Economy of china

The People's Republic of China is the world's second largest economy after the United States. It is the world's fastest-growing major economy, with average growth rates of 10% for the past 30 years. China is also the largest exporter and second largest importer of goods in the world. For 2010, inbound foreign direct investment into China surpassed $100bn for the first time, and investment overseas by Chinese companies in non-financial sectors totaled $59 billion.[6] The country's per capita GDP (PPP) is $7,518 (IMF, 93rd in the world) in 2010. The provinces in the coastal regions of China[7] tend to be more industrialized, while regions in the hinterland are less developed.

Overview

In the modern era, China's influence in the world economy was minimal until the late 1980s. At that time, economic reforms initiated after 1978 began to generate significant and steady growth in investment, consumption and standards of living. China now participates extensively in the world market and private sector companies play a major role in the economy. Since 1978 hundreds of millions have been lifted out of poverty: According to China's official statistics, the poverty rate fell from 53% in 1981[8] to 2.5% in 2005. However, in 2006, 10.8% of people still lived on less than $1 a day (purchasing power parity-adjusted).[9] The infant mortality rate fell by 39.5% between 1990 and 2005,[10] and maternal mortality by 41.1%.[11] Access to telephones during the period rose more than 94-fold, to 57.1%.[12]

In the 1949 revolution, China's economic system was officially made into a communist system. Since the wide-ranging reforms of the 1980s and afterwards, many scholars assert that China can be defined as one of the leading examples of state capitalism today.[13][14]

China has generally implemented reforms in a gradualist fashion. As its role in world trade has steadily grown, its importance to the international economy has also increased apace. China's foreign trade has grown faster than its GDP for the past 25 years.[15] China's growth comes both from huge state investment in infrastructure and heavy industry and from private sector expansion in light industry instead of just exports, whose role in the economy appears to have been significantly overestimated.[16] The smaller but highly concentrated public sector, dominated by 159 large SOEs, provided key inputs from utilities, heavy industries, and energy resources that facilitated private sector growth and drove investment, the foundation of national growth. In 2008 thousands of private companies closed down and the government announced plans to expand the public sector to take up the slack caused by the global financial crisis.[17] In 2010, there were approximately 10 million small businesses in China.[18]

The PRC government's decision to permit China to be used by multinational corporations as an export platform has made the country a major competitor to other Asian export-led economies, such as South Korea, Singapore, and Malaysia.[19] China has emphasized raising personal income and consumption and introducing new management systems to help increase productivity. The government has also focused on foreign trade as a major vehicle for economic growth. The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978. Some economists believe that Chinese economic growth has been in fact understated during much of the 1990s and early 2000s, failing to fully factor in the growth driven by the private sector and that the extent at which China is dependent on exports is exaggerated.[20] Nevertheless, key bottlenecks continue to constrain growth. Available energy is insufficient to run at fully installed industrial capacity,[21] and the transport system is inadequate to move sufficient quantities of such critical items as coal.[22]

The two most important sectors of the economy have traditionally been agriculture and industry, which together employ more than 70 percent of the labor force and produce more than 60 percent of GDP. The two sectors have differed in many respects. Technology, labor productivity, and incomes have advanced much more rapidly in industry than in agriculture. Agricultural output has been vulnerable to the effects of weather, while industry has been more directly influenced by the government. The disparities between the two sectors have combined to form an economic-cultural-social gap between the rural and urban areas, which is a major division in Chinese society. China is the world's largest producer of rice and is among the principal sources of wheat, corn (maize), tobacco, soybeans, peanuts (groundnuts), and cotton. The country is one of the world's largest producers of a number of industrial and mineral products, including cotton cloth, tungsten, and antimony, and is an important producer of cotton yarn, coal, crude oil, and a number of other products. Its mineral resources are probably among the richest in the world but are only partially developed.

