although the disparity would lessen if purchasing power data were used). Source: Economist Intelligence Unit
data tool.
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Table 6. Major Chinese Exports: 2011
Percent of 2011/2010
HS Code
Description
$billions
Total
% Change
World
1,899.3
100
20.3
85
Electrical machinery (such as computers and parts)
445.8
23.5
14.6
84 Machinery
353.9
18.6
14.2
61 Knit
apparel
80.2
4.2
20.2
62 Woven
apparel
63.1
3.3
16.0
90
Optical, photographic, cinematographic, measuring
60.7 3.2 16.5
checking, precision, medical or surgical instruments
and apparatus; parts and accessories thereof
94 Furniture
and
bedding
59.4
3.1
17.3
73
Iron and steel products
51.2
2.7
30.8
87
Vehicles, except railway (mainly auto parts, motorcycles,
49.6 2.6 29.2
trucks, and bicycles)
39 Plastic
45.5
2.4
30.9
89
Ships and boats
43.7
2.3
8.5





Source: World Trade Atlas, using official Chinese statistics.
Notes: Top 10 exports in 2011, 2-digit level, harmonized tariff system.
Table 7. Major Chinese Imports: 2011
Percent of 2011/2010
HS Code
Description
$ billions
Total
% change

World
1,741.4
100
24.9
85
Electrical machinery
351.0
20.2
11.6
27
Mineral fuel, oil etc.
273.5
15.7
45.2
84
Machinery
199.6
11.5
15.8
26
Ores, slag, and ash
150.7
8.7
39.5
90
Optical, photographic, cinematographic, measuring,
99.0 5.7 10.4
checking, precision, medical or surgical instruments
and apparatus; parts and accessories thereof
39
Plastic
70.2
4.0
10.2
87
Vehicles, not railway (mainly autos and parts)
65.3
3.8
32.2
29
Organic chemicals
63.2
3.6
31.0
74
Copper and articles thereof
54.3
3.1
18.0
98 Special
Classification
49.5
2.8
168.5





Source: World Trade Atlas, using official Chinese statistics.
Notes: Top 10 imports in 2011, two-digit level, harmonized tariff schedule.
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China’s Growing Appetite for Energy
China’s rapid economic growth has fueled a growing demand for energy, such as petroleum and
coal, and that demand is becoming an increasingly important factor in determining global energy
prices. According to the International Energy Agency (IEA), China overtook the United States in
2009 as the world’s largest energy user (in comparison, China’s energy use was only half that of
that of the United States in 2000). According to IEA projections, China’s demand for energy from
2008 (the baseline year) to 2035 will account for 30% of the projected increase in global demand
for energy during this period. By 2035, China is projected to consume 70% more energy than the
United States (even though, on a per capita basis, China’s energy consumption will be less than
half of U.S. levels).33
China is the world’s second largest consumer of oil products (after the United States) at 9.8
million barrels per day (bpd) in 2011 (compared to 3.9 million in 1997), and that level rises to
16.9 million bpd by 2035.34 China became a net oil importer (i.e., imports minus exports) in 1993.
Net oil imports grew from 632 thousand bpd in 1997 to about 5.0 million bpd in 2010 (see Figure
17), making it the world’s second largest net oil importer after the United States.35 China’s net oil
imports are projected to rise to 13.1 million bpd by 2030, a level that would be comparable to the
European Union in that year.36

33 International Energy Agency, 2011 World Energy Outlook, November 2011, available at http://www.iea.org/weo.
34 U.S. Energy Information Administration, Forecasts and Analysis, at http://www.eia.doe.gov/oiaf/forecasting.html.
35 China overtook Japan as the second largest net oil importer in 2009.
36 EIA, International Energy Outlook, September 19, 2011, available at http://www.eia.gov/forecasts/ieo.
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Figure 17. China’s Net Oil Imports: 1997-2011
(Thousands BPD)
6,000
5,000
4,000
3,000
2,000
1,000
0
97
98
9
0
01
02
3
4
5
06
7
8
9
10
11
19
19
199
200
20
20
200
200
200
20
200
200
200
20
20


