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CRS Report: China’s Economic Conditions

CRS Report: China’s Economic Conditions

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Published by Natch Greyes
Since the initiation of economic reforms 30 years ago, China has become one of the world’s fastest-growing economies. From 1979 to 2007 China’s real gross domestic product (GDP) grew at an average annual rate of 9.8%. Real GDP grew 11.4% in 2007 (the fastest annual growth since 1994). However, China faces a number of challenges, including the fallout from the global financial crisis, widespread government corruption, an inefficient banking system, over-dependence on exports and fixed investment for growth, pollution, widening income disparities, growing inflationary pressures, and the current global financial crisis. The Chinese government has indicated that it intends, over the coming years, to create a “harmonious society” that would promote more balanced economic growth and address a number of economic and social issues.

Trade and foreign investment continues to play a major role in China’s booming economy. From 2004 to 2007, the value of total Chinese merchandise trade nearly doubled. In 2007, China’s exports (at $1,218 billion) exceeded U.S. exports (1,162 billion) for the first time. China’s imports were $956 billion and its trade surplus was $262 billion (a historic high). Well over half of China’s trade is conducted by foreign firms operating in China. The combination of large 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 $1.9 trillion at the end September 2008.

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, trade and investment barriers to U.S. goods and services, and failure to ensure the safety of its exports to the United States. Concerns have also been raised over China’s rising demand for energy and raw materials, its impact on world prices for such commodities, increased pollution levels, and efforts China has made to invest in energy and raw materials around the world, including countries (such as Iran and Sudan) where the United States has political and human rights concerns. The current global financial crisis has raised a number of questions over how China might respond in terms of stimulating its own economy and possibly assisting troubled economies around the world.

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.
Since the initiation of economic reforms 30 years ago, China has become one of the world’s fastest-growing economies. From 1979 to 2007 China’s real gross domestic product (GDP) grew at an average annual rate of 9.8%. Real GDP grew 11.4% in 2007 (the fastest annual growth since 1994). However, China faces a number of challenges, including the fallout from the global financial crisis, widespread government corruption, an inefficient banking system, over-dependence on exports and fixed investment for growth, pollution, widening income disparities, growing inflationary pressures, and the current global financial crisis. The Chinese government has indicated that it intends, over the coming years, to create a “harmonious society” that would promote more balanced economic growth and address a number of economic and social issues.

Trade and foreign investment continues to play a major role in China’s booming economy. From 2004 to 2007, the value of total Chinese merchandise trade nearly doubled. In 2007, China’s exports (at $1,218 billion) exceeded U.S. exports (1,162 billion) for the first time. China’s imports were $956 billion and its trade surplus was $262 billion (a historic high). Well over half of China’s trade is conducted by foreign firms operating in China. The combination of large 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 $1.9 trillion at the end September 2008.

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, trade and investment barriers to U.S. goods and services, and failure to ensure the safety of its exports to the United States. Concerns have also been raised over China’s rising demand for energy and raw materials, its impact on world prices for such commodities, increased pollution levels, and efforts China has made to invest in energy and raw materials around the world, including countries (such as Iran and Sudan) where the United States has political and human rights concerns. The current global financial crisis has raised a number of questions over how China might respond in terms of stimulating its own economy and possibly assisting troubled economies around the world.

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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Published by: Natch Greyes on Feb 26, 2009
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Order Code RL33534
China\u2019s Economic Conditions
Updated November 20, 2008

Wayne M. Morrison Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division

China\u2019s Economic Conditions
Summary

Since the initiation of economic reforms 30 years ago, China has become one of the world\u2019s fastest-growing economies. From 1979 to 2007 China\u2019s real gross domestic product (GDP) grew at an average annual rate of 9.8%. Real GDP grew 11.4% in 2007 (the fastest annual growth since 1994). However, China faces a number of challenges, including the fallout from the global financial crisis, widespread government corruption, an inefficient banking system, over-dependence on exports and fixed investment for growth, pollution, widening income disparities, growing inflationary pressures, and the current global financial crisis. The Chinese government has indicated that it intends, over the coming years, to create a \u201charmonious society\u201d that would promote more balanced economic growth and address a number of economic and social issues.

