Economy of the People's Republic of China

The economies of the Special Administrative Regions of Hong Kong and Macau are separate from the rest of the People's Republic of China. This article is on the economy of mainland China. See also: Economy of Hong Kong and Economy of Macau

Since 1978 the People's Republic of China (PRC) government has been reforming its economy from a Soviet-style centrally planned economy to a more market-oriented economy but still within a rigid political framework of Communist Party of China control; called "Socialism with Chinese characteristics" which is one type of mixed economy.

To this end the authorities have switched to a system of household responsibility in agriculture in place of the old collectivization, increased the authority of local officials and plant managers in industry, permitted a wide variety of small-scale enterprise in services and light manufacturing, and opened the economy to increased foreign trade and investment. 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. The result has been a quadrupling of GDP since 1978. In 2004, with a nominal GDP of 7.262 trillion USD and its 1.3 billion people but a purchasing power parity (PPP) of just $5,000 per capita, mainland China has the second largest economy in the world and is regarded as one of the fastest-growing in the world.

Key figures

GDP: purchasing power parity - $7.262 trillion (2004 est.)
GDP - real growth rate: 9.1% (official data) (2003 est.)
GDP - per capita: purchasing power parity - $5,600 (2004 est.)
GDP - composition by sector: agriculture 14.8%, industry 52.9%, services 32.3% (2003)

Population below poverty line: 10% (2001 est.)
Household income or consumption by percentage share: lowest 10%: 2.4%, highest 10%: 30.4% (1998)

Inflation rate (consumer prices): 1.2% (2003 est.)

Labor force: 778.1 million (2003 est.)
Labor force - by occupation: agriculture 50%, industry 22%, services 28% (2001 est.)
Unemployment rate: urban unemployment roughly 10.1%; substantial unemployment and underemployment in rural areas (2003 est.)

Budget:
revenues: $265.8 billion
expenditures: $300.2 billion, including capital expenditures of $NA (2003 est.)

Background

In the 1980s, the PRC tried to combine central planning with market-oriented reforms to increase productivity, living standards, and technological quality without exacerbating inflation, unemployment, and budget deficits. The PRC pursued agricultural reforms, dismantling the commune system and introducing the household responsibility system that provided peasants greater decision-making 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 mainland Chinese and foreign trading enterprises. The PRC 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. Industry posted major gains especially in coastal areas near Hong Kong and across the strait from Taiwan, where foreign investment helped spur output of both domestic and export goods. 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.

On the darker side, the leadership has often experienced in its hybrid system the worst results of socialism (bureaucracy, lassitude, corruption) and of capitalism (windfall gains and stepped-up inflation). Beijing thus has periodically backtracked, retightening central controls at intervals. 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. Deng Xiaoping's Chinese New Year's visit to southern China in 1992 gave economic reforms new impetus. The 14th Communist Party Congress later in the year backed up Deng's renewed push for market reforms, stating that the PRC's key task in the 1990s was to create a "socialist market economy." Continuity in the political system but bolder reform in the economic system were announced as the hallmarks of the 10-year development plan for the 1990s.

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. Beijing approved additional long-term reforms aimed at giving still more play to market-oriented institutions and at strengthening the center's control over the financial system; state enterprises would continue to dominate many key industries in what was now termed "a socialist market economy". The PRC government called in speculative loans, raised interest rates, and reevaluated investment projects. The growth rate was thus tempered, and the inflation rate dropped from over 17% in 1995 to 8% in early 1996. The economy slowed in the late 1990s, influenced in part by the Asian Financial Crisis of 1998-99, with official growth of 7.8% in 1998, and 7.1% for 1999. Growth accelerated again early in the new century, reaching 9.1% in 2003 and 9.5% in 2004.

The executive vice prime minister of China, Huang Ju, speaking at the World Economic Forum at Davos, Switzerland in January, 2005 projected growth of economic output to $4 trillion by 2020, up from $1.6 trillion in 2005, with output per capita tripling to $3,000 per person.

