Economy of the People's Republic of China

2008/9 Schools Wikipedia Selection. Related subjects: Economics

Economy of
the People's Republic of China
Currency yuan (CNY); also referred to as the Renminbi (RMB)
Exchange rate ( av) (2007) Rmb:$ USD = 7.61
Rmb:¥ JPY100 = 6.47
Rmb:€ EUR = 10.55
Rmb:£ GBP = 15.23
Fiscal year Calendar year (01 Jan to 31 Dec)
Trade organizations WTO, APEC and others
Statistics
GDP (Nominal) (2007) $3.42 trillion (ranked 4th)
GDP ( PPP) (2006) $10.21 trillion (ranked 2nd)
GDP per capita (Nominal) (2006) $2,034 (ranked 107th)
GDP per capita (PPP) (2006) $7,800 (ranked 82nd)
GDP growth rate (2007) 11.4% (official data)
GDP by sector (2006) agriculture ( primary) (11.7%)
industry ( secondary) (48.9%)
services ( tertiary) (39.3%)
note: industry includes construction (5.5%)
GDP by components, % (2006) Private consumption (36.4)
Government consumption (13.7)
Gross fixed investment (40.9)
Exports of goods/services (39.7)
Imports of goods/services (-31.9)
Domestic demand growth (2002-06 av) 9.3%
Interest rates ( 2007- 12-20) One-year benchmark deposit rate: 4.14%
One-year lending rate: 7.47%
Inflation rate ( CPI) 4.6% (CPI: 8.7%, Feb 07 - Feb 08)
4.5% (2007 av)
1.7% (2006 av)
Household income or consumption by percentage share (2004) lowest 10%: 1.6%, highest 10%: 34.9%
Population below poverty line (2004) 10%
Gini index (2004) 46.9 ( List of countries)
Labor force (2006) 795.3 million
Labor force by occupation (2005) agriculture (45%), industry (24%), services (31%)
Unemployment rate (2006) 4.3% (official); 13% (unofficial)
Industrial production growth rate (2006) 22.9%
Main industries mining and ore processing, iron, steel, aluminium, and other metals, coal; machine building; armaments; textiles and apparel; petroleum; cement; chemicals; fertilizers; consumer products, including footwear, toys, and electronics; food processing; transportation equipment, including automobiles, rail cars and locomotives, ships, and aircraft; telecommunications equipment, commercial space launch vehicles, satellites
Agricultural products rice, wheat, potatoes, corn (maize), tobacco, soybeans, peanuts (groundnuts), tea, millet, barley, apples, cotton, oilseed; pork; fish
Natural resources Coal, iron ore, crude oil, mercury, tin, tungsten, antimony, manganese, molybdenum, vanadium, magnetite, aluminium, lead, zinc, uranium, hydropower potential (world's largest)
Investment (gross fixed) (2006) 40.9% of GDP
Foreign direct investment (FDI) inflows (2006) 3.1% of GDP
Stock of direct foreign investment - at home (2006) $699.5 billion
Stock of direct foreign investment - abroad (2006) $67.4 billion
Market value of publicly traded shares (2006) $2.426 trillion
Commercial bank prime rate (%; year-end) (2007) 6.7%
Debt service ratio, paid (2007) 2.7%
Trade
Current account balance (2007) $262.2 billion (9% of GDP)
( ranked 1st)
Exports (2007) $1,216.1 billion f.o.b.
Principal exports (US $ bn) (2006) Office machines & data processing equipment (134.5), Telecommunications equipment (123.6), Electrical machinery (101.7), Apparel & clothing (95.4), Miscellaneous manufactures (55.5)
Main destinations of exports (2006) US 21%, Hong Kong 16%, Japan 9.5%, South Korea 4.6%, Germany 4.2%, Netherlands 3.2%, UK 2.5%, Singapore 2.4%
Imports (2007) $953.9 billion f.o.b.
Principal imports (US $ bn) (2006) Electrical machinery (174.8), Petroleum & related products (84.1), Professional & scientific instruments (48.6), Metalliferous ores and scrap (44.0), Office machines & data processing equipment (40.7)
Main origins of imports (2006) Japan 14.6%, South Korea 11.3%, Taiwan 10.9%, US 7.5%, Germany 4.8%, Malaysia 3.0%, Australia 2.4%, Thailand 2.3%
Public finances
Public debt (2006) 22.1% of GDP
External debt (2006) $315 billion
Foreign exchange reserves (2007) $1.474 trillion
Foreign exchange reserves excl gold (2007) ?
Revenues (2006) $482.2 billion
Expenditures (2006) $515.8 billion; including capital expenditures of $NA
Budget balance (2006) -7.0% of GDP ( deficit)
Corporate income tax rate (2006) 33% (official)
Economic aid recipient $1.641 billion (2007)
Economic aid donor ?
Main source

All values, unless otherwise stated, are in US dollars
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The People's Republic of China has the second largest economy in the world after the US with a GDP of over $ 7 trillion (2007) when measured on a purchasing power parity (PPP) basis. In November 2007, it became the third largest in the world after the US and Japan with a nominal GDP of US$3.42 trillion (2007) when measured in exchange-rate terms. China has been the fastest-growing major nation for the past quarter of a century with an average annual GDP growth rate above 10%. China's per capita income has grown at an average annual rate of more than 8% over the last three decades drastically reducing poverty, but this rapid growth has been accompanied by rising income inequalities. The country's per capita income is classified as low by world standards, at about $2,000 (nominal, 107th of 179 countries/economies), and $7,800 (PPP, 82nd of 179 countries/economies) in 2006, according to the IMF.

Since the late 1970s and early 1980s, the economic reforms initially began with the shift of farming work to a system of household responsibility to start the phase out of collectivized agriculture, and later expanded to include the gradual liberalization of prices; fiscal decentralization; increased autonomy for state enterprises that increased the authority of local government officials and plant managers in industry thereby permitting a wide variety of private enterprise in services and light manufacturing; the foundation of a diversified banking system; the development of stock markets; the rapid growth of the non-state sector, and the opening of the economy to increased foreign trade and foreign investment. China has generally implemented reforms in a gradualist fashion, including the sale of equity in China's largest state banks to foreign investors and refinements in foreign exchange and bond markets in mid-2000s. 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. As of 2007, most of china's growth came from the Private Sector instead of exports. Particularly the smaller public sector, which was dominated by about 200 large state enterprises concentrated mostly in utilities, heavy industries, and energy resources.

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. China's GDP has increased tenfold since 1978, largely due to economic reforms including liberalization of their economy. 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. Nevertheless, key bottlenecks continue to constrain growth. Available energy is insufficient to run at fully-installed industrial capacity, the transport system is inadequate to move sufficient quantities of such critical items as coal, and the communications system cannot yet fully meet the needs of an economy of China's size and complexity.

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. Although 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, most of its industrial output still comes from relatively backward and ill-equipped factories. The technological level and quality standards of its industry as a whole are still fairly low.

History

1949-1980">

1949-1980

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">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 baseless charges that allowed the government to punish capitalists with severe fines. 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.

Throughout the 1950s and 1960s a number of widespread changes occurred in China's economic policies and procedures. During the First Five-Year Plan period (1953-1957), a policy of continued rapid industrial development was furthered, though somewhat at the detriment of other economic sectors. The largest part of the state's investment was directed into the industrial sector, while agriculture, which employed more than 78.6 percent of the labor force, was compelled to depend on its own minimal capital resources for a significant portion of its fund necessities. The highest priority was given to industrial sectors, such as coal, electric power, iron and steel, building materials, basic chemicals, and heavy engineering. By following the Soviet model, the goal was to set up technologically sophisticated, large-scale, capital-intensive plants. Many new factories were built with Soviet technical and financial assistance, as they could not be purely supported by domestic resources.

During the first policy plan fast growth in heavy industry was achieved, but a few months after the introduction of the Second Five-Year Plan (1958-1962), which was to be on the same lines as the First, the policy of the Great Leap Forward was announced. In agriculture, this involved the formation of people's communes, the abolition of private plots, and the increasing of output through greater cooperation and physical effort. Construction of large factories was to be continued apace, and in addition to that was the initiative to create a massive auxiliary network of simple, small-scale industries and plants that were built and managed locally. However, the Chinese peasantry was unprepared for this communal system, and a plunge in agricultural output soon followed.. Concurrently, the irregular and haphazard backyard production drive failed to achieve the intended objectives as it turned out enormous quantities of expensively produced, low quality goods, most notably steel produced from low quality iron which can not be used to build. During that time, these failures were exacerbated all the more by the Sino-Soviet split which caused the cancellation of Soviet assistance which had provided technicians and blueprints. In consequence, by late 1960 the country was in the throes of an economic and humanitarian disaster. Mao Zedong self-exiled from politics and was succeeded by Liu Shaoqi, who made a complete about-turn in policy. He criticized the disasters as "30% fault of nature, 70% human error." Private plots were restored, the size of the communes was reduced, and greater independence was given to the production team. There was also a mass transfer of the unemployed from industry to the countryside, and industrial investment was temporarily slashed in order to free resources for farm production.

