People's Republic of China - Economy
Since 1979, China has been engaged in an effort to reform its economy. The Chinese leadership has adopted a pragmatic perspective on many political and socioeconomic problems, and has sharply reduced the role of ideology in economic policy. Political and social stability, economic productivity, and public welfare are considered paramount. In these years, the government has emphasized raising personal income and consumption and introducing new management systems to help increase productivity. The government also has focused on foreign trade as a major vehicle for economic growth.
In the 1980s, China tried to combine central planning with market-oriented reforms to increase productivity, living standards, and technological quality without exacerbating inflation, unemployment, and budget deficits. China pursued agricultural reforms, dismantling the commune system and introducing a household-based system that provided peasants greater decisionmaking in agricultural activities. The government also encouraged nonagricultural activities such as village enterprises in rural areas, and promoted more self-management for state-owned enterprises, increased competition in the marketplace, and facilitated direct contact between Chinese and foreign trading enterprises. China also relied more upon foreign financing and imports.
During the 1980s, these reforms led to average annual rates of growth of 10% in agricultural and industrial output. Rural per capita real income doubled. China became self-sufficient in grain production; rural industries accounted for 23% of agricultural output, helping absorb surplus labor in the countryside. The variety of light industrial and consumer goods increased. Reforms began in the fiscal, financial, banking, price setting, and labor systems.
By the late 1980s, however, the economy had become overheated with increasing rates of inflation. At the end of 1988, in reaction to a surge of inflation caused by accelerated price reforms, the leadership introduced an austerity program.
China's economy regained momentum in the early 1990s. During a visit to southern China in early 1992, China's paramount leader at the time Deng Xiaoping made a series of political pronouncements designed to reinvigorate the process of economic reform. The 14th Party Congress later in the year backed Deng's renewed push for market reforms, stating that China's key task in the 1990s was to create a "socialist market economy." The 10-year development plan for the 1990s stressed continuity in the political system with bolder reform of the economic system.
During 1993, output and prices were accelerating, investment outside the state budget was soaring, and economic expansion was fueled by the introduction of more than 2,000 special economic zones (SEZs) and the influx of foreign capital that the SEZs facilitated. Fearing hyperinflation, Chinese authorities called in speculative loans, raised interest rates, and re-evaluated investment projects. The growth rate was thus tempered, and the inflation rate dropped from over 17% in 1995 to 8% in early 1996. In 1996, the Chinese economy continued to grow at a rapid pace, at about 9.5%, accompanied by low inflation. The economy slowed for the next 3 years, with official growth of 8.9% in 1997, 7.8% in 1998 and 7.1% for 1999. The year 2000 showed a modest reversal of this trend. Gross domestic product in 2000 grew officially at 8.0% that year.
Despite China's impressive economic development during the past two decades, reforming the state enterprise sector and modernizing the banking system remain major hurdles. During the 15th National Congress of the Chinese Communist Party that met in September 1997, President Jiang Zemin announced plans to sell, merge, or close the vast majority of SOEs in his call for increased "non-public ownership." The 9th National People's Congress endorsed the plans at its March 1998 session.
Agriculture
Most of China's labor force is engaged in agriculture, even though only under 10% of the land is suitable for cultivation. There are 329 million Chinese farmers--roughly half the work force--mostly laboring on tiny plots of land relative to U.S. farmers. Virtually all arable land is used for food crops, and China is among the world's largest producers of rice, potatoes, sorghum, millet, barley, peanuts, tea, and pork. Major non-food crops, including cotton, other fibers, and oil seeds, furnish China with a large proportion of its foreign trade revenue. Agricultural exports, such as vegetables and fruits, fish and shellfish, grain and grain products, and meat and meat products, are exported to Hong Kong. Yields are high because of intensive cultivation, but China hopes to further increase agricultural production through improved plant stocks, fertilizers, and technology. Incomes for Chinese farmers are stagnating, leading to an increasing wealth gap between the cities and countryside. Government policies that continue to emphasize grain self-sufficiency and the fact that farmers do not own--and cannot buy or sell--the land they work have contributed to this situation.
Industry
Major state industries are iron, steel, coal, machine building, light industrial products, armaments, and textiles. These industries completed a decade of reform (1979-89) with little substantial management change. The 1999 industrial census revealed that there were 7,930,000 industrial enterprises at the end of 1999 (including small-scale town and village enterprises); total employment in state-owned industrial enterprises was approximately 24 million. High-tech industries are well positioned to take advantage of opportunities created by WTO; the response of moribund industries -- such as autos -- is less clear. Machinery and electronic products have become China's main exports.
