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Wednesday, July 13, 2011

China’s Economic Conditions

Wayne M. Morrison
Specialist in Asian Trade and Finance

Prior to the initiation of economic reforms and trade liberalization 32 years ago, China maintained policies that kept the economy very poor, stagnant, centrally controlled, vastly inefficient, and relatively isolated from the global economy. Since opening up to foreign trade and investment in 1979, China has been one of the world’s fastest-growing economies and has emerged as a major economic and trade power. China’s rapid economic growth has sharply improved Chinese living standards and helped raise hundreds of millions of people out of extreme poverty. In 2010, China was the world’s second largest economy, largest merchandise exporter, second largest merchandise importer, second largest recipient of foreign direct investment (FDI), and largest holder of foreign exchange reserves.

The global economic crisis that began in 2008 significantly affected China’s economy, especially its external sector. China’s trade (both exports and imports) and inflows of FDI diminished sharply, and millions of workers reportedly lost their jobs. The Chinese government responded by implementing a $586 billion economic stimulus package (largely aimed at infrastructure projects), loosening monetary policies to increase bank lending, and providing various incentives to boost domestic consumption. Such policies enabled China to effectively weather the effects of the sharp global fall in demand for Chinese products. While several of the world’s leading economies, including the United States, experienced negative or stagnant gross domestic product (GDP) growth in 2008 and 2009, China achieved real GDP growth rates of 9.6% and 9.2%, respectively. In 2010, China’s exports recovered to pre-crisis levels, and real GDP grew 10.3%. The International Monetary Fund (IMF) projects that China’s real GDP will grow by 9.6% in 2011 and increase at an average rate of 9.5% over the next five years.

Some economic forecasters project that China will overtake the United States as the world’s largest economy within a few years, although U.S. per capita GDP levels are expected to remain much larger than that of China for many years to come. Many economists contend that the ability of China to maintain a rapidly growing economy in the long run will depend largely on the ability of the Chinese government is to implement comprehensive economic reforms that more quickly hasten China’s transition to a free market economy, and to rebalance the Chinese economy by making consumer demand, rather than exporting, the main engine of China’s economic growth. China faces numerous other challenges as well that could affect its future economic growth (as well as internal political stability), such as widespread pollution, growing income disparities, an undeveloped social safety net, poorly enforced economic regulations, and extensive involvement of the state in several economic sectors.

China’s economic rise has significant implications for the United States and hence is of major interest to Congress. On the one hand, China is a large (and potentially huge) export market for the United States. Many U.S. firms use China as the final point of assembly in their global supply chain networks. China’s large holdings of U.S. Treasury securities help the federal government finance its budget deficits and keep U.S. interest rates low. However, some analysts contend that China maintains a number of distortive economic policies (such as an undervalued currency and protectionist industrial policies) that undermine U.S. economic interests. They warn that efforts by the Chinese government to promote the development of indigenous innovation and technology could mean that Chinese firms will increasingly pose a “competitive challenge” to many leading U.S. industries. This report surveys the rise of China’s economy, describes major economic challenges facing China, and discusses the implications of China’s economic development for the United States.

Date of Report: July 24, 2011
Number of Pages: 29
Order Number: RL33534
Price: $29.95

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