This policy, which led to an immediate improvement in the agricultural situation, was maintained until 1963, when it again became possible to redirect some resources to the capital goods industry. As a result, industrial production and construction gathered some momentum, but due effort was taken to try to avoid the earlier mistake of sacrificing food production to iron and steel and similar industries. Then, in 1966 the " Great Proletarian Cultural Revolution" began, initially as a campaign for Mao to retake power from Liu Shaoqi and to "eliminate the liberal bourgeoisie" from the Party. Unlike the Great Leap Foward, the Cultural Revolution did not have an explicit economic rationale. Nevertheless, industrial production was badly affected by the ensuing confusion and strife, when hundreds of millions of people simply stopped working, while notable politicians, factory owners, and even teachers were victims to the massive "uprisings".

The Cultural Revolution left some problematic legacies for the economy. In industry, wages had been frozen and bonuses cancelled. This had, when combined with the policies of employing more workers than necessary to absorb unemployment and hiring workers on a permanent basis, essentially eliminated incentives to work hard. In addition, technicians and many managers lost their authority and could not play an effective role in production in the wake of the movement. The entire urban system, moreover, provided less than minimal incentives to achieve efficiency in production. While overall output continued to grow, capital-output ratios declined. In agriculture, per capita output in 1977 was no higher than in 1957. In 1952, gross industrial output of China was estimated at 34,900 million yuan in current prices. GDP per capita grew a paltry 17% in the 1960s, and rose to 70% in the 1970s.

1980-1990

Since 1979, China began to make major reforms to its economy. The Chinese leadership adopted a pragmatic perspective on many political and socioeconomic problems, and sharply reduced the role of ideology in economic policy. 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.

Rural and agricultural reforms began with major price increases for agricultural products in 1979. In 1981 the authorities began to dismantle the collectively farmed land, and it was with the introduction of the household responsibility system that these fields were contracted out to private families to work, which provided peasants greater decision-making in agricultural activities. During this time, the size of private plots (land actually owned by individuals) was increased, and most restrictions on selling agricultural products in free markets were lifted.

China's people's communes were largely eliminated by 1984 after more than 25 years in existence. Also by that time, much longer-term contracts for land were encouraged (generally 15 years or more), and the concentration of land through subleasing of parcels was made legal. In 1985 the government announced that it would dismantle the system of planned procurements with state-allocated production quotas in agriculture. Peasants who had stopped working the land were encouraged to find private employment in the countryside or in small towns. However, they did not obtain permission to move to major cities at that time.

With production being introduced in the agricultural sector, private ownership of production assets became legal, although many major non-agricultural and industrial facilities were still state-owned and centrally planned. The government also encouraged non-agricultural 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. Restraints on foreign trade were relaxed and joint ventures encouraged.

"What is socialism and what is Marxism? We were not quite clear about this in the past. Marxism attaches utmost importance to developing the productive forces. We have said that socialism is the primary stage of communism and that at the advanced stage the principle of from each according to his ability and to each according to his needs will be applied. This calls for highly developed productive forces and an overwhelming abundance of material wealth. Therefore, the fundamental task for the socialist stage is to develop the productive forces. The superiority of the socialist system is demonstrated, in the final analysis, by faster and greater development of those forces than under the capitalist system. As they develop, the people's material and cultural life will constantly improve. One of our shortcomings after the founding of the People's Republic was that we didn't pay enough attention to developing the productive forces. Socialism means eliminating poverty. Pauperism is not socialism, still less communism."
— Chinese paramount leader Deng Xiaoping on June 30, 1984

Urban economic reform was aimed at integrating China more fully with the international economy. The development of the private sector was allowed and it was permitted to compete with state firms in a number of service sectors, and increasingly in infrastructure operations, such as construction. Authorities rationalized the pricing structure and transferred investment somewhat away from the metallurgical and machine-building industries and toward light and high-technology industries, while an emphasis on resolving the energy, transportation, and communications bottlenecks was retained. Individuals were allocated state jobs for which they had specialized training, skills, or talents, and material incentives for individual effort and a consumer ethos were created in order to encourage people to work harder and be more productive. Resource allocation by state planning was reduced and enterprises were made ultimately responsible for their own profits and losses.

Central government (mandatory) planning was reduced and the profit remission system was replaced with contracting and tax-based systems. The reduction in the scope of mandatory planning was based on the assumption that market forces can more efficiently allocate many resources. This assumption, in turn, requires a rational pricing system that takes into account any and all extant technologies and scarcities. Because extensive subsidies were built into the economic system, however, price reform became an extremely sensitive issue. The fear of inflation also served as a constraint on price reform. Nevertheless, the fact that products produced in excess of amounts targeted in the plan could be sold, in most cases, at essentially free market prices had created a two-tiered price system that was designed to gradually wean the economy from the administratively fixed prices of an earlier era.

Several measures were taken to improve the incentives for enterprise managers so as to increase the efficiency of their firms. Enterprises were allowed to keep a substantial share of increases in production, so managers could be rewarded. This combined with the permission for enterprises to buy and sell surplus goods on essentially a free market basis meant that the prices thus obtained were often far higher than for goods produced to meet plan quotas. Managerial authority within firms was strengthened, and bonuses were restored and allowed to grow to significant proportions. Managers also were given greater authority to hire, transfer, suspend, lay off, recall, promote, discharge, assign, reward or discipline workers. The state plan also diverted some resources into the light industrial sector, for example, it gave some light industrial enterprises that produced high-quality goods priority in energy consumption.

During the 1980s, these reforms led to average annual rates of growth of 10% in agricultural and industrial output. The variety of light industrial and consumer goods increased. 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. 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. Efforts to create a freer labor market were also part of the overall stress on achieving greater efficiency. As with price reform, tampering with a system that kept many citizens living more comfortably and securely than would an economically more rational system risked serious repercussions in relations with the public. Changes had proceeded slowly in this sensitive area.

A decision was made in 1978 to permit foreign direct investment in several small " special economic zones" along the coast. The country lacked the legal infrastructure and knowledge of international practices to make this prospect attractive for many foreign businesses, however. 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. 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. 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 economics)">capital.

The common threads of these reforms were the search for efficiency and an assumption that management of the economy by large governmental bureaucracies was unlikely to produce that result. The changes in China's economic thinking and strategy since 1978 were so great — with the potential repercussions for important vested interests so strong — that actual practice had inevitably lagged considerably behind declaratory policy. Notable during this period were the swings in economic policy between an emphasis on market-oriented reforms and a return to at least partial reliance on centralized planning. Indeed, by the end of 1989 China's economic policy had again begun to place greater emphasis on centralized planning and on large state-run enterprises, signifying a marked slowdown of the reforms. The leadership often experienced in its hybrid system the worst results of socialism (lassitude, political corruption, disrespect of personal property) and of capitalism (windfall gains, a huge and widening gap between rich and poor, stepped-up inflation). The government thus periodically backtracked, re-tightening central controls at intervals. By the late 1980s, the economy became 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. That same year, the 22 point regulation was also set by the PRC to encourage Taiwanese investments on mainland soil.

1990-2000

China's nominal GDP trend from 1952 to 2005.
China's nominal GDP trend from 1952 to 2005.

China's economy regained momentum in the early 1990s. During a Chinese New Year visit to southern China in early 1992, China's paramount leader at the time Deng Xiaoping made a series of political pronouncements designed to give new impetus to and reinvigorate the process of economic reform. The 14th National Communist Party Congress later in the year backed up Deng's renewed push for market reforms, stating that China'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. The government approved additional long-term reforms aimed at giving still more play to market-oriented institutions and at strengthening central control over the financial system; state enterprises would continue to dominate many key industries in what was now termed a "socialist market economy". Fearing hyperinflation, the authorities 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.

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, influenced in part by the Asian Financial Crisis, with official growth of 8.9% in 1997, 7.8% in 1998 and 7.1% for 1999. From 1995-1999, inflation dropped sharply, reflecting tighter monetary policies and stronger measures to control food prices. The year 2000 showed a modest reversal of this trend. Gross domestic product in 2000 grew officially at 8.0% that year, and had quadrupled since 1978. In 1999, with its 1.25 billion people but a GDP of just $3,800 per capita (PPP), China became the second largest economy in the world after the US.

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.

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, and even faster, 10.1%, in 2004, and 9.9% in 2005 despite attempts by the government to cool the economy. China's total trade in 2006 surpassed $1.76 trillion, making China the world's third-largest trading nation after the U.S. and Germany. 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 job market.

Nevertheless, serious imbalances exist behind the spectacular trade performance, high investment flows, and high GDP growth. High numbers of non-performing loans weigh down the state-run banking system. Inefficient state-owned enterprises (SOEs) are still a drag on growth, despite announced efforts to reform, sell, merge, or close the vast majority of SOEs.

Social and economic indicators have improved since reforms were launched, but rising inequality is evident between the more highly developed coastal provinces and the less developed, poorer inland regions. According to World Bank estimates, around 300 million people in China in 2007 — mostly in rural areas of the lagging inland provinces — still live in poverty, on consumption of less than $1 a day (roughly the size of the United States population). About 47% of the Chinese population lives under $2 a day.

