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China Economy

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Economic Reforms

Since 1979, China has reformed and opened its economy. The Chinese leadership has adopted a more pragmatic perspective on many political and socioeconomic problems, and has reduced the role of ideology in economic policy. China's ongoing economic transformation has had a profound impact not only on China but on the world. The market-oriented reforms China has implemented over the past two decades have unleashed individual initiative and entrepreneurship. The result has been the largest reduction of poverty and one of the fastest increases in income levels ever seen. China today is the fourth-largest economy in the world. It has sustained average economic growth of over 9.5% for the past 26 years. In 2006 its $2.68 trillion economy was about one-fifth the size of the U.S. economy.

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 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 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.

Following the Chinese Communist Party's Third Plenum, held in October 2003, Chinese legislators unveiled several proposed amendments to the state constitution. One of the most significant was a proposal to provide protection for private property rights. Legislators also indicated there would be a new emphasis on certain aspects of overall government economic policy, including efforts to reduce unemployment (now in the 8-10% range in urban areas), to rebalance income distribution between urban and rural regions, and to maintain economic growth while protecting the environment and improving social equity. The National People's Congress approved the amendments when it met in March 2004. The Fifth Plenum in October 2005 approved the 11th Five-Year Economic Program aimed at building a "harmonious society" through more balanced wealth distribution and improved education, medical care, and social security.

Agriculture

China is the world's most populous country and one of the largest producers and consumers of agricultural products. Over 40% of China's labor force is engaged in agriculture, even though only 10% of the land is suitable for cultivation and agriculture contributes only 13% of China's GDP. China's cropland area is only 75% of the U.S. total, but China still produces about 30% more crops and livestock than the United States because of intensive cultivation, China is among the world's largest producers of rice, corn, wheat, soybeans, vegetables, tea, and pork. Major non-food crops include cotton, other fibers, and oilseeds. 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. In addition, inadequate port facilities and lack of warehousing and cold storage facilities impede both domestic and international agricultural trade.

Industry

Industry and construction account for about 46% of China's GDP. Major industries are mining and ore processing; iron; steel; aluminum; coal, machinery; textiles and apparel; armaments; petroleum; cement; chemicals; fertilizers; consumer products including footwear, toys, and electronics; automobiles and other transportation equipment including rail cars and locomotives, ships, and aircraft; and telecommunications.

China has become a preferred destination for the relocation of global manufacturing facilities. Its strength as an export platform has contributed to incomes and employment in China. The state-owned sector still accounts for about 40% of GDP. In recent years, authorities have been giving greater attention to the management of state assets--both in the financial market as well as among state-owned-enterprises--and progress has been noteworthy.

Regulatory Environment

Though China's economy has expanded rapidly, its regulatory environment has not kept pace. Since Deng Xiaoping's open market reforms, the growth of new businesses has outpaced the government's ability to regulate them. This has created a situation where businesses, faced with mounting competition and poor oversight, will be willing to take drastic measures to increase profit margins, often at the expense of consumer safety. This issue acquired more prominence in 2007, with the United States placing a number of restrictions on problematic Chinese exports. The Chinese Government recognizes the severity of the problem, recently concluding that up to 20% of the country's products are substandard or tainted, and undertaking efforts in coordination with the United States and others to better regulate the problem.

Energy

Together with strong economic growth, China's demand for energy is surging rapidly. In 2003, China surpassed Japan to become the second-largest consumer of primary energy, after the United States. China is the world's second-largest consumer of oil, after the United States, and for 2006, China's increase in oil demand represented 38% of the world total increase in oil demand. China is also the third-largest energy producer in the world, after the United States and Russia. China's electricity consumption is expected to grow by over 4% a year through 2030, which will require more than $2 trillion in electricity infrastructure investment to meet the demand. China expects to add approximately 15,000 megawatts of generating capacity a year, with 20% of that coming from foreign suppliers.

Coal makes up the bulk of China's energy consumption (70% in 2005), and China is the largest producer and consumer of coal in the world. As China's economy continues to grow, China's coal demand is projected to rise significantly. Although coal's share of China's overall energy consumption will decrease, coal consumption will continue to rise in absolute terms. China's continued and increasing reliance on coal as a power source has contributed significantly to putting China on the path to becoming the world's largest emitter of acid rain-causing sulfur dioxide and green house gases, including carbon dioxide.

The 11th Five-Year Program, announced in 2005, calls for greater energy conservation measures, including development of renewable energy sources and increased attention to environmental protection. Moving away from coal towards cleaner energy sources including oil, natural gas, renewable energy, and nuclear power is an important component of China's development program. China has abundant hydroelectric resources; the Three Gorges Dam, for example, will have a total capacity of 18 gigawatts when fully on-line (projected for 2009). In addition, the share of electricity generated by nuclear power is projected to grow from 1% in 2000 to 5% in 2030. China's renewable energy law, which went into effect in 2006, calls for 10% of its energy to come from renewable energy sources by 2020.