Source: U.S. Energy Administration, China Energy Newswire, and British Petroleum June 2010 Statistical Review
of World Energy. Data for 2010 and 2011 from China Daily.
China’s Regional and Bilateral Free Trade Agreements
The Chinese government has maintained an active policy of boosting trade and investment ties
around the world, especially with countries in Asia. To that end, China has entered into a number
of regional and bilateral trade agreements, or is in the process of doing so. China currently has
free trade agreements (FTAs) with ASEAN, Pakistan, Chile, Hong Kong, Macau, New Zealand,
Singapore, Pakistan, Peru, and Costa Rica. China also has an economic cooperation framework
agreement (ECFA) with Taiwan. China is currently in the process of negotiating FTAs with the
Cooperation Council for the Arab States of the Gulf (which includes Saudi Arabia, Kuwait, the
United Arab Emirates, Qatar, and Bahrain), Australia, Iceland, Norway, Switzerland, and the
Southern African Customs Union (which includes Botswana, Lesotho, Namibia, and Swaziland).
In May 2012, China, Japan, and South Korea agreed to begin negotiations for an FTA in 2012.
China has also considered negotiating an FTA with India, but with little progress to date.37

37 Chinese Ministry of Commerce, China FTA Network, available at
http://fta.mofcom.gov.cn/english/fta_qianshu.shtml.
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Major Long-Term Challenges Facing the
Chinese Economy
China’s economy has shown remarkable growth over the past several years, and many economists
project that it will enjoy fairly healthy growth in the near future. However, economists caution
that these projections are likely to occur only if China continues to make major reforms to its
economy. Failure to implement such reforms could endanger future growth. They note that
China’s current economic model has resulted in a number of negative economic (and social)
outcomes, such as over-reliance on fixed investment and exporting for its economic growth,
extensive inefficiencies that exist in many sectors (due largely to government industrial policies),
wide-spread pollution, and growing income inequality, to name a few. Many of China’s economic
problems and challenges stem from its incomplete transition to a free market economy and from
imbalances that have resulted from the government’s goal of economic growth at all costs.
China’s Incomplete Transition to a Market Economy
Despite China’s three-decade history of widespread economic reforms, Chinese officials contend
that China is a “socialist-market economy.” This appears to indicate that the government accepts
and allows the use of free market forces in a number of areas to help grow the economy, but
where the government still plays a major role in the country’s economic development.
Industrial Policies and SOEs
According to the World Bank, “China has become one of the world’s most active users of
industrial policies and administrations.” 38 According to one estimate, China’s SOEs may account
for up of 50% of non-agriculture GDP.39 In addition, although the number of SOEs has declined
sharply, they continue to dominate a number of sectors (such as petroleum and mining,
telecommunications, utilities, transportation, and various industrial sectors); are shielded from
competition; are the main sectors encouraged to invest overseas; and dominate the listings on
China’s stock indexes.40 One study found that SOEs constituted 50% of the 500 largest
manufacturing companies in China and 61% of the top 500 service sector enterprises.41 It is
estimated that there were 154,000 SOEs as of 2008, and while these accounted for only 3.1% of
all enterprises in China, they held 30% of the value of corporate assets in the manufacturing and
services sectors.42 Of the 58 Chinese firms on the 2011 Fortune Global 500 list, 54 were