Government role

Since 1949 the government, under China's socialist political and economic system, has been responsible for planning and managing the national economy. In the early 1950s, the foreign trade system was monopolized by the state. Nearly all the domestic enterprises were state-owned and the government had set the prices for key commodities, controlled the level and general distribution of investment funds, determined output targets for major enterprises and branches, allocated energy resources, set wage levels and employment targets, operated the wholesale and retail networks, and steered the financial policy and banking system. In the countryside from the mid-1950s, the government established cropping patterns, set the level of prices, and fixed output targets for all major crops.

Since 1978 when economic reforms were instituted, the government role in the economy has lessened to a great degree. Industrial output by state enterprises slowly declined, although a few strategic industries have today remained predominantly state-owned. While the role of the government in managing the economy has been reduced and the role of both private enterprise and market forces increased, the government maintains a major role in the urban economy. With its policies on such issues as agricultural procurement the government also retains a major influence on rural sector performance. The State Constitution of 1982 specified that the state is to guide the country's economic development by making broad decisions on economic priorities and policies, and that the State Council, which exercises executive control, was to direct its subordinate bodies in preparing and implementing the national economic plan and the state budget. A major portion of the government system (bureaucracy) is devoted to managing the economy in a top-down chain of command with all but a few of the more than 100 ministries, commissions, administrations, bureaus, academies, and corporations under the State Council are concerned with economic matters.

Each significant economic sector is supervised and controlled by one or more of these organizations, which includes the People's Bank of China, National Development and Reform Commission, Ministry of Finance, and the ministries of agriculture; coal industry; commerce; communications; education; light industry; metallurgical industry; petroleum industry; railways; textile industry; and water resources and electric power. Several aspects of the economy are administered by specialized departments under the State Council, including the National Bureau of Statistics, Civil Aviation Administration of China, and the tourism bureau. Each of the economic organizations under the State Council directs the units under its jurisdiction through subordinate offices at the provincial and local levels.

The whole policy-making process involves extensive consultation and negotiation. Economic policies and decisions adopted by the National People's Congress and the State Council are to be passed on to the economic organizations under the State Council, which incorporates them into the plans for the various sectors of the economy. Economic plans and policies are implemented by a variety of direct and indirect control mechanisms. Direct control is exercised by designating specific physical output quotas and supply allocations for some goods and services. Indirect instruments — also called "economic levers" — operate by affecting market incentives. These included levying taxes, setting prices for products and supplies, allocating investment funds, monitoring and controlling financial transactions by the banking system, and controlling the allocation of key resources, such as skilled labor, electric power, transportation, steel, and chemicals (including fertilizers). The main advantage of including a project in an annual plan is that the raw materials, labor, financial resources, and markets are guaranteed by directives that have the weight of the law behind them. In reality, however, a great deal of economic activity goes on outside the scope of the detailed plan, and the tendency has been for the plan to become narrower rather than broader in scope. A major objective of the reform program was to reduce the use of direct controls and to increase the role of indirect economic levers. Major state-owned enterprises still receive detailed plans specifying physical quantities of key inputs and products from their ministries. These corporations, however, have been increasingly affected by prices and allocations that were determined through market interaction and only indirectly influenced by the central plan.

Total economic enterprise in China is apportioned along lines of directive planning (mandatory), indicative planning (indirect implementation of central directives), and those left to market forces. In the early 1980s during the initial reforms enterprises began to have increasing discretion over the quantities of inputs purchased, the sources of inputs, the variety of products manufactured, and the production process. Operational supervision over economic projects has devolved primarily to provincial, municipal, and county governments. The majority of state-owned industrial enterprises, which were managed at the provincial level or below, were partially regulated by a combination of specific allocations and indirect controls, but they also produced goods outside the plan for sale in the market. Important, scarce resources — for example, engineers or finished steel — may have been assigned to this kind of unit in exact numbers. Less critical assignments of personnel and materials would have been authorized in a general way by the plan, but with procurement arrangements left up to the enterprise management.

In addition, enterprises themselves are gaining increased independence in a range of activity. While strategically important industry and services and most of large-scale construction have remained under directive planning, the market economy has gained rapidly in scale every year as it subsumes more and more sectors. Overall, the Chinese industrial system contains a complex mixture of relationships. The State Council generally administers relatively strict control over resources deemed to be of vital concern for the performance and health of the entire economy. Less vital aspects of the economy have been transferred to lower levels for detailed decisions and management. Furthermore, the need to coordinate entities that are in different organizational hierarchies generally causes a great deal of informal bargaining and consensus building.

Consumer spending has been subject to a limited degree of direct government influence but is primarily determined by the basic market forces of income levels and commodity prices. Before the reform period, key goods were rationed when they were in short supply, but by the mid-1980s availability had increased to the point that rationing was discontinued for everything except grain, which could also be purchased in the free markets. Collectively owned units and the agricultural sector were regulated primarily by indirect instruments. Each collective unit was "responsible for its own profit and loss," and the prices of its inputs and products provided the major production incentives.

Vast changes were made in relaxing the state control of the agricultural sector from the late 1970s. The structural mechanisms for implementing state objectives — the people's communes and their subordinate teams and brigades — have been either entirely eliminated or greatly diminished. Farm incentives have been boosted both by price increases for state-purchased agricultural products, and it was permitted to sell excess production on a free market. There was more room in the choice of what crops to grow, and peasants are allowed to contract for land that they will work, rather than simply working most of the land collectively. The system of procurement quotas (fixed in the form of contracts) has been being phased out, although the state can still buy farm products and control surpluses in order to affect market conditions.

Foreign trade is supervised by the Ministry of Commerce, customs, and the Bank of China, the foreign exchange arm of the Chinese banking system, which controls access to the foreign currency required for imports. Ever since restrictions on foreign trade were reduced, there have been broad opportunities for individual enterprises to engage in exchanges with foreign firms without much intervention from official agencies.

Although the government still dominates the economy in parts, the extent of its control has been limited by the sheer volume of economic activity. Furthermore, the concept of government supervision of the economy had changed from one of direct state control to one of indirect guidance of a more dynamic economy.

Regional economies

China's underdeveloped transportation system — combined with important differences in the availability of natural and human resources and in industrial infrastructure — has produced significant variations in the regional economies of China.

Economic development has generally been more rapid in coastal provinces than in the interior, and there are large disparities in per capita income between regions. The three wealthiest regions are along the southeast coast, centred on the Pearl River Delta; along the east coast, centred on the Lower Yangtze River; and near the Bohai Gulf, in the Beijing-Tianjin- Liaoning region. It is the rapid development of these areas that is expected to have the most significant effect on the Asian regional economy as a whole, and Chinese government policy is designed to remove the obstacles to accelerated growth in these wealthier regions.

Development

China, economically extremely backward up until 1979, has again become one of the world's major economic powers with the greatest potential. In the 22 years following reform and opening-up in 1979 in particular, China's economy developed at an unprecedented rate, and that momentum has been held steady into the 21st century. In 2004, China further strengthened and improved its macro control, and the economy entered its best ever development period of recent years. The gross domestic product (GDP) for 2004 amounted to 13,687.59 billion yuan, 9.5 percent higher than the previous year.

China adopts the " five-year-plan" strategy for economic development. The 11th Five-Year Plan (2006-2010) is the currently being implemented.

Three-Step Development Strategy

China's overall economic construction objectives were clearly stated in the Three Step Development Strategy set out in 1987: Step One--to double the 1980 GNP and ensure that the people have enough food and clothing -- was attained by the end of the 1980s; Step Two--to quadruple the 1980 GNP by the end of the 20th century --was achieved in 1995 ahead of schedule; Step Three--to increase per-capita GNP to the level of the medium-developed countries by 2050--at which point, the Chinese people will be fairly well-off and modernization will be basically realized.

Regional development

Template:China regional economic strategies These strategies are aimed at the relatively poorer regions in China in an attempt to prevent widening inequalities:

  • Great Western Development, designed to improve the economic situation of the western provinces through capital investment and development of natural resources.
  • Revitalize Northeast China, to rejuvenate the industrial bases in the northeastern China. It covers 3 provinces: Heilongjiang, Jilin, and Liaoning.
  • Rise of Central China Plan, to accelerate the development of its central regions. It covers 6 provinces: Shanxi, Henan, Anhui, Hubei, Hunan, and Jiangxi.
  • Third Front, focused on the southwestern provinces.

Foreign investment abroad:

  • Go Global, to encourage its enterprises to invest overseas.

Key national projects

The "West-to-East Electricity Transmission," the "West-to-East Gas Transmission," and the " South-North Water Transfer Project" are the government's three key strategic projects, aimed at realigning overall economic development and achieving rational distribution of national resources across China. The "West-to-East Electricity Transmission" project is in full swing, involving hydropower and coal resources in western China and the construction of new power transmission channels to deliver electricity to the east. The southern power grid line, transmitting three million kW from Guizhou to Guangdong, was completed in September 2004. The "West-to-East Gas Transmission" project includes a 4,000 km trunk pipeline running through 10 provinces, autonomous regions or municipalities, conveying natural gas to cities in northern and eastern China. This was finished in October 2004 and has a design capacity of 12 billion cu m per year. Construction of the "South-to-North Water Diversion" project was officially launched on 27 December 2002 and completion of Phase I is scheduled for 2010; this will relieve serious water shortfall in northern China and realize a rational distribution of the water resources of the Yangtze, Yellow, Huaihe, and Haihe river valleys.