Since 1993, China has been a net importer of oil, a large portion of which comes from the Middle East. Net imports are expected to rise to 3.5 million barrels per day by 2010. China is interested in diversifying the sources of its oil imports and has invested in oil fields around the world. Beijing also plans to increase China's natural gas production, which currently accounts for only 3% of China's total energy consumption. Analysts expect China's consumption of natural gas to more than double by 2010.

In May 2004, then-Secretary of Energy Spencer Abraham signed a Memorandum of Understanding (MOU) with China's National Development and Reform Commission (NDRC) that launched the U.S.-China Energy Policy Dialogue. The dialogue has strengthened energy-related interactions between China and the United States, the world's two largest energy consumers. The U.S.-China Energy Policy Dialogue builds upon the two countries' existing cooperative ventures in high energy nuclear physics, fossil energy, energy efficiency and renewable energy and energy information exchanges. The NDRC and the Department of Energy also exchange views and expertise on Peaceful Uses of Nuclear Technologies, and we convene an annual Oil and Gas Industry Forum with China.

In July 2009, during the U.S.-China Strategic and Economic Dialogue, the two countries negotiated a Memorandum of Understanding (MOU) to Enhance Cooperation on Climate Change, Energy, and the Environment in order to expand and enhance cooperation between the two sides on clean and efficient energy, to protect the environment, and to ensure energy security.

Environment

One of the serious negative consequences of China's rapid industrial development has been increased pollution and degradation of natural resources. Many analysts estimate that China will surpass the United States as the world's largest emitter of carbon dioxide and other greenhouse gases in 2009. A World Health Organization report on air quality in 272 cities worldwide concluded that seven of the world's 10 most polluted cities were in China. According to China'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 cause 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. By some estimates, every day approximately 300 million residents drink contaminated water. Ninety percent of urban water bodies are severely polluted. Water scarcity also is an issue; for example, severe water scarcity in Northern China is a serious threat to sustained economic growth and the government has begun working on a project for 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 7%-10% of GDP each year.

China's leaders are increasingly paying attention to the country's severe environmental problems. In 1998, the State Environmental Protection Administration (SEPA) was officially upgraded to a ministry-level agency, reflecting the growing importance the Chinese Government places on environmental protection. In recent years, China has strengthened its environmental legislation and made some progress in stemming environmental deterioration. In 2005, China joined the Asia Pacific Partnership on Clean Development, which brings industries and governments together to implement strategies that reduce pollution and address climate change. During the 10th Five-Year Plan, China plans to reduce total emissions by 10%. Beijing in particular invested heavily in pollution control as part of its campaign to host a successful Olympiad in 2008. Some cities have seen improvement in air quality in recent years.

China is an active participant in climate change talks and other multilateral environmental negotiations, taking environmental challenges seriously but pushing for the developed world to help developing countries to a greater extent. It is a signatory to the Basel Convention governing the transport and disposal of hazardous waste and the Montreal Protocol for the Protection of the Ozone Layer, as well as the Convention on International Trade in Endangered Species 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 dam will help prevent devastating floods and generate clean hydroelectric power that will enable the region to lower its dependence on coal, thus lessening air pollution.

The United States and China are members of the Asia Pacific Partnership on Clean Development and Climate (APP). The APP is a public-private partnership of six nations--Australia, China, India, Japan, the Republic of Korea, and the United States--committed to explore new mechanisms to meet national pollution reduction, energy security and climate change goals in ways that reduce poverty and promote economic development. APP members have undertaken cooperative activities involving deployment of clean technology in partner countries in eight areas: cleaner fossil energy, renewable energy and distributed generation, power generation and transmission, steel, aluminum, cement, coal mining, and buildings and appliances.

The United States and China have been engaged in an active program of bilateral environmental cooperation since the mid-1990s, with an emphasis on clean energy technology and the design of effective environmental policy. While both governments view this cooperation positively, China 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.

Science and Technology

Science and technology have always preoccupied China's leaders; indeed, China's political leadership comes almost exclusively from technical backgrounds and has a high regard for science. Deng called it "the first productive force." Distortions in the economy and society created by party rule have severely hurt Chinese science, according to some Chinese science policy experts. The Chinese Academy of Sciences, modeled on the Soviet system, puts much of China's greatest scientific talent in a large, under-funded apparatus that remains largely isolated from industry, although the reforms of the past decade have begun to address this problem.

Chinese science strategists see China's greatest opportunities in newly emerging fields such as biotechnology and computers, where there is still a chance for China to become a significant player. Most Chinese students who went abroad have not returned, but they have built a dense network of trans-Pacific contacts that will greatly facilitate U.S.-China scientific cooperation in coming years. The U.S. space program is often held up as the standard of scientific modernity in China. China's small but growing space program, which successfully completed their second manned orbit in October 2005, is a focus of national pride.

