CRS — China’s Economic Conditions

January 14, 2013

China’s Economic Conditions (PDF)

Source: Congressional Research Service (via Federation of American Scientists)

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 nearly 10% 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 greatly 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%, although it has slowed somewhat in 2012.

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 those 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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