Hong Kong and Macau

In accordance with the One Country, Two Systems policy, the economies of the former European colonies, Hong Kong and Macao, are separate from the rest of the PRC, and each other. Both Hong Kong and Macau are free to conduct and engage in economic negotiations with foreign countries, as well as participating as full members in various international economic organizations such as the World Customs Organization, the World Trade Organization and the Asia-Pacific Economic Cooperation forum, often under the names "Hong Kong, China" and "Macao, China".

Macroeconomic trends

The table below shows the trend of the GDP of China at market prices estimated by the IMF with figures in millions ( Chinese yuan). For purchasing power parity comparisons, the US dollar is exchanged at 2.05 CNY only.

Year Gross domestic product US dollar exchange Inflation index (2000=100)
1955 91,000 2.46 -
1960 145,700 2.46 -
1965 171,600 2.46 -
1970 225,300 2.46 21.3
1975 299,700 1.86 22.4
1980 460,906 1.49 25
1985 896,440 2.93 30
1990 1,854,790 4.78 49
1995 6,079,400 8.35 91
2000 9,921,500 8.27 100
2005 18,308,500 8.19 106

Average wages in 2007 hover around $12-14 per day (just below Guatemalan levels).

Systemic problems

The government has in recent years struggled to contain the social strife and environmental damage related to the economy's rapid transformation; collect public receipts due from provinces, businesses, and individuals; reduce corruption and other economic crimes; sustain adequate job growth for tens of millions of workers laid off from state-owned enterprises, migrants, and new entrants to the work force; and 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 were 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 China's population control program. Another long-term threat to continued rapid economic growth has been the deterioration in the environment, notably air and water pollution, soil erosion, growing desertification and the steady fall of the water table especially in the north. China also has continued to lose arable land because of erosion and infrastructure development.

Other major problems concern the labor force and the pricing system. There is large-scale underemployment in both urban and rural areas, and the fear of the disruptive effects of major, explicit unemployment is strong. The prices of certain key commodities, especially of industrial raw materials and major industrial products, are determined by the state. In most cases, basic price ratios were set in the 1950s and are often irrational in terms of current production capabilities and demands. Over the years, large subsidies were built into the price structure, and these subsidies grew substantially in the late 1970s and 1980s. 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.

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 a number of restrictions being placed on problematic Chinese exports by the United States. The Chinese Government recognizes the severity of the problem, recently concluding that up to 20% of the country's products are substandard or tainted.

Inflation

During the winter of 2007-2008, inflation ran about 7% on an annual basis, rising to 8.7% in statistics for February, 2008, released in March, 2008. The food and fuel sectors were major problem areas, with meat and fuel posing special difficulties.

Shortages of gasoline and diesel fuel developed in the fall of 2007 due to reluctance of refineries to produce fuel at low prices set by the state. These prices were slightly increased in November, 2007 with fuel selling for $2.65 a gallon, still slightly below world prices. Price controls were in effect on numerous basic products and services, but were ineffective with food, prices of which were rising at an annual rate of 18.2% in November, 2007. The problem of inflation has caused concern at the highest levels of the Chinese government. On January 9, 2008 the government of China issued the following statement on its official website: "The Chinese government decided on Wednesday to take further measures to stabilize market prices and increase the severity of punishments for those guilty of driving up prices through hoarding or cheating."

Pork is an important part of the Chinese economy with a per capita consumption of a fifth of a pound per day. The worldwide rise in the price of animal feed associated with increased production of ethanol from corn resulted in steep rises in pork prices in China in 2007. Increased cost of production interacted badly with increased demand resulting from rapidly rising wages. The state responded by subsidizing pork prices for students and the urban poor and called for increased production. Release of pork from the nation's strategic pork reserve was considered.

By January 2008, the inflation rate rose to 7.1%, which BBC News described as the highest inflation rate since 1997, due to the winter storms that month.China's inflation rate jumped to a new decade high of 8.7 percent in February 2008 after severe winter storms disrupted the economy and worsened food shortages, the government said March 11, 2008.

Labor shortages and rising export costs

By 2005, there were signs of stronger demand for labor 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 have characterized export industries in provinces such as 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 $150 a month on average. The labor shortage was partially driven by the demographic trends, as the proportion of people of working age fell as the result of strict family planning.

It was reported in The New York Times in April 2006 that labor costs continued to increase and a shortage of unskilled labor had developed with a million or more employees being sought. Operations which relied on cheap labor were contemplating relocations to cities in the interior or to other low-cost countries such as Vietnam or Bangladesh. Many young people were attending college rather than opting for minimum-wage factory work. The demographic shift resulting from the one-child policy continued to reduce the supply of young entry-level workers. Also, government efforts to advance economic development in the interior of the country were beginning to be effective at creating better opportunities there. A follow-up article in The New York Times in late August 2007 reported acceleration of this trend. The minimum wage a young unskilled factory worker could be hired at had increased to $200 with experienced workers commanding more. There was strong demand for young workers willing to work long hours and live in dormitory conditions, while older workers, over forty, were considered unsuitable. Rising wages were being, to a certain extent, offset by increases in productivity, but in 2007, a slight rise in the cost of imports from China was recorded by the United States government: "After falling since its inception in December, 2003, the price index for imports from China rose 0.4 percent in July, 2007, the largest monthly increase since the index was first published in December 2003. The July increase was the third consecutive monthly advance. Over the past year, import prices from China increased 0.9 percent." By February, 2008, concerns were being raised that rising wages and inflation in China were beginning to create inflationary pressure in the United States and Europe, which had depended on cheap prices for consumer goods from China exerting downward pressure on prices.

Financial and banking system

A Shanghai branch of Industrial and Commercial Bank of China (ICBC)
A Shanghai branch of Industrial and Commercial Bank of China (ICBC)

Most of China's financial institutions are state governed. The chief instruments of financial and fiscal control are the People's Bank of China (PBC) and the Ministry of Finance, both under the authority of the State Council. The People's Bank of China replaced the Central Bank of China in 1950 and gradually took over private banks. It fulfills many of the functions of other central and commercial banks. It issues the currency, controls circulation, and plays an important role in disbursing budgetary expenditures. Additionally, it administers the accounts, payments, and receipts of government organizations and other bodies, which enables it to exert thorough supervision over their financial and general performances in consideration to the government's economic plans. The PBC is also responsible for international trade and other overseas transactions. Remittances by overseas Chinese are managed by the Bank of China (BOC), which has a number of branch offices in several countries.

Other financial institutions that are crucial, include the China Development Bank (CDB), which funds economic development and directs foreign investment; the Agricultural Bank of China (ABC), which provides for the agricultural sector; the China Construction Bank (CCB), which is responsible for capitalizing a portion of overall investment and for providing capital funds for certain industrial and construction enterprises; and the Industrial and Commercial Bank of China (ICBC), which conducts ordinary commercial transactions and acts as a savings bank for the public.

Shanghai Stock Exchange (SSE)
Shanghai Stock Exchange (SSE)

China's economic reforms greatly increased the economic role of the banking system. Enterprises and individuals can go to the banks to obtain loans outside the state plan, and this has proved to be a major source of financing both for start-up companies and businesses and for the expansion, modernization or privatization of existing enterprises. Even though nearly all investment capital was previously provided on a grant basis according to the state plan, policy has since the start of the reform shifted to a loan basis through the various state-directed financial institutions. Increasing amounts of funds are made available through the banks for economic and commercial purposes. Foreign sources of capital have also become increasingly prominent. China has received loans from the World Bank and several United Nations programs, as well as from countries (particularly Japan) and, to a lesser extent, commercial banks. Hong Kong has been a major conduit of this investment, as well as a source itself.

With two stock exchanges ( Shanghai Stock Exchange and Shenzhen Stock Exchange), mainland China's stock market had a market value of $1 trillion by January 2007, which became the third largest stock market in Asia, after Japan and Hong Kong. It is estimated to be the world's third largest by 2016.

Currency system

The renminbi (“people’s currency”) is the currency of the mainland, denominated as the yuan, subdivided into 10 jiao or 100 fen. The renminbi is issued by the People's Bank of China, the monetary authority of the PRC. The ISO 4217 abbreviation is CNY, although also commonly abbreviated as "RMB". The Latinised symbol is ¥. The yuan is generally considered by outside observers to be undervalued by about 30%.

The renminbi is held in a floating exchange-rate system managed primarily against the US dollar. On July 21, 2005 China revalued its currency by 2.1% against the US dollar and, since then has moved to an exchange rate system that references a basket of currencies and has allowed the renminbi to fluctuate at a daily rate of up to half a percent.

The rate of exchange (Chinese yuan per US$1) in mid-2007 was RMB 7.45, while in early 2006 was RMB 8.07:US $1 = 8.2793 yuan (January 2000), 8.2783 (1999), 8.2790 (1998), 8.2898 (1997), 8.3142 (1996), 8.3514 (1995).

Beginning January 1, 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.

There is a complex relationship between China's balance of trade, inflation, measured by the consumer price index and the value of its currency. Despite allowing the value of the yuan to "float", China's central bank has decisive ability to control its value with relationship to other currencies. Inflation in 2007, reflecting sharply rising prices for meat and fuel, is probably related to the worldwide rise in commodities used as animal feed or as fuel. Thus rapid rises in the value of the yuan permitted in December, 2007 are possibly related to efforts to mitigate inflation by permitting the renminbi to be worth more.