The U.S.-China Science and Technology Agreement remains the framework for bilateral cooperation in this field. A 5-year agreement to extend the Science and Technology Agreement was signed in April 2006. The agreement is among the longest-standing U.S.-China accords, and includes over 11 U.S. Federal agencies and numerous branches that participate in cooperative exchanges under the Science and Technology Agreement and its nearly 60 protocols, memoranda of understanding, agreements, and annexes. The agreement covers cooperation in areas such as marine conservation, renewable energy, and health. Biennial Joint Commission Meetings on Science and Technology bring together policymakers from both sides to coordinate joint science and technology cooperation. Executive Secretaries meetings are held biennially to implement specific cooperation programs. Japan and the European Union also have high profile science and technology cooperative relationships with China.

Trade

The U.S. trade deficit with China reached $268 billion in 2008. U.S. imports from China accounted for 16.1% of overall U.S. imports in 2008. At the same time, the share of many other Asian countries' imports to the United States and the U.S. trade deficit with the Asia-Pacific region as a whole have fallen. U.S. goods exports to China, which accounted for 5.5% of total U.S. exports in 2008, totaled $71.5 billion, a 9.5% increase of $16.2 billion from 2007 ($55.3 billion). The top three U.S. exports to China in 2008 were electrical machinery ($11.4 billion), machinery ($9.7 billion), and aircraft ($5.1 billion). In July 2009, Treasury Secretary Timothy Geithner met with P.R.C. Vice Premier Wang Qishangin Beijing for the inaugural round of the Strategic and Economic Dialogue (for further details, please refer to the S&ED section below). 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 of that year.

China formally joined the WTO in December 2001. As part of this far-reaching trade liberalization agreement, China agreed to lower tariffs and abolish market impediments. Chinese and foreign businessmen, for example, gained the right to import and export on their own, and to sell their products without going through a government middleman. By 2005, average tariff rates on key U.S. agricultural exports dropped from 31% to 14% and on industrial products from 25% to 9%. The agreement also opens up new opportunities for U.S. providers of services like banking, insurance, and telecommunications. China has made significant progress implementing its WTO commitments, but serious concerns remain, particularly in the realm of intellectual property rights protection.

China is now one of the most important markets for U.S. exports: in 2008, U.S. exports to China totaled $71.5 billion, a 9.5% increase of $16.2 billion from 2007. U.S. agricultural exports have increased dramatically, totaling $12.2 billion in 2009 and thus making China our fourth-largest agricultural export market. Leading categories include: soybeans ($7.3 billion), cotton ($1.6 billion), and hides and skins ($859 million).

Export growth continues to be a major driver of 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. In its eleventh Five-Year Program, adopted in 2005, China placed greater emphasis on developing a consumer demand-driven economy to sustain economic growth and address global imbalances.

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, a lack of transparency in the regulatory process makes it difficult for businesses to plan for changes in the domestic market structure.

In April 2009, the United States and China announced that the Joint Commission on Commerce and Trade (JCCT) will continue to serve as the primary venue for the two countries to discuss trade issues. Under the Obama administration, the JCCT, which will be led by Commerce Secretary Gary Locke and U.S. Trade Representative Ron Kirk on the U.S. side and Vice Premier Wang Qishan on the Chinese side, will not only focus on discussing trade issues, but will also include broader issues such as healthcare and innovation and industrial policies.

Foreign Investment

China's investment climate has changed dramatically in a quarter-century of reform. In the early 1980s, China restricted foreign investments to export-oriented operations and required foreign investors to form joint-venture partnerships with Chinese firms. Foreign direct investment (FDI) grew quickly during the 1980s, but slowed 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. Since the early 1990s, China has allowed foreign investors to manufacture and sell a wide range of goods on the domestic market, and authorized the establishment of wholly foreign-owned enterprises, now the preferred form of FDI. However, the Chinese Government's emphasis on guiding FDI into manufacturing has led to market saturation in some industries, while leaving China's services sectors underdeveloped. China is now one of the leading FDI recipients in the world, receiving over $80 billion in 2007 according to the Chinese Ministry of Commerce.

As part of its WTO accession, China undertook to eliminate certain trade-related investment measures and to open up specified sectors that had previously been closed to foreign investment. New laws, regulations, and administrative measures to implement these commitments are being issued. Major remaining barriers to foreign investment include opaque and inconsistently enforced laws and regulations and the lack of a rules-based legal infrastructure.

Opening to the outside remains central to China's development. Foreign-invested enterprises produce about half of China's exports, and China continues to attract large investment inflows. Foreign exchange and gold reserves were $2.033 trillion at the end of 2008, and have now surpassed those of Japan, making China's foreign exchange reserves the largest in the world.


Information by U.S. Department of State


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