Challenges

From 1995-1999 inflation dropped sharply, reflecting tighter monetary policies and stronger measures to control food prices. At the same time, the government struggled to (a) collect revenues due from provinces, businesses, and individuals; (b) reduce corruption and other economic crimes; and (c) keep afloat the large state-owned enterprises, most of which had not participated in the vigorous expansion of the economy and many of which had been losing the ability to pay full wages and pensions. From 50 to 100 million surplus rural workers are adrift between the villages and the cities, many subsisting through part-time low-paying jobs. Popular resistance, changes in central policy, and loss of authority by rural cadres have weakened the PRC's population control program. Another long-term threat to continued rapid economic growth is the deterioration in the environment, notably air pollution, soil erosion, and the steady fall of the water table especially in the north. China continues to lose arable land because of erosion and economic development.

Despite mainland China's impressive economic development during the past two decades, reforming the state enterprise sector and modernizing the banking system remain major hurdles. Over half of mainland China's large state-owned enterprises are inefficient and reporting losses. 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 "public ownership" (privatization in euphemistic terms). The 9th National People's Congress endorsed the plans at its March 1998 session. The next few years will witness increasing tensions between a highly centralized political system and an increasingly decentralized economic system.

Another main hurdle in the Chinese economy is actually the rapid growth that has occurred in the last 10 years. Some economists fear that China's economy is over-heating which means that inflation will become a serious issue in the Chinese economy and that due to China's global economic expansion an over-heating could have major repercussions among other nations. Chinese officials deny that the economy is over-heating, although they do admit that certain areas are "heating up" in that they have weak infrastructures that contribute to the lack of economic control.

Taxation has also proved to be a problem in stabilizing the Chinese economy. Officials are now planning on implementing tax cuts to certain economic sectors and industries in hopes that the tax cuts will help to regulate the economy. Officials are using the example of Ronald Reagan's tax polices of the 1980s in the United States as a guideline for the new Chinese policy. A primary goal of the tax cuts will be to assist in decreasing the investment disparity between rural and urban areas and to encourage government owned corporations to compete with foreign corporations.

By 2005, there were signs of a labor shortage with workers being able to choose employment which offered higher wages and better working conditions, enabling some to move away from the restrictive dormitory life and boring factory work which characterize export industries in Guangdong and Fujian. Minimum wages began rising toward the equivalent of 100 U.S. dollars a month as companies scrambled for employees with some paying as much as an average 150 a month. The labor shortage was partially driven by demographic trends as the proportion of people of working age falls as the result of strict family planning.

Agriculture

Main agricultural products: rice, wheat, potatoes, sorghum, peanuts, tea, millet, barley, cotton, oilseed, pork, fish.

Most of China's labor force is engaged in agriculture, even though only about 15.4% of the land is suitable for cultivation. There are 329 million Chinese farmers - roughly half the work force - mostly laboring on small pieces 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.

Industry

Main industries: iron and steel, coal, machine building, armaments, textiles and apparel, petroleum, cement, chemical fertilizers, footwear, toys, food processing, automobiles, consumer electronics, telecommunications.

Industrial production growth rate: 12.6% (2002 est.)

Major state industries are iron, steel, coal, machine building, light industrial products, armaments, and textiles. These industries completed a decade of reform (1979-1989) with little substantial management change. The 1999 industrial census revealed that there were 7,930,000 industrial enterprises at the end of 1999; total employment in state-owned industrial enterprises was about 24 million. The automobile industry is expected to grow rapidly in the coming decade, as is the petrochemical industry. Machinery and electronic products have become China's main exports.

Energy and mineral resources

Over the past decade China has managed to keep its energy growth rate at just half the rate of GDP growth, a considerable achievement. Although energy consumption slumped in absolute terms and economic growth slowed during 1998, mainland 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 75% of China's energy, toward greater reliance on oil, natural gas, renewable energy, and nuclear power.

The PRC has closed some 30,000 coal mines over the past 5 years to cut overproduction. This has reduced coal production by over 25%. Since 1993, China has been a net importer of oil; today imported oil accounts for 20% of the processed crude in China. Net imports are expected to rise to 3.5 million barrels (560,000 m³) 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 (2001-2005), 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 section 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.