Tax system

From the 1950s to the 1980s, the central government's revenues derived chiefly from the profits of the state enterprises, which were remitted to the state. Some government revenues also came from taxes, of which the most important was the general industrial and commercial tax.

The trend, however, has been for remitted profits of the state enterprises to be replaced with taxes on those profits. Initially, this tax system was adjusted so as to allow for differences in the capitalization and pricing situations of various firms, but more-uniform tax schedules were introduced in the early 1990s. In addition, personal income and value-added taxes were implemented at that time.

Agriculture

Production of wheat from 1961-2004. Data from FAO, year 2005. Y-axis: Production in metric ton.
Production of wheat from 1961-2004. Data from FAO, year 2005. Y-axis: Production in metric ton.

China is the world's most populous country and one of the largest producers and consumers of agricultural products. According to the United Nations World Food Program, in 2003, China fed 20 percent of the world's population with only 7 percent of the world's arable land. China ranks first worldwide in farm output, and, as a result of topographic and climatic factors, only about 10–15 percent of the total land area is suitable for cultivation. Of this, slightly more than half is unirrigated, and the remainder is divided roughly equally between paddy fields and irrigated areas. Nevertheless, about 60 percent of the population lives in the rural areas, and until the 1980s a high percentage of them made their living directly from farming. Since then, many have been encouraged to leave the fields and pursue other activities, such as light manufacturing, commerce, and transportation; and by the mid-1980s farming accounted for less than half of the value of rural output. Today, agriculture contributes only 13% of China's GDP.

The quality of the soil varies. Environmental problems such as floods, drought, and erosion pose serious threats in many parts of the country. The wholesale destruction of forests gave way to an energetic reforestation program that proved inadequate, and forest resources are still fairly meagre. The principal forests are found in the Qinling Mountains and the central mountains and on the Sichuan-Yunnan plateau. Because they are inaccessible, the Qinling forests are not worked extensively, and much of the country's timber comes from Heilongjiang, Jilin, Sichuan, and Yunnan.

About 45 percent of China's labor force is engaged in agriculture. There are over 300 million Chinese farm workers - mostly laboring on small pieces of land relative to U.S. farms. Virtually all arable land is used for food crops. China is the world's largest producer of rice and is among the principal sources of wheat, corn (maize), tobacco, soybeans, peanuts (groundnuts), cotton, potatoes, sorghum, peanuts, tea, millet, barley, oilseed, pork, and fish. Major non-food crops, including cotton, other fibers, and oilseeds, furnish China with a small 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, for example, 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. China hopes to further increase agricultural production through improved plant stocks, fertilizers, and technology.

Though incomes for farmers have continued to rise over the past two decades, the rate of growth has fallen further behind that of urban residents, leading to an increasing wealth gap between the cities and countryside. Government policies that have continued 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.

Western China, comprising Tibet, Xinjiang, and Qinghai, has little agricultural significance except for areas of floriculture and cattle raising. Rice, China's most important crop, is dominant in the southern provinces, many of which yield two harvests a year. In the north, wheat is of the greatest importance, while in central China wheat and rice vie with each other for the top place. Millet and kaoliang (a variety of grain sorghum) are grown mainly in the northeast and some central provinces, which, together with some northern areas, also provide considerable quantities of barley. Most of the soybean crop is derived from the north and the northeast; corn (maize) is grown in the centre and the north, while tea comes mainly from the hilly areas of the southeast. Cotton is grown extensively in the central provinces, but it is also found to a lesser extent in the southeast and in the north. Tobacco comes from the centre and parts of the south. Other important crops are potatoes, sugar beets, and oilseeds.

There is still a relative lack of, especially advanced, agricultural machinery. For the most part the Chinese peasant or farmer depends on simple, non mechanized farming implements. Good progress has been made in increasing water conservancy, and about half the cultivated land is under irrigation.

Animal husbandry constitutes the second most important component of agricultural production. China is the world's leading producer of pigs, chickens, and eggs, and it also has sizable herds of sheep and cattle. Since the mid-1970s, greater emphasis has been placed on increasing the livestock output. China has a long tradition of ocean and freshwater fishing and of aquaculture. Pond raising has always been important and has been increasingly emphasized to supplement coastal and inland fisheries threatened by overfishing and to provide such valuable export commodities as prawns.

Industry and manufacturing

Industry and construction account for about 48% of China's GDP. Around 8% of the total manufacturing output in the world comes from China itself. China ranks third worldwide in industrial output. Major industries include mining and ore processing; iron and steel; aluminium; coal; machinery; armaments; textiles and apparel; petroleum; cement; chemical; fertilizers; food processing; automobiles and other transportation equipment including rail cars and locomotives, ships, and aircraft; consumer products including footwear, toys, and electronics; telecommunications and information technology. 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.

Since the founding of the People's Republic, industrial development has been given considerable attention. Among the various industrial branches the machine-building and metallurgical industries have received the highest priority. These two areas alone now account for about 20-30 percent of the total gross value of industrial output. In these, as in most other areas of industry, however, innovation has generally suffered at the hands of a system that has rewarded increases in gross output rather than improvements in variety, sophistication and quality. China, therefore, still imports significant quantities of specialized steels. Overall industrial output has grown at an average rate of more than 10 percent per year, having surpassed all other sectors in economic growth and degree of modernization. Some heavy industries and products deemed to be of national strategic importance remain state-owned, but an increasing proportion of lighter and consumer-oriented manufacturing firms are privately held or are private-state joint ventures.

The predominant focus of development in the chemical industry is to expand the output of chemical fertilizers, plastics, and synthetic fibers. The growth of this industry has placed China among the world's leading producers of nitrogenous fertilizers. In the consumer goods sector the main emphasis is on textiles and clothing, which also form an important part of China's exports. Textile manufacturing, a rapidly growing proportion of which consists of synthetics, account for about 10 percent of the gross industrial output and continues to be important, but less so than before. The industry tends to be scattered throughout the country, but there are a number of important textile centers, including Shanghai, Guangzhou, and Harbin.

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. Prior to 1978, most output was produced by state-owned enterprises. As a result of the economic reforms that followed, there was a significant increase in production by enterprises sponsored by local governments, especially townships and villages, and, increasingly, by private entrepreneurs and foreign investors. The 1996 industrial census revealed that there were 7,342,000 industrial enterprises at the end of 1995; total employment in industrial enterprises was approximately 147 million. 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 about 24 million. The automobile industry has grown rapidly since 2000, as has the petrochemical industry. Machinery and electronic products became China's main exports. China is the world’s leading manufacturer of chemical fertilizers, cement, and steel. By 2002 the share in gross industrial output by state-owned and state-holding industries had decreased to 41%, and the state-owned companies themselves contributed only 16% of China’s industrial output.

China’s construction sector has grown substantially since the early 1980s. In the twenty-first century, investment in capital construction has experienced major annual increases. In 2001 investments increased 8.5% over the previous year. In 2002 there was a 16.4% increase, followed by a 30% increase in 2003. The manufacturing sector produced 44.1% of GDP in 2004 and accounted for 11.3% of total employment in 2002. Industry and construction produced 53.1% of China’s GDP in 2005. Industry (including mining, manufacturing, construction, and power) contributed 52.9% of GDP in 2004 and occupied 22.5% of the workforce.

Energy production has increased rapidly, but it still falls considerably short of demand. This is partly due to artificial energy prices that have been held so low that industries have had few incentives to conserve. Coal provides about 75-80 percent of China's energy consumption. Petroleum production, which began growing rapidly from an extremely low base in the early 1960s, has basically remained at the same level since the late 1970s. There are large petroleum reserves in the inaccessible northwest and potentially significant offshore petroleum deposits, but about half of the country's oil production still comes from the major Daqing oilfield in the northeast. China has much, and partially undeveloped, hydroelectric power potential and natural gas reserves. The government has made plans to develop nuclear power plants in the coastal and western regions (see Nuclear power in China).

Overall, the distribution of industry remains very uneven, despite serious efforts from the mid-1950s to the late 1970s to build up industry in the interior at the cost of the major cities on the east coast. While percentage growth of industry in the interior provinces generally greatly exceeded that of the coastal areas, the far larger initial industrial base of the latter has meant that a few coastal regions have continued to dominate China's industrial economy. The establishment of special economic zones in coastal areas only heightened this disparity. Shanghai by itself accounts for about 8-10 percent of China's gross value of industrial output, and the east coast accounts for about 60 percent of the national industrial output. The rate of industrialization increased and diversified after the early 1990s. Notable were the development of aerospace, aircraft, and automobile manufacturing. In addition, China expanded rapidly into the production of pharmaceuticals, software, semiconductors, electronics, and precision equipment.

Steel industry

China is the largest producer of steel in the world and the steel industry has been rapidly increasing its steel production. Iron ore production kept pace with steel production in the early 1990s but was soon outpaced by imported iron ore and other metals in the early 2000s. Steel production, an estimated 140 million tons in 2000, was increased to 419 million tons in 2006. Much of the country's steel output comes from a large number of small-scale producing centers, one of the largest being Anshan in Liaoning.