38 The World Bank, China:2030, p. 114.
39 U.S.-China Economic and Security Review Commission, An Analysis of State-owned Enterprises and State
Capitalism in China, by Andrew Szamosszegi and Cole Kyle, October 26, 2011, p.1.
40 The nature of China’s SOEs has become increasing complex. Many SOEs appear to be run like private companies.
For example, and a number of SOEs have made initial public offerings in China’s stock markets and those in other
countries (including the United States), although the Chinese government is usually the largest shareholder. It is not
clear to what extent the Chinese government attempts to influence decisions made by the SOE’s which have become
shareholding companies.
41 Xiao Geng, Xiuke Yang, and Anna Janus, State-owned Enterprises in China, Reform Dynamics and Impacts, 2009,
p.155.
42 The World Bank, State-Owned Enterprises in China: How Big Are They?, January 19, 2010.
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identified as having government ownership of 50% or more. 43 The World Bank estimates that
more than one in four SOEs lose money.44
The Banking System
China’s banking system is largely controlled by the central government, which attempts to ensure
that capital (credit) flows to industries deemed by the government to be essential to China’s
economic development. SOEs, which are believed to receive preferential credit treatment by
government banks, while private firms must often pay higher interest rates or obtain credit
elsewhere. According to one estimate, SOEs accounted for 85% ($1.4 trillion) of all bank loans in
2009.45 In addition, the government sets interest rates for depositors at very low rates, often below
the rate of inflation, which keeps the price of capital relatively low for firms.46 It is believed that
oftentimes SOEs do not repay their loans, which may have saddled the banks with a large amount
of non-performing loans. In addition, local governments are believed to have borrowed
extensively from state banks shortly after the global economic slowdown began to impact the
Chinese economy to fund infrastructure and other initiatives. Some contend these measures could
further add to the amount of non-performing loans held by the banks. Many analysts contend that
one of the biggest weaknesses of the banking system is that it lacks the ability to ration and
allocate credit according to market principles, such as risk assessment.
An Undervalued Currency
China does not allow its currency to float and therefore must make large-scale purchases of
dollars to keep the exchange rate within certain target levels. Although the renminbi (RMB) has
appreciated against the dollar in real terms by about 40% since reforms were introduced in July
2005, analysts contend that it remains highly undervalued.47 China’s undervalued currency makes
its exports less expensive, and its imports more expensive, than would occur under a floating
exchange rate system. In order to maintain its exchange rate target, the government must
purchases foreign currency (such as the dollar) by expanding the money supply. This makes it
much more difficult for the government to use monetary policy to combat inflation.48
Many economists argue that China’s industrial policies have sharply limited competition and the
growth of the private sector, caused over-capacity in many industries, and distorted markets by

43 Global 500, The World's Largest Corporations," Fortune, July 25, 2011, available at
http://money.cnn.com/magazines/fortune/global500/2011/index.html.
44 World Bank, China 2030, p.25.
45 The Economist, State Capitalism’s Global Reach, New Masters of the Universe, How State Enterprise is Spreading,
January 21, 2012, available at http://www.economist.com/node/21542925.
46 Some economists argue that a significant portion of China’s SOEs could not stay in business if they had to pay a
market-based interest rate for credit.
47 See CRS Report RS21625, China's Currency Policy: An Analysis of the Economic Issues, by Wayne M. Morrison
and Marc Labonte.
48 If Chinese banks raised interest rates in an effort to control inflation, overseas investors might to try to shift funds to
China (through illegal means) to take advantage of the higher Chinese rates. The Chinese government has had difficulty
blocking such inflows of “hot money.” Such inflows force the government to boost the money supply to buy up the
foreign currency necessary to maintain the targeted peg. Expanding the money supply contributes to easy credit
policies by the banks, which has contributed to overcapacity in a number of sectors, such as steel, and speculative asset
bubbles (such as in real estate). This often forces the government to use administrative controls to limit credit to certain
sectors.
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artificially lowering the costs of various factor costs (such as capital, water, land, and energy)
below market levels in order to promote targeted industrial sectors. Such policies have come at
the expense of other (non-industrial) sectors of the economy, such as services.
Implications of China’s “Unbalanced” Economic Growth Model
China’s economic model, until recently, has emphasized rapid economic growth above nearly all
other considerations. Various data show that, while China’s GDP has risen rapidly over past 33
years, Chinese households do not appear to have shared equally in that growth. In addition,
China’s economic model has resulted in a number of significant problems that may negatively
affect future growth.
Overdependence on Exporting and Fixed Investment
The International Monetary Fund (IMF) estimates that that fixed investment related to tradable
goods plus net exports together accounted for over 60% of China’s GDP growth from 2001 to
2008 (up from 40% from 1990 to 2000), which was significantly higher than in the G-7 countries
(16%), the euro area (30%) and the rest of Asia (35%). China’s fixed investment as a percentage
of GDP is the highest of any major economy and its importance has been growing. As shown in
Figure 18, fixed investment as a percent of GDP increased from 25% in 1990 to 48.5% in 2011.
On the other hand, during the same period, private consumption of as a percent of GDP fell from
48.8% to 33.9%.49 China’s private consumption as a share of GDP is the lowest of any major
economy.50 In addition, as indicated in Figure 19, personal disposable income in China as a share
of GDP has also been falling over the past decade or so, from 47.6% in 2000 to 42.2% in 2011.51
China’s overall savings rate as a percent of GDP in 2011 was 52.1%, which was the highest rate
of any major economy.
Many economists contend that the falling share of private consumption and disposable income
relative to GDP is largely caused by two main factors: China’s banking policies and the lack of an
adequate social safety net. The Chinese government places restrictions on the export of capital.
As a result, Chinese households put a large share of their savings in domestic banks. The Chinese
government sets the interest rate on deposits. Often this rate is below the rate of inflation, which
lowers household income. Some economists consider this policy to constitute a transfer of wealth
from Chinese households to Chinese firms which benefit from low interest rates. This “tax” on
household income negatively affects household consumption. Secondly, China’s lack of an
adequate social safety net (such as pensions, health care, unemployment insurance, and
education) induces households to save a large portion of their income. According to one estimate,
the average saving rate of urban households relative to their disposable incomes rose from 18% in
1995 to nearly 29% in 2009.52 Corporations are also a major contributor the high savings rate in
China. Many Chinese firms, especially SOEs, do not pay out dividends and thus are able to retain