Trade and foreign investment continues to play a major role in China\u2019s booming economy. From 2004 to 2007, the value of total Chinese merchandise trade nearly doubled. In 2007, China\u2019s exports (at $1,218 billion) exceeded U.S. exports (1,162 billion) for the first time. China\u2019s imports were $956 billion and its trade surplus was $262 billion (a historic high). Well over half of China\u2019s trade is conducted by foreign firms operating in China. The combination of large trade surpluses, foreign direct investment flows, and large-scale purchases of foreign currency have helped make China the world\u2019s largest holder of foreign exchange reserves at $1.9 trillion at the end September 2008.

China\u2019s 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\u2019s 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, trade and investment barriers to U.S. goods and services, and failure to ensure the safety of its exports to the United States. Concerns have also been raised over China\u2019s rising demand for energy and raw materials, its impact on world prices for such commodities, increased pollution levels, and efforts China has made to invest in energy and raw materials around the world, including countries (such as Iran and Sudan) where the United States has political and human rights concerns. The current global financial crisis has raised a number of questions over how China might respond in terms of stimulating its own economy and possibly assisting troubled economies around the world.

This report provides an overview of China\u2019s economic development, challenges China faces to maintain growth, and the implications of China\u2019s rise as a major economic power for the United States. This report will be updated as events warrant.

Contents
Most Recent Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

An Overview of China\u2019s Economic Development. . . . . . . . . . . . . . . . . . . . . . . . 2 China\u2019s Economy Prior to Reforms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Introduction of Economic Reforms. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 China\u2019s Economic Growth Since Reforms: 1979-Present. . . . . . . . . . . . . . 3 Causes of China\u2019s Economic Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Measuring the Size of China\u2019s Economy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Foreign Direct Investment in China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 China\u2019s Trade Patterns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

China\u2019s Major Trading Partners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Major Chinese Trade Commodities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

China\u2019s Growing Appetite for Imported Oil. . . . . . . . . . . . . . . . . . . . . . . . 12 China\u2019s Growing Overseas Direct Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Major Long-Term Challenges Facing the Chinese Economy. . . . . . . . . . . . . . . 16 Fallout From the Current Global Financial Crisis. . . . . . . . . . . . . . . . . . . . . . . . 19 Appendix. China\u2019s Growing Economic Ties with Africa, North Korea, and

Iran. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

China-Africa Trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
China\u2019s Imports From Africa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
China\u2019s Mineral Fuel Imports From Africa. . . . . . . . . . . . . . . . . . . . . 22
China\u2019s Exports to Africa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
China\u2019s Trade with North Korea. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
China\u2019s Trade With Iran. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

List of Tables
Table 1. China\u2019s Average Annual Real GDP Growth: 1960-2008. . . . . . . . . . . 4
Table 2. Comparisons of U.S., Japanese, and Chinese GDP and Per Capita GDP

in Nominal U.S. Dollars and PPP, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Table 3. Major Foreign Investors in China: 1979-2007. . . . . . . . . . . . . . . . . . . . 7 Table 4. Foreign Direct Investment by Sectors in 2007. . . . . . . . . . . . . . . . . . . . . 8 Table 5. China\u2019s Merchandise World Trade, 1979-2007. . . . . . . . . . . . . . . . . . . 8 Table 6. China\u2019s Major Trading Partners: 2007. . . . . . . . . . . . . . . . . . . . . . . . 10 Table 7. Major Chinese Exports: 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Table 8. Major Chinese Imports: 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Table 9. Top 10 Destinations for China\u2019s Overseas Direct Investment: 2005 . . 15 Table 10. Top Five African Sources of Chinese Imports: 2004-2007. . . . . . . . 22 Table 11. Top Five Chinese Imports from Africa: 2004-2007. . . . . . . . . . . . . . 22

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