Automotive industry

By 2006 China had become the world’s third largest automotive vehicle manufacturer (after US and Japan) and the second largest consumer (only after US). Automobile manufacturing has soared during the reform period. In 1975 only 139,800 automobiles were produced annually, but by 1985 production had reached 443,377, then jumped to nearly 1.1 million by 1992 and increased fairly evenly each year up until 2001, when it reached 2.3 million. In 2002 production rose to nearly 3.25 million and then jumped to 4.44 million in 2003, 5.07 million in 2004, 5.71 million in 2005 and 7.28 million in 2006. In 2007, 9 million automobiles are expected to be produced and the country could become the number-one automaker in the world by 2020. Domestic sales have kept pace with production. After respectable annual increases in the mid- and late 1990s, passenger car sales soared in the early 2000s. In 2006, a total of 7.22 million automobiles have been sold, including 5.18 million units of passenger cars and 2.04 million units of commercial vehicles.

So successful has China’s automotive industry been that it began exporting car parts in 1999. China began to plan major moves into the automobile and components export business starting in 2005. A new Honda factory in Guangzhou was built in 2004 solely for the export market and was expected to ship 30,000 passenger vehicles to Europe in 2005. By 2004, 12 major foreign automotive manufacturers had joint-venture plants in China. They produced a wide range of automobiles, minivans, sport utility vehicles, buses, and trucks. In 2003 China exported US$4.7 billion worth of vehicles and components. The vehicle export was 78,000 units in 2004, 173,000 units in 2005, and 340,000 units in 2006. The vehicle and component export is targeted to reach US$70 billion by 2010.

Other industries

Services

China's services output ranks ranks seventh worldwide, and high power and telecom density has ensured that it has remained on a high-growth trajectory in the long-term. In 2005 the services sector produced 40.3% of China’s annual GDP, second only to manufacturing. However, its proportion of GDP is still low compared with the ratio in more developed countries, and the agricultural sector still employs a larger workforce. Prior to the onset of economic reforms in 1978, China’s services sector was characterized by state-operated shops, rationing, and regulated prices. With reform came private markets and individual entrepreneurs and a commercial sector. The wholesale and retail trade has expanded quickly, with urban areas now having many shopping malls, retail shops, restaurant chains and hotels. Public administration has still remained a main component of the service sector, while tourism has become a significant factor in employment and as a source of foreign exchange.

Tourism

China's tourism industry is one of the fastest-growing industries in the national economy and is also one of the industries with a very distinct global competitive edge. The total revenue of China's tourism industry reached USD 67.3 billion in 2002, accounting for 5.44% of the GDP. It dropped, largely due to SARS, to USD 59 billion in 2003. Nevertheless, for areas rich in tourism resources, tourism has become the main source of tax revenue and the key industry for economic development.

The total number of inbound tourists was 91.66 million in 2003, and that of tourists staying overnight was 32.7 million, about 10 times of the number in 1980. International tourism receipts were USD 17.4 billion in 2003. China's ranking for both the overnight tourist arrivals and tourism receipts were among the world's top five in 2003. However, there is unlikely to be a big increase in the inbound tourism market.

China's domestic tourism market makes up more than 90% of the country's tourism traffic, and contributes more than 70% of total tourism revenue. In 2002, domestic tourists reached 878 million and tourism revenue was USD 46.9 billion. The five-days-per-week and long vacation schemes have increased leisure time for the Chinese people and spurred market demand in domestic tourism and led to its prosperity.

A large middle class population with strong consumption power is emerging in China, especially in major cities. China's outbound tourists reached 20.22 million in 2003, overtaking Japan for the first time. Currently there are 65 countries/areas open to Chinese tour groups. Putting aside the threat of SARS and other unexpected events, based on the current economic growth situation and the social development of China, China's outbound tourism is poised to achieve a new growth peak.

Driven by the flourishing tourism industry, China's tourist hotel sector is expanding rapidly. At the end of 2003, China had a total of 10,093 tourist hotels and more than 820,000 rooms. 773 of these tourist hotels were foreign-funded. The number of foreign-funded (inclusive of Hong Kong, Macau and Taiwan investments) four- and five-star tourist hotels made up 26% and 30.02% of the national total, respectively.

In 2003, there were a total of 11,522 travel agencies in China, among which, 1,349 were international ones and 10,203 were domestic ones. While overall tourism market concentration rose, there was a drop in the market position of the traditional three key travel agencies. As competition heightened, China's tourism industry on the whole, had begun to start earning low profits, even while it was expanding its scale of operations.

Currently, there are approximately 15,000 natural, cultural and man-made places of attraction which are above county level. Presently, Hong Kong investors are the main participants in the establishment of tourist attractions in China. In 2001, Sichuan became the first province to propose renting out the operation rights of 10 scenic areas to foreign investors.

According to the plan by China National Tourism Administration, the number of inbound tourists, foreign exchange earnings from tourism and the domestic market size are targeted to have an annual growth of 4%, 8% and 8%, respectively, in the next five to ten years. It is also forecasted by the WTO that China's tourism industry will take up to 8.6% of world market share to become the world's top tourism industry by 2020.

Labor and welfare

A window washer on one of the thousands of skyscrapers in Shanghai.
A window washer on one of the thousands of skyscrapers in Shanghai.

One of the hallmarks of China's socialist economy was its promise of employment to all able and willing to work and job-security with virtually lifelong tenure. Reformers targeted the labor market as unproductive because industries were frequently overstaffed to fulfill socialist goals and job-security reduced workers' incentive to work. This socialist policy was pejoratively called the iron rice bowl.

In 1979-1980, the state reformed factories by giving wage increases to workers, which was immediately offset by sharply rising inflation rates of 6%-7%. In other words, although they were given more pay, their money was worth less and they could buy less, which meant they were poorer. The state remedied this problem, in part, by distributing wage subsidies.

The reforms also dismantled the iron rice bowl, which meant it witnessed a rise in unemployment in the economy. In 1979, immediately after the iron rice bowl was dismantled, there were 20 million unemployed people. Official Chinese statistics reveal that 4.2% of the total urban workforce was unemployed in 2004, although other estimates have reached 10%. As part of its newly developing social security legislation, China has an unemployment insurance system. At the end of 2003, more than 103.7 million people were participating in the plan, and 7.4 million laid-off employees had received benefits.

A 10-percent sample tabulation of census questionnaires from the 1982 census provided needed statistical data on China's working population and allowed the first reliable estimates of the labor force's size and characteristics. The quality of the data was considered to be quite high, although a 40-million-person discrepancy existed between the 10-percent sample and the regular employment statistics. This discrepancy can be explained by the combination of inaccurate employment statistics and varying methods of calculation and scope of coverage. The estimated mid-1982 labor force was 546 million, or approximately 54 percent of the total population. Males accounted for slightly more than half of the estimated labor force, and the labor force participation rates for persons age fifteen years and older were among the highest in the world.

The 10-percent sample showed that approximately three-fourths of the labor force worked in the agricultural sector. According to the National Bureau of Statistics, in the mid-1980s more than 120 million people worked in the nonagricultural sector. The sample revealed that men occupied the great majority of leadership positions. The average worker was about thirty years old, and three out of every four workers were under forty-five years of age. The working population had a low education level. Less than 40 percent of the labor force had more than a primary school education, and 30 percent were illiterate or semiliterate.

In mid-1982 the overall unemployment rate was estimated to be about 5 percent. Of the approximately 25 million unemployed, 12 million were men and 13 million were women. The unemployment rate was highest in the northeast and lowest in the south. The unemployment rates were higher than those of East Asian, Southeast Asian, and Pacific island countries for which data were available but were lower than the rates found in North America and Europe. Virtually all of the unemployed persons in cities and towns were under twenty years of age.

By the 1990s and 2000s, agriculture has remained the largest employer, though its proportion of the workforce has steadily declined; between 1991 and 2001 it dropped from about 60% to 40% of the total. The manufacturing labor force has also become smaller at a slower rate, partially because of reforms implemented at many of the state-run enterprises. Such reforms and other factors have increased unemployment and underemployment in both urban and rural areas. Women have been a major labor presence in China since the People's Republic was established. Some 40-45 percent of all women over age 15 are employed.

China’s estimated employed labor force in 2005 totaled 791.4 million persons, about 60% of the total population. During 2003, 49% of the labor force worked in agriculture, forestry, and fishing; 22% in mining, manufacturing, energy, and construction industries; and 29% in the services sector and other categories. In 2004 some 25 million persons were employed by 743,000 private enterprises. Urban wages rose rapidly from 2004-2007, at a rate of 13 to 19% per year with average wages near $200 in 2007.

The All-China Federation of Trade Unions (ACFTU) was established in 1925 to represent the interests of national and local trade unions and trade union councils. The ACFTU reported a membership of 130 million, out of an estimated 248 million urban workers, at the end of 2002. Chinese trade unions are organized on a broad industrial basis. Membership is open to those who rely on wages for the whole or a large part of their income, a qualification that excludes most agricultural workers. In theory, membership is not compulsory, but in view of the unions' role in the distribution of social benefits, the economic pressure to join is great. The lowest unit is the enterprise union committee. Individual trade unions also operate at the provincial level, and there are trade union councils that coordinate all union activities within a particular area and operate at county, municipal, and provincial levels. At the top of the movement is the ACFTU, which discharges its functions through a number of regional federations.