49 Private consumption in China has been rising rapidly over the past several years, but not as fast as over parts of the
economy.
50 In comparison, the U.S. figure was 71.1%.
51 That rate was 43.4% in 1990.
52 VOX, The Puzzle of China’s Rising Household Saving Rate, by Marcos Chamon, Kai Liu, and Eswar Prasad,
January 18, 2011, available at http://voxeu.org/index.php?q=node/6028.
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most of their earnings. Many economists contend that requiring the SOEs to pay dividends could
boost private consumption in China.
Figure 18. Chinese Gross Savings, Gross Fixed Investment, and Private Consumption
as a Percent of GDP: 1990-2011
(percent)
60.0
50.0
40.0
30.0
20.0
10.0
0.0
90
92
94
96
98
00
02
04
06
08
10
19
19
19
19
19
20
20
20
20
20
20
Private consumption
Gross fixed investment
Gross natonal savings
Source: Economist Intelligence Unit.

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Figure 19. Chinese Disposable Personal Income as a Percent of GDP: 2000-2011
(percent)
49.0
48.0
47.0
46.0
45.0
44.0
43.0
42.0
41.0
40.0
39.0
38.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Economist Intelligence Unit.
Growing Pollution
China’s economic growth model has emphasized the growth of heavy industry in China, much of
which is energy-intensive and high polluting. The level of pollution in China continues to worsen,
posing series health risks to the population. The Chinese government often disregards its own
environmental laws in order to promote rapid economic growth. 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
official estimate in 2006, environmental damage costs the country $226 billion, or 10% of the
country’s GDP, each year.53 The Chinese government estimated that in 2004 there were over 300
million people living in rural areas that drank unsafe water (caused by chemicals and other
contaminants).Toxic spills in 2005 and 2006 threatened the water supply of millions of people.
China is the largest producer and consumer of coal, which accounts for about 70% of China’s
energy use. In October 2009, China’s media reported that thousands of children living near
smelters had been found to have excessive amounts of lead in their blood. Although growing
environmental degradation has been recognized as a serious problem by China’s central
government, it has found it difficult to induce local governments to comply with environmental
laws, especially when such officials feel doing so will come at the expense of economic growth.