China has acquired some highly sophisticated production facilities through trade and also has built a number of advanced engineering plants capable of manufacturing an increasing range of sophisticated equipment, including nuclear weapons and satellites, but most of its industrial output still comes from relatively ill-equipped factories. The technological level and quality standards of its industry as a whole are still fairly low,[23] notwithstanding a marked change since 2000, spurred in part by foreign investment. A report by UBS in 2009 concluded that China has experienced total factor productivity growth of 4 per cent per year since 1990, one of the fastest improvements in world economic history.[24]

China's increasing integration with the international economy and its growing efforts to use market forces to govern the domestic allocation of goods have exacerbated

this problem. Over the years, large subsidies were built into the price structure, and these subsidies grew substantially in the late 1970s and 1980s.[25] By the early 1990s these subsidies began to be eliminated, in large part due to China's admission into the World Trade Organization (WTO) in 2001, which carried with it requirements for further economic liberalization and deregulation. 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, whilst retaining state domination of the economy.

Wayne M. Morrison of the Congressional Research Service wrote in 2009 that \"Despite the relatively positive outlook for its economy, China faces a number of difficult challenges that, if not addressed, could undermine its future economic growth and stability. These include pervasive government corruption, an inefficient banking system, over-dependence on exports and fixed investment for growth, the lack of rule of law, severe pollution, and widening income disparities.\"[26] Economic consultant David Smick adds that the recent actions by the Chinese government to stimulate their economy have only added to a huge industrial overcapacity and commercial real estate vacancy problems.[27]

History

1949–1978

In 1949, China followed a socialist heavy industry development strategy, or the \"Big Push\" strategy. Consumption was reduced while rapid industrialization was given high priority. The government took control of a large part of the economy and redirected resources into building new factories. Entire new industries were created. Most important, economic growth was jump-started. Tight control of budget and money supply reduced inflation by the end of 1950. Though most of it was done at the expense of suppressing the private sector of small to big businesses by the Three-anti/five-anti campaigns between 1951 to 1952. The campaigns were notorious for being anti-capitalist, and imposed charges that allowed the government to punish capitalists with severe fines.[28] In the beginning of the Communist party's rule, the leaders of the party had agreed that for a nation such as China, which does not have any heavy industry and minimal secondary production, capitalism is to be utilized to help the building of the \"New China\" and finally merged into communism.[29]

1978–1990

Since 1978, China began to make major reforms to its economy. The Chinese leadership adopted a pragmatic perspective on many political and socioeconomic problems, and quickly began to introduce aspects of a capitalist economic system. Political and social stability, economic productivity, and public and consumer welfare were considered paramount and indivisible. In these years, the government emphasized raising personal income and consumption and introducing new management systems to help increase productivity. The government also had 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. Reforms began in the agricultural, industrial, fiscal, financial, banking, price setting, and labor systems.[30]

A decision was made in 1978 to permit foreign direct investment in several small \"special economic zones\" along the coast.[31] The country lacked the legal infrastructure and knowledge of international practices to make this prospect attractive for many foreign businesses, however.[31] In the early 1980s steps were taken to expand the number of areas that could accept foreign investment with a minimum of red tape, and related efforts were made to develop the legal and other infrastructures necessary to make this work well.[32] This additional effort resulted in making 14 coastal cities and three coastal regions \"open areas\" for foreign investment. All of these places provide favored tax treatment and other advantages for foreign investment. Laws on contracts, patents, and other matters of concern to foreign businesses were also passed in an effort to attract international capital to spur China's development.[33] The largely bureaucratic nature of China's economy, however, posed a number of inherent problems for foreign firms that wanted to operate in the Chinese environment, and China gradually had to add more incentives to attract foreign capital.[34]

1990–2000

In the 1990s, the Chinese economy continued to grow at a rapid pace, at about 9.5%, accompanied by low inflation. The Asian financial crisis affected China at the margin, mainly through decreased foreign direct investment and a sharp drop in the growth of its exports. However, China had huge reserves, a currency that was not freely convertible, and capital inflows that consisted overwhelmingly of long-term investment. For these reasons it remained largely insulated from the regional crisis and its commitment not to devalue had been a major stabilizing factor for the region. However, China faced slowing growth and rising unemployment based on internal problems, including a financial system burdened by huge amounts of bad loans, and massive layoffs stemming from aggressive efforts to reform state-owned enterprises (SOEs).

Despite China's impressive economic development during the past two decades,

reforming the state sector and modernizing the banking system remained major hurdles. Over half of China's state-owned enterprises were inefficient and reporting losses. During the 15th National Communist Party Congress 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\" (feigongyou or privatization in euphemistic terms). The 9th National People's Congress endorsed the plans at its March 1998 session. In 2000, China claimed success in its three year effort to make the majority of large state owned enterprises (SOEs) profitable.