Energy and Mineral Resources
According to Chinese statistics, China has managed to keep its energy growth rate at just half the rate of GDP growth over the past decade. Though these numbers are not reliable, there is agreement that China has improved its energy efficiency significantly over this period. China's total energy consumption may double by 2020 according to some projections. China is expected to add approximately 15,000 megawatts of generating capacity a year, with 20% of that coming from foreign suppliers.
Beijing, due in large part to environmental concerns, would like to shift China's current energy mix from a heavy reliance on coal, which accounts for 70% of China's energy, toward greater reliance on oil, natural gas, renewable energy, and nuclear power.
China has closed thousands of coal mines over the past 5 years to cut overproduction. According to Chinese statistics, this has reduced coal production by over 25%. Since 1993, China has been a net importer of oil. Net imports are expected to rise to 3.5 million barrels per day by 2010. China is interested in developing oil imports from Central Asia and has invested in Kazakhstan oil fields. Beijing is particularly interested in increasing China's natural gas production -- currently just 10% of oil production--and is incorporating a natural gas strategy in its tenth 5-year plan (2001-05) with the goal of expanding gas use from its current 2% share of China's energy production to 4% by 2005 (gas accounts for 25% of U.S. energy production).
Beijing also intends to continue to improve energy efficiency and promote the use of clean coal technology. Only one-fifth of the new coal power plant capacity installed from 1995 to 2000 included desulphurization equipment. Interest in renewable sources of energy is growing, but except for hydropower, their contribution to the overall energy mix is unlikely to rise above 1%-2% in the near future.
China's energy sector continues to be hampered by difficulties in obtaining funding, including long-term financing, and by market balkanization due to local protectionism that prevents more efficient large plants from achieving economies of scale.
Trade and Investment
China's global trade totaled $616 billion in 2002; the trade surplus stood at $30 billion. China's primary trading partners include Japan, the EU, the United States, South Korea, Hong Kong, and Taiwan. According to U.S. statistics, China had a trade surplus with the U.S. of $103 billion in 2002.
China is taking steps to decentralize its foreign trading system and integrate itself into the world trading system. In November 1991, China joined the Asia Pacific Economic Cooperation (APEC) group, which promotes free trade and cooperation in the economic, trade, investment, and technology spheres. China served as APEC chair in 2001, and Shanghai hosted the annual APEC leaders meeting in October.
China formally joined the WTO in December 2001. Accession marks the end of a 15 year long cycle of negotiations. As part of this far-reaching trade liberalization agreement, China agreed to lower tariffs and abolish market impediments after it joins the WTO. Chinese and foreign businessmen, for example, will gain the right to import and export on their own, and to sell their products without going through a government middleman. Average tariff rates on key U.S. agricultural exports will drop from 31% to 14% in 2004 and on industrial products from 25% to 9% by 2005. The agreement also opens up new opportunities for U.S. providers of services like banking, insurance, and telecommunications. After one year in the WTO, China made significant progress implementing its WTO commitments, but serious concerns remain.
Export growth continues to be a major component supporting China's rapid economic growth. To increase exports, China has pursued policies such as fostering the rapid development of foreign-invested factories, which assemble imported components into consumer goods for export and liberalizing trading rights.
The United States is one of China's primary suppliers of power generating equipment, aircraft and parts, computers and industrial machinery, raw materials, and chemical and agricultural products. However, U.S. exporters continue to have concerns about fair market access due to strict testing and standards requirements for some imported products. In addition, nontransparency in the regulatory process makes it difficult for businesses to plan for changes in the domestic market structure.
Foreign Investment
Foreign investment stalled in late 1989 in the aftermath of Tiananmen. In response, the government introduced legislation and regulations designed to encourage foreigners to invest in high-priority sectors and regions.
In 1990, the government eliminated time restrictions on the establishment of joint ventures, provided some assurances against nationalization, and allowed foreign partners to become chairs of joint venture boards. In 1991, China granted more preferential tax treatment for wholly foreign-owned businesses and contractual ventures and for foreign companies which invest in selected economic zones or in projects encouraged by the state, such as energy, communications, and transportation. China also authorized some foreign banks to open branches in Shanghai and allowed foreign investors to purchase special "B" shares of stock in selected companies listed on the Shanghai and Shenzhen Securities Exchanges. These "B" shares are sold to foreigners but carry no ownership rights in a company. China revised significantly its laws on Wholly Foreign-Owned Enterprises and China Foreign Equity Joint Ventures in 2000 and 2001, easing export performance and domestic content requirements. In 2002, China received nearly $53 billion in foreign direct investment, making it the number one recipient of FDI in the world.
Opening to the outside remains central to China's development. Foreign-invested enterprises produce about 45% of China's exports, and China continues to attract large investment inflows. For the past 8 years, China has been the world's second-largest recipient of foreign direct investment after the United States. Foreign exchange reserves totaled about $290 billion in 2002.