53 China Daily, June 6, 2006.
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The EIA projects that by 2035, China’s carbon dioxide emissions could be nearly double its
current levels.54 A study by ExxonMobil, by 2030, China’s CO2 emissions could equal the
combined level in the United States and EU combined.55
Other Challenges
China’s economy faces a number of social and political challenges as well:
• Public unrest. For China’s Communist Party leadership, a growing economy is
its main source of political legitimacy. However, every year numerous protests
occur in China over a number of issues, including pollution, government
corruption, and land seizures. A number of protests in China have stemmed in
part from frustrations among many Chinese (especially peasants) that they are
not benefitting from China’s economic reforms and rapid growth, and
perceptions that those who are getting rich are doing so because they have
connections with government officials. A 2005 United Nations report stated that
the income gap between the urban and rural areas was among the highest in the
world and warned that this gap threatens social stability. The report urged China
to take greater steps to improve conditions for the rural poor, and bolster
education, health care, and the social safety net.56 It is estimated that 300 million
people in China (mainly in rural areas) lacked health insurance, and many that do
have basic insurance must pay a significant amount of medical expenses out of
their own pocket.57
• 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 relative lack of the rule
of law and widespread government corruption in China limit competition and
undermine the efficient allocation of goods and services in the economy.
• Poor government regulatory environment. China maintains a weak and
relatively decentralized government structure to regulate economic activity in
China. Laws and regulations often go unenforced or are ignored by local
government officials. As a result, many firms cut corners in order to maximize
profits. This has lead to a proliferation of unsafe food and consumer products
being sold in China or exported abroad. Lack of government enforcement of food
safety laws led to a massive recall of melamine-tainted infant milk formula that
reportedly killed at least four children and sickened 53,000 others in 2008.

54 EIA, International Energy Outlook, September 19, 2011, available at http://www.eia.gov/forecasts/ieo.
55 ExxonMobil, The Outlook for Energy, A View to 2030, December 29, 2009, p. 4.
56 China’s Human Development Report 2005.
57 Washington Post, October 29, 2009.
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Plans Announced by the Chinese Government to
Reform and Restructure the Economy
Various government officials have publicly stated the need for China to change course from its
traditional economic growth model of growth at all cost to one that balances economic growth
with a number of social goals in order to develop a “socialist harmonious society,” and to further
modernize the economy. In March 2007, Chinese Premier Wen Jiabao stated that there are
“structural problems in China's economy which cause unsteady, unbalanced, uncoordinated and
unsustainable development.” He defined “unsteady development” as overheated investment,
excessive credit and liquidity, and merchandise trade and current account surpluses. “Unbalanced
development” was described as economic disparities between rural and urban areas, regions of
the country, and between economic and social development. “Uncoordinated development” was
described as the lack of balance between various sectors of the economy (especially in regards to
the services sector) and between investment and consumption (i.e., economic growth is mainly
driven by investment and exports rather than consumer demand). Lastly, “unsustainable
development” referred to problems caused by China’s inefficient use of energy and resources and
failure to protect the environment.
The Central Government Five-Year Plans
China’s last two five-year plans (FYP), the 11th FYP (2006-2010) and the 12th FYP (2011-2015),
have placed strong emphasis on promoting consumer demand, addressing income disparities
(such as by boosting spending on social safety net programs) boosting energy efficiency, reducing
pollution, improving the rule of law, and deepening economic reforms. Those plans have also
identified a number of industries and technologies that the government has targeted for
development (see text box).