Electricity:

• production: 1,910 TWh (2003)
• consumption: 1,630 TWh (2003)
• exports: 10.38 TWh (2002)
• imports: 2.3 TWh (2002)

Electricity - production by source:'

• fossil fuel: 80.2%
• hydro: 18.5%
• other: 0.1% (2001)
• nuclear: 1.2%

Oil:

• production: 3.392 million barrel/day (2003 est.)
• consumption: 4.956 million barrel/day (2002 est.)
• exports: 427,800 barrel/day (2002)
• imports: 2.414 million barrel/day (2002)
• proved reserves: 17.74 billion barrel (2004 est.)

Natural gas:

• production: 35 billion m³ (2003 est.)
• consumption: 29.18 billion m³ (2002 est.)
• exports: 0 m³ (2002 est.)
• imports: 0 m³ (2002 est.)
• proved reserves: 2.23 trillion m³ (2004)

See also:

• Xihu Trough
• Daqing Field
• Three Gorges Dam
• Daya Bay

Environment

Main article: Environment of China

A harmful by-product of China's rapid industrial development has been increased pollution. A 1998 World Health Organization report on air quality in 272 cities worldwide concluded that seven of the 10 most-polluted cities were in China. According to the PRC's own evaluation, two-thirds of the 338 cities for which air-quality data are available are considered polluted - two-thirds of them moderately or severely so. Respiratory and heart diseases related to air pollution are the leading causes of death in China. Almost all of the nation's rivers are considered polluted to some degree, and half of the population lacks access to clean water. Ninety percent of urban water bodies are severely polluted. Water scarcity also is an issue; for example, severe water scarcity in Northern China has forced the government to plan a large-scale diversion of water from the Yangtze River to northern cities, including Beijing and Tianjin. Acid rain falls on 30% of the country. Various studies estimate pollution costs the Chinese economy about 7% of GDP each year.

China's communist leaders are increasingly paying attention to the country's severe environmental problems. In March 1998, the State Environmental Protection Administration (SEPA) was officially upgraded to a ministry-level agency, reflecting the growing importance the PRC government places on environmental protection. In recent years, the PRC has strengthened its environmental legislation and made some progress in stemming environmental deterioration. In 1999, the PRC invested more than 1% of GDP in environmental protection, a proportion that will likely increase in coming years. During the 10th 5-Year Plan the PRC plans to reduce total emissions by 10%. Beijing in particular has invested heavily in pollution control as part of its successful campaign to win the competition to host the 2008 Olympic Games.

The PRC is an active participant in the climate change talks and other multilateral environmental negotiations. It is a signatory to the Basel Convention governing the transport and disposal of hazardous waste and the Montreal Protocol on Substances That Deplete the Ozone Layer, as well as the Convention on the International Trade in Endangered Species of Wild Flora and Fauna and other major environmental agreements.

The question of environmental impacts associated with the Three Gorges Dam project has generated controversy among environmentalists inside and outside China. Critics claim that erosion and silting of the Yangtze River threaten several endangered species, while Chinese officials say the hydroelectric power generated by the project will enable the region to lower its dependence on coal, thus lessening air pollution.

The U.S.-China Forum on Environment and Development, co-chaired by the U.S. Vice President and the PRC Premier, has been the principal vehicle of an active program of bilateral environmental cooperation since its inception in 1997. Despite positive reviews of the Forum's achievements from both sides, the PRC has often compared the U.S. program, which lacks a foreign assistance component, with those of Japan and several European Union (EU) countries that include generous levels of aid.

Foreign trade

China's global trade exceeded $1 trillion in 2004, more than doubling from 2001. The trade surplus however was stable at $30 billion. (>40 billion in 1998, <30 billion in 2003). China's primary trading partners include Japan, U.S., South Korea, Germany, Singapore, Malaysia, Russia, and the Netherlands. According to U.S. statistics, China had a trade surplus with the U.S. of $170 billion in 2004, more than doubling from 1999. Wal-Mart, the United States' largest retailer, is China's 7th largest export partner, just ahead of the United Kingdom.

The PRC has experimented with decentralizing its foreign trading system and has sought to integrate itself into the world trading system. In November 1991, the PRC joined the Asia-Pacific Economic Cooperation (APEC) group, which promotes free trade and cooperation in economic, trade, investment, and technology issues. In 2001, China served as APEC chair, and Shanghai hosted the annual APEC leaders meeting.