2000–present

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.[35]

The Fifth Plenum in October 2005 approved the 11th Five-Year Economic Program (2006–2010) aimed at building a \"harmonious society\" through more balanced wealth distribution and improved education, medical care, and social security. On March 2006, the National People's Congress approved the 11th Five-Year Program. The plan called for a relatively conservative 45% increase in GDP and a 20% reduction in energy intensity (energy consumption per unit of GDP) by 2010.

China's economy grew at an average rate of 10% per year during the period 1990–2004, the highest growth rate in the world. China's GDP grew 10.0% in 2003, 10.1%, in 2004, and even faster 10.4% in 2005 despite attempts by the government to cool the economy. China's total trade in 2010 surpassed $2.97 trillion, making China the world's second-largest trading nation after the U.S. Such high growth is necessary if China is to generate the 15 million jobs needed annually—roughly the size of Ecuador or Cambodia—to employ new entrants into the national job market.

On January 14, 2009, as confirmed by the World Bank[36] the NBS published the revised figures for 2007 fiscal year in which growth happened at 13 percent instead of 11.9 percent (provisional figures). China's gross domestic product stood at US$3.38 trillion while Germany's GDP was USD $3.32 trillion for 2007. This made China the world's third largest economy by gross domestic product.[37] Based on these figures, in 2007 China recorded its fastest growth since 1994 when the GDP

grew by 13.1 percent.[38]

China launched its Economic Stimulus Plan to specifically deal with the Global financial crisis of 2008–2009. It has primarily focused on increasing affordable housing, easing credit restrictions for mortgage and SMEs, lower taxes such as those on real estate sales and commodities, pumping more public investment into infrastructure development, such as the rail network, roads and ports. By the end of 2009 it appeared that the Chinese economy was showing signs of recovery. At the 2009 Economic Work Conference in December 'managing inflation expectations' was added to the list of economic objectives, suggesting a strong economic upturn and a desire to take steps to manage it.[39]

By 2010 it was evident to outside observers such as The New York Times that China was poised to move from export dependency to development of an internal market. Wages were rapidly rising in all areas of the country and Chinese leaders were calling for an increased standard of living.[40]

In 2010, China's GDP was valued at $5.87 trillion, surpassed Japan's $5.47 trillion, and became the world's second largest economy after the U.S.[41] China could become the world's largest economy (by nominal GDP) sometime as early as 2020.[42]

China is the largest creditor nation in the world and owns approximately 20.8% of all foreign-owned US Treasury securities.[43]

Transportation

Main article: Transport in the People's Republic of China

Development of the country's transportation infrastructure is given a high priority because it is so strategically tied to the national economy and national defense. Regardless, the transportation infrastructure is still not fully developed in many aspects and areas, and it constitutes a major hindrance on economic growth and the efficient logistical movement of goods and people. China's transportation policy, influenced by political, military, and economic concerns, have undergone major changes since 1949.[129]

Immediately after the People's Republic was founded, the primary goal was to repair existing transportation infrastructure in order to meet military transport and logistics needs as well as to strengthen territorial integrity. During most of the 1950s, new road and rail links were built, while at the same time old ones were improved. During the 1960s much of the improvement of regional transportation became the responsibility of the local governments, and many small railways were constructed. Emphasis was also placed on developing transportation in remote rural, mountainous,

and forested areas, in order to integrate poorer regions of the country and to help promote economies of scale in the agricultural sector.

Before the reform era began in the late 1970s, China's transportation links were mostly concentrated in the coastal areas and access to the inner regions was generally poor. This situation has been improved considerably since then, as railways and highways have been built in the remote and frontier regions of the northwest and southwest. At the same time, the development of international transportation was also pursued, and the scope of ocean shipping was broadened considerably.

Freight haulage is mainly provided by rail transport. The rail sector is monopolized by China Railways, which is controlled by the Ministry of Railways and there is wide variation in services provided. In late 2007 China became one of the few countries in the world to launch its own indigenously developed high-speed train.[130] As rail capacity is struggling to meet demand for the transport of goods and raw materials such as coal, air routes, roads and waterways are rapidly being developed to provide an increasing proportion of China's overall transportation needs.[131]

Science and technology

Main articles: Science and technology in the People's Republic of China, Higher education in China, and List of Chinese universities

Science and technology have always preoccupied China's leaders and indeed, China's political leadership comes almost exclusively from technical backgrounds and has a high regard for science. Deng Xiaoping called it \"the first productive force.\" In recent times, with Hu Jintao and Wen Jiabao and their predecessors Jiang Zemin and Zhu Rongji all being trained engineers, China's leaders have been described as technocrats.