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China’s 12th Five-Year Plan58
China’s Five-Year Plans (FYPs), which have been issued by the government since 1953. The FYP is the major vehicle
for the government to establish broad economic and social goals for the time period under consideration, to
coordinate investments between the central and local governments, and to oversee implementation of policy. Not
only does the plan influence investments by government entities, it also provides direction for bank lending and
government approvals and regulation of private and semi-private industries. In March 2011, China’s National People’s
Congress approved the 12th Five-Year Plan (covering the years 2011 to 2015).
The 12th FYP (2011-2015) contains three broad themes or areas of focus: (1) economic restructuring, (2) promoting
greater social equality, and (3) protecting the environment. Chinese industrial policy comes into play primarily in
economic restructuring but also is apparent in the other areas of focus. Particularly noteworthy is the targeting of
seven strategic emerging industries that are intended to become the backbone of China’s economy in the future and
to be able to compete well on a global scale. These seven industries are: (1) biotechnology, (2) new energy, (3) high-
end equipment manufacturing, (4) energy conservation and environmental protection, (5) clean-energy vehicles, (6)
new materials, and (7) next-generation information technology. The government reportedly intends to spend up to
$2.1 trillion on these industries during the 12th FYP. Some of the highlights of the FYP include:
•
achieving an average real GDP growth rate of 7% and ensuring that incomes rise at least as fast as GDP;
•
consolidating inefficient sectors and promoting the services industry (with the goal of expanding service sector
output to account for 47% of GDP—up four percentage points from the current level);
•
promoting energy saving and new energy industries, promoting the development of nuclear, water, wind, and
solar power, and expanding non-fossil fuel to account for 11.4% of primary energy consumption;
•
welcoming foreign investment in modern agriculture, high-technology, and environmental protection industries;
•
turning coastal regions from “world’s factory” to hubs of research and development, high-end manufacturing, and
services;
•
lengthening high-speed railway and highway networks;
•
increasing expenditure on R&D to account for 2.2 percent GDP;
•
expanding non-fossil fuel to account for 11.4% of primary energy consumption;
•
cutting water consumption per unit of value-added industrial output by 30%, energy consumption per unit of
GDP by 16%, and carbon dioxide emission per unit of GDP by 17%;
•
transfer the coastal regions from the “world’s factory” to hubs of R&D, high-end manufacturing, and
environmental protection industries;
•
increasing the minimum wage by no less than 13% on average each year; and
•
building 36 million affordable apartments for low-income people.
Sources: Xinhua News Agency, Highlights of China’s 12th Five-Year Plan, March 5, 2011; and APCO Worldwide, China’s
12th Five-Year Plan: How it Actually Works and What’s in Store For the Next Five Years, December 10, 2010.
The Drive for “Indigenous Innovation”
Many of the industrial policies that China has implemented or formulated since 2006 appear to
stem largely from a comprehensive document issued by China’s State Council (the highest
executive organ of state power) in 1996 titled “the National Medium-and Long-Term Program for
Science and Technology Development (2006-2020),” often referred to as the MLP. The MLP
appears to represent an ambitious plan to modernize the structure of China’s economy by
transforming it from a global center of low-tech manufacturing to a major center of innovation
(by the year 2020) and a global innovation leader by 2050. As some observers describe it, China

58 "Highlights of China's Draft 12th Five-Year Plan," Xinhua, March 5, 2011.
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wants to go from a model of “made in China” to “innovated in China.” It also seeks to sharply
reduce the country’s dependence on foreign technology. The MLP includes the stated goals of
“indigenous innovation, leapfrogging in priority fields, enabling development, and leading the
future.”59 Some of the broad goals of the MLP state that by 2020:
• The progress of science and technology will contribute 60% or above to China’s
development.
• The country's reliance on foreign technology will decline to 30% or below (from
an estimated current level of 50%).
• Gross expenditures for research and development (R&D) would rise to 2.5% of
gross domestic product (from 1.3% in 2005). Priority areas for increased R&D
include space programs, aerospace development and manufacturing, renewable
energy, computer science, and life sciences.60
The document states that “China must place the strengthening of indigenous innovative capability
at the core of economic restructuring, growth model change, and national competitiveness
enhancement. Building an innovation-oriented country is therefore a major strategic choice for
China’s future development.” This goal, according to the document, is to be achieved by
formulating and implementing regulations in the country’s government procurement law to
“encourage and protect indigenous innovation,” establishing a coordination mechanism for
government procurement of indigenous innovative products, requiring a first-buy policy for major
domestically made high-tech equipment and products that possess proprietary intellectual
property rights, providing policy support to enterprises in procuring domestic high-tech
equipment, and developing “relevant technology standards” through government procurement.
Challenges to U.S. Policy of China’s Economic Rise
China’s rapid economic growth and emergence as major economic power have given China’s
leadership increased confidence in its economic model. Many believe the key challenges for the
United States are to convince China that: (1) it has a stake in maintaining the international trading
system, which is largely responsible for its economic rise, and to take a more active leadership
role in maintaining that system; and (2) that further economic and trade reforms are the surest
way for China to grow and modernize its economy. For example, by boosting domestic spending
and allowing its currency to appreciate, China would import more, which would help speed
economic recovery in other countries, promote more stable and balanced economic growth in
China, and lessen trade protectionist pressures around the world. Lowering trade barriers on
imports would boost competition in China, lower costs for consumers, and increase economic
efficiency. However, many U.S. stakeholders are concerned that China’s efforts to boost the
development of indigenous innovation and technology could result in greater intervention by the
state (such as subsidies and trade and investment barriers), which could negatively affect U.S. IP-
intensive firms. Failure by China to take meaningful steps to rebalance its economy could