In theory the appropriate trade union organizations have been consulted on the level of wages as well as on wage differentials, but in practice their role in these and similar matters has been insignificant. They have not engaged in collective bargaining, as their principal duties have included assisting the party and promoting production. In fulfilling these tasks, they have had a role in enforcing labor discipline. From the point of view of the membership, the most important activities have concerned the social and welfare services. Thus, the unions have looked after industrial safety, organized social and cultural activities, and, provided services such as clinics, rest and holiday homes, hostels, libraries, and clubs. They also administer old-age pensions, workers' insurance, disability benefits, and other welfare schemes. More recently, however, reforms of the social security system have involved moving the responsibility for pensions and other welfare to the provinces.

In China exists labor laws which, if fully enforced, would greatly alleviate common abuses such as not paying workers. In 2006, a new labor law was proposed and submitted for public comment. The new law, as currently drafted, would permit collective bargaining in a form analogous to that standard in Western economies, although the only legal unions would continue to be those affiliated with the All-China Federation of Trade Unions, the Communist Party’s official union organization. The new law has support from labor activists, but has been opposed by some foreign corporations, including the American Chamber of Commerce and the European Chamber of Commerce. There is some expectation that the new law, if enacted, would be enforced. An ongoing effort to organize Chinese operations of foreign companies succeeded in 2006 at Wal-Mart. The campaign is projected to include Eastman Kodak, Dell and other companies. It was reported in 2008 that problems with sweatshops persist.

External trade

Statistics

Exports: $1216 billion (2007)
Exports - commodities: machinery and equipment, textiles and clothing, footwear, toys, mineral fuels, plastics, optical and medical equipment, iron and steel
Exports - partners: US 21.0%, EU 18.1%, Hong Kong 17.0%, Japan 12.4%, ASEAN 7.2%, South Korea 4.7% (2004)
Imports: $953.9 billion (2007)
Imports - commodities: machinery and equipment, oil and mineral fuels, plastics, optical and medical equipment, organic chemicals, iron and steel
Imports - partners: Japan 16.8%, EU 12.4%, ASEAN 11.2%, South Korea 11.1%, US 7.9%, Russia 2.2% (2004)

International trade makes up a sizeable portion of China's overall economy. The course of China's foreign trade has experienced considerable transformations since the early 1950s. In 1950 more than 70 percent of the total trade was with non- Communist countries, but by 1954, a year after the end of the Korean War, the situation was completely reversed, and trade with Communist countries stood at about 75 percent. During the next few years, trade with the Communist world lost some of its standing, but it was only after the Sino-Soviet split of 1960, which resulted in the cancellation of Soviet credits and the withdrawal of Soviet technicians, that the non-Communist world began to see a speedy recovery in its position. In 1965 China's trade with other socialist countries made up only about a third of the total.

Being a Second World country at the time, a meaningful segment of China's trade with the Third World was financed through grants, credits, and other forms of assistance. At first, from 1953 to 1955, aid went mainly to North Korea and North Vietnam and some other Communist states; but from the mid-1950s large amounts, mainly grants and long-term, interest-free loans, were promised to politically uncommitted developing countries. The principal efforts were made in Asia, especially to Indonesia, Burma, Pakistan, and Ceylon, but large loans were also granted in Africa (Ghana, Algeria, Tanzania) and in the Middle East (Egypt). However, after Mao Zedong's death in 1976, these efforts were scaled back. After which, trade with developing countries became negligible, though during that time, Hong Kong and Taiwan both began to emerge as major trading partners.

Since economic reforms began in the late 1970s, China sought to decentralize its foreign trade system to integrate itself into the international trading system. On November 1991, China joined the Asia-Pacific Economic Cooperation (APEC) group, which promotes free trade and cooperation the in 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's global trade totaled $324 billion in 1997 and $151 billion in the first half of 1998; the trade surplus stood at $40.0 billion. China's primary trading partners were Japan, Taiwan, the U.S., South Korea, Hong Kong, Germany, Singapore, Russia, and the Netherlands. China had a trade surplus with the U.S. of $49.7 billion in 1997 and $54.6 billion in 1998. Major imports were power generating equipment, aircraft and parts, computers and industrial machinery, raw materials, and chemical and agricultural products.

In 1998, China was in its 12th year of negotiations for accession to the World Trade Organization (WTO) — formerly the General Agreement on Tariffs and Trade (GATT), and had significantly reduced import tariffs. Previously in 1996, China had already introduced cuts to more than 4,000 tariff lines, reducing average tariffs from 35% to 23%; further tariff cuts that took effect October 1, 1997 decreased average tariffs to 17%. To gain WTO entry, all prospective WTO members were required to comply with certain fundamental trading disciplines and offer substantially expanded market access to other members of the organization. Many major trading entities — among them the United States, the European Union, and Japan — shared concerns with respect to China's accession. These concerns included obtaining satisfactory market access offers for both goods and services, full trading rights for all potential Chinese consumers and end-users, nondiscrimination between foreign and local commercial operations in China, the reduction of monopolistic state trading practices, and the elimination of arbitrary or non-scientific technical standards. China and other WTO members worked to achieve a commercially viable accession protocol.

In 1999, Premier Zhu Rongji signed a bilateral U.S.-China Agricultural Cooperation Agreement, which lifted longstanding Chinese prohibitions on imports of citrus, grain, beef, and poultry. In November 1999, the United States and China reached a historic bilateral market-access agreement to pave the way for China's accession to the WTO. As part of the far-reaching trade liberalization agreement, China agreed to lower tariffs and abolish market impediments after it joins the world trading body. Chinese and foreign businessmen, for example, would gain the right to import and export on their own - and to sell their products without going through a government middleman. After reaching a bilateral WTO agreement with the EU and other trading partners in summer 2000, China worked on a multilateral WTO accession package. China concluded multilateral negotiations on its accession to the WTO in September 2001. The completion of its accession protocol and Working Party Report paved the way for its entry into the WTO on December 11, 2001, after 16 years of negotiations, the longest in GATT history.

Global distribution of Chinese exports in 2006 as a percentage of the top market.
Global distribution of Chinese exports in 2006 as a percentage of the top market.

According to IMF statistics, China's global trade totaled $353 billion in 1999; the trade surplus stood at $36 billion. China's global trade totaled $454 billion in 2000; the trade surplus stood at $20 billion. China's primary trading partners included Japan, the EU, the U.S., South Korea, Hong Kong, and Taiwan. According to U.S. statistics, China had a trade surplus with the U.S. of $68.7 billion in 1999. China had a trade surplus with the U.S. of $83 billion in 2000. (Note: U.S. figures may overestimate Chinese exports, and its surplus, by failing to account for the fact that China's assembly industries first import many almost-finished products.)

China's global trade exceeded $1.758 trillion at the end of 2006. It first broke the 1 trillion mark ($1.15 trillion) in 2004, more than doubling from 2001. At the end of 2004, China became the world's third largest trading nation behind the United States and Germany. The trade surplus however was stable at $30 billion (more than 40 billion in 1998, less than 30 billion in 2003). China's primary trading partners include Japan, the U.S., South Korea, Germany, Singapore, Malaysia, Russia, and the Netherlands. The vast majority of China's imports consists of industrial supplies and capital goods, notably machinery and high-technology equipment, the majority of which comes from the developed countries, primarily Japan and the United States. Regionally, almost half of China's imports come from East and Southeast Asia, and about one-fourth of China's exports go to the same destinations. About 80 percent of China's exports consist of manufactured goods, most of which are textiles and electronic equipment, with agricultural products and chemicals constituting the remainder. Out of the five busiest ports in the world, three are in China.

The U.S. is one of China's primary suppliers of semiconductors and electronic components, power-generating equipment, aircraft and parts, computers and industrial machinery, raw materials, waste and scrap, 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. Intellectual property theft makes many foreign companies wary of doing business in mainland China. Some foreign politicians and manufacturers also say the value of the yuan is artificially low and gives export from mainland China an unfair advantage. These and other issues are behind the recent push for greater protectionism by some in the US Congress, including a 27.5% consumer tax on imports. 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 U.S. trade deficit with China reached $232.5 billion in 2006, as imports grew 18%. China's share of total U.S. imports has grown from 7% to 15% since 1996. At the same time, the share of many other Asian countries' imports to the United States fell, from 39% in 1996 to 21.1% in 2005. The share of overall Asian imports (including China) to the United States actually declined from 38.8% in 1996 to 35.7% in 2005. The U.S. global trade deficit with the Asia-Pacific region as a whole also has fallen from 75% in 1995 to 49% in 2005.

Chinese cars at a dealer's lot in Nizhny Novgorod, the traditional capital of the Russian automotive industry.
Chinese cars at a dealer's lot in Nizhny Novgorod, the traditional capital of the Russian automotive industry.