Since the early 1980s scientific and technological modernization has been given an especially high priority. Plans were made to rebuild the educational structure, continue sending students abroad, negotiate technological purchases and transfer arrangements with the U.S. and others, and develop ways to disseminate scientific and technological information. Areas of most critical interest have included microelectronics, telecommunications, computers, automated manufacturing, and energy. China also has had a space program since the 1960s and, by the late 1990s, had successfully launched more than 25 satellites.

On the other hand, 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 have seen 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. A majority of Chinese students who went abroad have not returned,[134] but they have built a dense network of global contacts that have greatly facilitated international scientific cooperation.[135] The United States is often held up as the standard of scientific modernity in China. Indeed, photos of the Space Shuttle often appear in Chinese advertisements as a symbol of advanced technology. China's growing space program, which has put a man in space and successfully completed their second manned orbit in October 2005, is a focus of national pride.

At the end of 1996, China had 5,434 state-owned independent research and development institutions at and above the county level. There were another 3,400 research institutions affiliated with universities, 13,744 affiliated with medium and large industrial enterprises, and 726 affiliated with medium and large construction enterprises. A total of 2.8 million people were engaged in scientific and technological activities in these institutions.

The U.S.–China Science and Technology Agreement remains the framework for bilateral cooperation between the two countries in this field. It was originally signed in 1979. A five-year agreement to extend and amend the accord, including provisions for the protection of intellectual property rights, was signed in May 1991, and the Agreement was again extended for five years in April 1996. Five-year agreements to extend the accord were signed in April 2001 and April 2006. The Agreement is among the longest-standing U.S.–China accords, and includes over eleven U.S. Federal agencies and numerous branches that participate in cooperative exchanges under the S&T Agreement and its nearly 60 protocols, memoranda of understanding, agreements and annexes. The Agreement covers cooperation in areas such as marine conservation, high-energy physics, 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.

Luxury goods

Main article: Luxury goods in the People's Republic of China

A factor that often goes overlooked is the extent of luxury spending the Chinese citizenry are undertaking. There is no greater indication of the newfound wealth of

the Chinese than the amount of money now spent on goods and services that were once inaccessible. Foremost among these is the shift towards bottled water. The Chinese bottled water manufacturing industry is forecast to more than double in size in 2008, becoming a $10.5 (US dollars) billion industry in the process. Meanwhile, as those who once had no recourse but poor-quality tap water take advantage of its availability in supermarkets, those who had little or no running water are now capitalising on its availability. The tap water production and supply industry is expected to grow by 29.3% in 2008, to $11.9 billion. This demonstrates the difference in what, exactly, is considered a luxury in Chinese society; many Chinese consider running water a considerable extravagance. Some consumption is more conspicuous. The country's motor vehicle production industry is expected to expand by 29.5% to nearly $200 billion, as many Chinese eschew traditional modes of transport, such as bicycles, for the comforts of modern cars. Also, consumption of chocolate and other confectionery is set to increase by 24.3%, as the industry expands to $4.6 billion, in order to keep up with China's collective sweet tooth. Couple with this is 20.8% growth in China's fast food industry, as major players such as McDonalds enter the country with vigour. Also, the LVMH group, who own major luxury brands including Louis Vuitton apparel, Moet-Chandon wines and champagne and Hennessey cognacs, reported earnings growth of over 25% in 2007 in China, the region now accounting for around 16% of their global business.[136]

Environment and public health

Main articles: Environment of China, Water supply and sanitation in the People's Republic of China, and Public health in the People's Republic of China

One of the serious negative consequences of China's rapid industrial development since the 1980s has been increased pollution and degradation of natural resources. Problems such as soil erosion, desertification and the steady fall of the water table, especially in the north, have posed a threat to the sustainable development of the country. China is an active participant in climate change talks and other multilateral environmental negotiations in organization such as the UN Environment Program (UNEP).