59 The MLP identifies main areas and priority topics, including energy, water and mineral resources, the environment,
agriculture, manufacturing, communications and transport, information industry and modern service industries,
population and health, urbanization and urban development, public security, and national defense. The report also
identifies 16 major special projects and 8 “pioneer technologies.”
60 R&D Magazine, December 22, 2009.
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increase tensions with its trading partners, especially if China’s share of global exports continues
to increase rapidly, and if that increase is viewed as being the result of non-market policies that
give Chinese exports an unfair competitive advantage.61 Some economist contend that some
economic rebalancing by China appears to taken place in recent years, noting that China’s current
account surplus as a percent of GDP declined from a historical high of 10.1% in 2007 to 2.8% in
2011 (see Figure 20). However, ass indicated in Figure 21, fixed investment has been the largest
contributor to China’s economic growth over the past five years, rather than private consumption.
Figure 20. Current Account Balances as a Percent of GDP for China and the United
States: 2000-2011
(percent)
12.0
10.1
10.0
8.6
9.1
8.0
5.9
5.2
5.1
6.0
4.0
2.8
1.7
2.4
2.8
3.6
1.3
2.0
0.0
-2.0
-4.0
-2.7
-3.2
-3.1
-6.0
-4.2
-3.9
-4.3
-4.7
-5.3
-5.1
-4.7
-5.9
-6.0
-8.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
China
United States

Source: International Monetary Fund.

61 Sharp increases in Chinese exports of higher-end manufacturing could also raise trade tensions between China and its
major trading partners. This has already occurred in some areas, such as wind turbines and solar panels.
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Figure 21. Sources of China’s GDP Growth: 2007-2011
(% points)
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
2007
2008
2009
2010
2011
Gross fixed investment
External balance
Private consumption
Government consumption
Stockbuilding
GDP growth

Source: Economist Intelligence Unit.
Opinions differ as to the most effective way of dealing with China on major economic issues.
Some support a policy of engagement with China using various forums, such as the U.S.-China
Strategic and Economic Dialogue (S&ED), which holds discussions on major long-term
economic issues the highest government level. Others support a somewhat mixed policy of using
engagement when possible, coupled with a more aggressive use of the World Trade Organization
(WTO) dispute settlement procedures to address China’s unfair trade policies. Still others, who
see China as a growing threat to the U.S. economy and the global trading system, advocate a
policy of trying to contain China’s economic power and using punitive measures when needed to
force China to “play by the rules.”
China’s growing economic power has made it a critical and influential player on the global stage
on a number of issues important to U.S. interests, such as global economic cooperation, climate
change, nuclear proliferation, and North Korean aggression.62 China is in a position to help
advance U.S. interests or to frustrate them. China’s rising economy has also enabled it to boost its
military capabilities, raising the prospects that China could use that power to project its interests
globally, which could bring it into conflict with the United States and its allies.
U.S. policymakers face a number of complex challenges on how to deal with these issues. Can
the U.S. compel better behavior from China via quiet diplomacy or public confrontation? Has
U.S. leverage over Beijing lessened in the wake of China’s economic rise, and has China’s
leverage over Washington increased?

62 For additional information on these issues, see CRS Report R41108, U.S.-China Relations: Policy Issues, by Susan
V. Lawrence and Thomas Lum.
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Author Contact Information

Wayne M. Morrison

Specialist in Asian Trade and Finance
wmorrison@crs.loc.gov, 7-7767

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