Wayne M. Morrison
Specialist in Asian Trade and Finance
Prior to the initiation of economic reforms and trade liberalization 34 years ago, China maintained policies that kept the economy very poor, stagnant, centrally controlled, vastly inefficient, and relatively isolated from the global economy. Since opening up to foreign trade and investment and implementing free market reforms in 1979, China has been among the world’s fastest-growing economies, with real annual gross domestic product (GDP) growth averaging nearly 10% through 2012. In recent years, China has emerged as a major global economic and trade power. It is currently the world’s second-largest economy, largest merchandise exporter, second-largest merchandise importer, second-largest destination of foreign direct investment (FDI), largest manufacturer, and largest holder of foreign exchange reserves.
The global economic crisis that began in 2008 greatly affected China’s economy. China’s exports, imports, and FDI inflows declined, GDP growth slowed, and millions of Chinese workers reportedly lost their jobs. The Chinese government responded by implementing a $586 billion economic stimulus package, loosening monetary policies to increase bank lending, and providing various incentives to boost domestic consumption. Such policies enabled China to effectively weather the effects of the sharp global fall in demand for Chinese products, while several of the world’s leading economies experienced negative or stagnant economic growth. From 2008 to 2012, China’s real GDP growth averaged 9.2%. However, the economy has shown signs of slowing. Real GDP grew by 7.8% in 2012 and is projected to grow at the same level in 2013.
Some economists forecast that China will overtake the United States as the world’s largest economy within a few years. However, the ability of China to maintain a rapidly growing economy in the long run will depend largely on the ability of the Chinese government to implement comprehensive economic reforms that more quickly hasten China’s transition to a free market economy; rebalance the Chinese economy by making consumer demand, rather than exporting and fixed investment, the main engine of economic growth; and boost productivity and innovation. China faces numerous other challenges as well that could impede future economic growth, such as widespread pollution, growing income disparities, an undeveloped social safety net, and extensive involvement of the state in the economy. The Chinese government has acknowledged that its current economic growth model needs to be altered. In 2006, the Chinese government formally outlined a goal of building a “harmonious socialist society” by taking steps to lessen income inequality, improve the rule of law, enhance environmental protection, reduce corruption, and improve the country’s social safety net (such as expanding health care and pension coverage to rural areas). In addition, the government has announced plans to rebalance the economy and boost innovation.
China’s economic rise has significant implications for the United States and hence is of major interest to Congress. On the one hand, China is a large (and potentially huge) export market for the United States. Many U.S. firms use China as the final point of assembly in their global supply chain networks. China’s large holdings of U.S. Treasury securities help the federal government finance its budget deficits. However, some analysts contend that China maintains a number of distortive economic policies (such as protectionist industrial policies and an undervalued currency) that undermine U.S. economic interests. They warn that efforts by the Chinese government to promote innovation, often through the use of subsidies and other distortive measures, could negatively affect 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 rise for the United States.
Date of Report: July 23, 2013
Number of Pages: 43
Order Number: RL33534
Price: $29.95
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