Trade volume between China and Russia reached $29.1 billion in 2005, an increase of 37.1% compared with 2004. A spokesman for the Ministry of Commerce, Van Jingsun, said that the volume of trade between China and Russia could exceed 40 billion dollars in 2007. China’s export of machinery and electronic goods to Russia grew 70%, which is 24% of China’s total export to Russia in the first 11 months of 2005. During the same time, China’s export of high-tech products to Russia increased by 58%, and that is 7% of China’s total exports to Russia. Also in this time period border trade between the two countries reached $5.13 billion, growing 35% and accounting for nearly 20% of the total trade. Most of China’s exports to Russia remain apparel and footwear. Russia is China’s eighth largest trade partner and China is now Russia’s fourth largest trade partner, and China now has over 750 investment projects in Russia, involving $1.05 billion. China’s contracted investment in Russia totaled $368 million during January-September of 2005, twice that in 2004.

Chinese imports from Russia are mainly those of energy sources, such as crude oil, which is mostly transported by rail, and electricity exports from neighboring Siberian and Far Eastern regions. In the near future, exports of both of these commodities are set to increase, as Russia is building the Eastern Siberia-Pacific Ocean oil pipeline with a branch to Chinese border, and Russian power grid monopoly UES is building some of its hydropower stations with a view of future exports to China.

Export growth have continued to be a major component supporting China's rapid economic growth. To increase exports, China pursued policies such as fostering the rapid development of foreign-invested factories, which assembled imported components into consumer goods for export and liberalizing trading rights. In its 11th Five-Year Program, adopted in 2005, China placed greater emphasis on developing a consumer demand-driven economy to sustain economic growth and address imbalances.

The China Council for the Promotion of International Trade (CCPIT) promotes China's international economic and commercial interests. This is accomplished by developing business cooperation and exchanges with foreign countries. It also produces economic data, creates diplomatic ties and is active with trade arbitration issues. Hong Kong remains prominent in domestic trade, notably in its reliance on the mainland for agricultural products.

Foreign investment

China's investment climate has changed dramatically with more than two decades 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. The Encouraged Industry Catalogue sets out the degree of foreign involvement allowed in various industry sectors. Foreign investment slowed in late 1989 in the aftermath of Tiananmen Square protests. In response, the government introduced legislation and regulations designed to encourage foreigners to invest in high-priority sectors and regions.

Since the early 1990s, the government has allowed foreign investors to manufacture and sell a wide range of goods on the domestic market, eliminated time restrictions on the establishment of joint ventures, provided some assurances against nationalization, allowed foreign partners to become chairs of joint venture boards, and authorized the establishment of wholly foreign-owned enterprises, now the preferred form of FDI. In 1991, China granted more preferential tax treatment for Wholly Foreign Owned Enterprises and contractual ventures and for foreign companies, which invested 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 sold to foreigners carried no ownership rights in a company. In 1997, China approved 21,046 foreign investment projects and received over $45 billion in foreign direct investment. 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.

Foreign investment remains a strong element in China's rapid expansion in world trade and has been an important factor in the growth of urban jobs. In 1998, foreign-invested enterprises produced about 40% of China's exports, and foreign exchange reserves totalled about $145 billion. Foreign-invested enterprises today produce about half of China's exports (note that the majority of China's foreign investment come from Hong Kong, Macau and Taiwan), and China continues to attract large investment inflows. 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. From 1993-2001, China was the world's second-largest recipient of foreign direct investment after the United States. China received $39 billion FDI in 1999 and $41 billion FDI in 2000. China is now one of the leading FDI recipients in the world, receiving almost $80 billion in 2005 according to World Bank statistics. In 2006, China received $69.47 billion in foreign direct investment.

Foreign exchange reserves totaled $155 billion in 1999 and $165 billion in 2000. Foreign exchange reserves exceeded $800 billion in 2005, more than doubling from 2003. Foreign exchange reserves were $819 billion at the end of 2005, $1.066 trillion at the end of 2006, and have now surpassed those of Japan, making China's foreign exchange reserves the largest in the world.

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. Warner Bros., for instance, withdrew its cinema business in China as a result of a regulation that requires Chinese investors to own at least a 51 percent stake or play a leading role in a foreign joint venture.

Demographics

Since the 1950s medical care, public hygiene and sanitation improved considerably, and epidemics were controlled. Consecutive generations continuously experienced better health. The population growth rate surged as the mortality rate dropped more rapidly than the birth rate. China’s massive population has always been a major difficulty for the government as it has struggled to provide for it. In the 1950s, food supply was inadequate and the standard of living was generally low. This spurred the authorities to initiate a major birth control program. The Great Leap Forward industrial plan in 1958-60 caused a huge famine which caused the death rate to surpass the birth rate and by 1960, the overall population was declining. A second population control drive began in 1962 with major efforts focused on promoting late marriages and the use of contraceptives. By 1963 the country was in the beginning of recovery from the famine and the birth rate soared to its highest since 1949 with an annual population growth rate of 3%. In 1966, the Cultural Revolution suspended this second family planning program, but resumed four years later with the third attempt by making later marriage and family size limitation an obligation. Since 1970, the efforts have been much more effective. The third family planning program continued until 1979 when the one child per family policy was implemented. By the early 1980s, China’s population reached around 1 billion and by the early 2000s, surpassed 1.3 billion. In the 1980s, the average overall population growth was around 1.5%. In the 1990s, this fell to about 1%. Today it is about 0.6%. China's population growth rate is now among the lowest for a developing country, although, because its population is so huge, annual net population growth is still considerable. One demographic consequence of the one-child policy is that China is now one of the most rapidly ageing countries in the world.

From 100 million to 150 million surplus rural workers are adrift between the villages and the cities, many subsisting through part-time, low-paying jobs.

According to the latest Forbes China Rich List (2007), China had 66 billionaires, the second largest number after the United States, which had 415. In the 2006 Forbes Rich List it stated that there were 15 Chinese billionaires. In the latest 2007 Hurun Report, it lists 106 billionaires in China.

Transportation

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.

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. 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.

Communications

China possesses a diversified communications system that links all parts of the country by Internet, telephone, telegraph, radio, and television. None of the telecommunications forms are as prevalent or as advanced as those in modern Western countries, but the system includes some of the most sophisticated technology in the world and constitutes a foundation for further development of a modern network.

China's number of Internet users or netizens topped 137 million by the end of 2006, an increase of 23.4% from a year before and 162 million by June 2007, making China the second largest Internet user after the United States, according to China's Ministry of Information Industry (MII). China's mobile phone penetration rate is 34% in 2007. In 2006, mobile phone users sent 429 billion text messages, or on average 967 text messages per user. For 2006, the number of fixed-lines grew by 79%, mainly in the rural areas.

Science and technology

Science and technology are a concern of China's leadership and many of China's leaders have come from technical backgrounds with 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. Most Chinese students who went abroad have not returned, but they have built a dense network of global contacts that have greatly facilitated international scientific cooperation. 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.

Environment and public health

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. Although China has passed environmental legislation and has participated in some international anti-pollution conventions, pollution will be a serious problem in China for years to come.

A 1998 WHO 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 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 is a serious threat to sustained economic growth and 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%-10% of GDP each year. A 2005 report by the World Bank states that more than 300 million people in rural China have no access to safe water and nearly 800 million have seen no improvement in sanitation and hygiene in recent years.

China's leaders have increasingly paid attention to the country's severe environmental problems. The head of National Environmental Protection Agency (NEPA) proclaimed in 1991 that environmental protection was one of China's basic national policies, at the same time cautioning that environmental protection must be coordinated with economic development. According to NEPA, $3.2 billion was spent on pollution prevention and environmental rehabilitation from 1981-85, $8.8 billion from 1986-1990, and about $15 billion for the eighth five-year plan (1991-95).

China has sought to contain its increasing industrial pollution largely through administrative procedures and efforts to increase public awareness. The heavily polluted Pearl River delta was one of the first major industrialized areas targeted for clean up. Officials hoped that new sewage treatment plants for cities in the delta area would enable the river to support an edible fish population by the year 2000. A nascent environmental protection industry has also emerged. However, in some areas of China, pollution has long been considered as one of the costs associated with economic development.

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 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.

In March 1998, NEPA was officially upgraded to a ministry-level agency and renamed as the State Environmental Protection Administration (SEPA), reflecting the growing importance the Chinese government placed on environmental protection. The Chinese government recognizes the environmental situation in China is grim and that increasing water and air pollution, as well as deforestation and desertification, will threaten the base of China's economic development. In 1999, China invested more than 1% of GDP in environmental protection.

In recent years, China has strengthened its environmental legislation and made some progress in stemming environmental deterioration. During the 10th Five-Year Plan (2001-2005), China planned to reduce total emissions by 10%. Beijing in particular has invested heavily in pollution control as part of its preparation of the 2008 Olympic Games. 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. Some cities have seen improvement in air quality in recent years.

At the beginning of 2007 SEPA announced 82 projects, with a total investment value of over 112 billion yuan, had been found in serious breach of the environmental impact assessment law and regulations on the integration of health and safety measures into project design.

China is an active participant in climate change talks and other multilateral environmental negotiations in organization such as the UN Environment Program (UNEP). While China has taken environmental challenges seriously, it has pushed for the developed world to help developing countries to a far 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, the Kyoto Protocol, as well as the Convention on International Trade in Endangered Species and other major environmental agreements.

China is a member 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, aluminium, 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. The U.S.-China Forum on Environment and Development, co-chaired by the U.S. Vice President and the Premier of the People's Republic of China, 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, China has often compared the U.S. program, which lacks a foreign assistance component, with those of Japan and several EU countries that include generous levels of aid.

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