During his 1999 visit to the United States, Premier Zhu Rongji signed a bilateral Agricultural Cooperation Agreement, which lifted longstanding Chinese prohibitions on the import of citrus, grain, beef, and poultry. In November 1999, the United States and PRC reached a historic bilateral market-access agreement to pave the way for the PRC's accession to the World Trade Organization (WTO). As part of the far-reaching trade liberalization agreement, the PRC agreed to lower tariffs and abolish market impediments after it joins the world trading body. 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 new opportunities for U.S. providers of services like banking, insurance, and telecommunications. After reaching a bilateral WTO agreement with the EU and other trading partners in summer 2000, the PRC worked on a multilateral WTO accession package. To increase exports, the PRC has pursued policies such as fostering the rapid development of foreign-invested factories, which assemble imported components into consumer goods for export. The PRC joined the WTO on December 11, 2001, after 15 years of negotiations, the longest in GATT history.

The U.S. 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 China's restrictive trade policies and U.S. export restrictions.

Exports: $580 billion (2004 est.)

Exports - commodities: machinery and equipment, plastics, optical and medical equipment, iron and steel

Exports - partners: US 21.1%, Hong Kong 17.4%, Japan 13.6%, South Korea 4.6%, Germany 4% (2003)

Imports: $550 billion (2004 est.)

Imports - commodities: machinery and equipment, oil and mineral fuels, plastics, optical and medical equipment, organic chemicals, iron and steel

Imports - partners: Japan 18%, Taiwan 11.9%, South Korea 10.4%, US 8.2%, Germany 5.9% (2003)

See also: Closer Economic Partnership Arrangement with Hong Kong and Macau.

High-tech standards

1. The security protocol (Wapi) on top of the Wi-Fi.
2. EVD, for DVD.
3. Dragon chips to challenge the Intel and AMD ones.

Foreign investment

Foreign investment stalled in late 1989 in the aftermath of the Tiananmen protests. 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, the PRC granted more preferential tax treatment for Wholly Foreign Owned Enterprises 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 transport. It 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. In 1999, China received nearly $39 billion in foreign direct investment.

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. Foreign exchange reserves totaled about $659 billion in March 2005, more than doubling from March 2003. (316 billion)

External debt: $200 billion (2004 est.)

Economic aid - recipient: $NA

Currency

Currency: 1 yuan = 10 jiao = 100 fen (see also: Renminbi)

Exchange rates: yuan per US$1 - 8.2793 (January 2000), 8.2783 (1999), 8.2790 (1998), 8.2898 (1997), 8.3142 (1996), 8.3514 (1995)
note: beginning 1 January 1994, the People's Bank of China quotes the midpoint rate against the US dollar based on the previous day's prevailing rate in the interbank foreign exchange market.

Miscellaneous

Fiscal year: calendar year

Hong Kong and Macao

In accordance with the One Country, Two Systems policy the economies of the Hong Kong and Macao have continued to be administered and treated as separate entities from the rest of the PRC despite reverting to PRC rule in 1997 and 1999 respectively. Both entities are free to conduct and engage in economic negotiations with foreign countries, as well as participating as full members in various economical international organizations such as the World Trade Organization and the Asia-Pacific Economic Cooperation forum, often under the names "Hong Kong, China" and "Macau, China".

See the articles Economy of Hong Kong and Economy of Macau for more details.

See also

Economy

• Asian financial crisis
• British East India Company
• Communications in the People's Republic of China
• Economy of Asia
• Closer Economic Partnership Arrangement
• Economy of Taiwan
• East Asian Tigers
• Free trade
• Intellectual property in the People's Republic of China
• List of Chinese companies
• Science and technology in China
• Special Economic Zone
• Transportation in China

Stock exchanges

• Shanghai Stock Exchange
• Shenzhen Stock Exchange

Others

• Law of the People's Republic of China
• Forbes family
• Opium trade
• Opium Wars
• Politics of the People's Republic of China

References

• CIA World Factbook (http://www.cia.gov/cia/publications/factbook/geos/ch.html)
• http://www.china.org.cn/e-company/index.htm
• http://www.china.org.cn/english/eng-shuzi2003/index.htm

Articles

• The Banker: China’s statistics don’t add up (http://www.thebanker.com/news/fullstory.php/aid/1845/China%92s_statistics_don%92t_add_up.html) - 02 August 2004

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