China's Economic Conditions *

By Morrison, Wayne M. | Current Politics and Economics of Northern and Western Asia, July 1, 2012 | Go to article overview

China's Economic Conditions *


Morrison, Wayne M., Current Politics and Economics of Northern and Western Asia


INTRODUCTION

The rapid rise of China as a major economic power within a time span of about three decades is often described by analysts as one of the greatest economic success stories in modern times. From 1979 (when economic reforms began) to 2011, China's real gross domestic product (GDP) grew at an average annual rate of nearly 10%.1 From 1980 to 2011, real GDP grew 19-fold in real terms, real per capita GDP increased 14-fold, and an estimated 500 million people were raised out of extreme poverty. China is now the world's second-largest economy and some analysts predict it could become the largest within a few years. Yet, on a per capita basis, China remains a relatively poor country.

China's economic rise has led to a substantial increase in U.S.-China economic ties. According to U.S. trade data, total trade between the two countries surged from $5 billion in 1980 to $503 billion in 2011. China is currently the United States' second-largest trading partner, its third-largest export market, and its largest source of imports. Many U.S. companies have extensive operations in China in order to sell their products in the booming Chinese market and to take advantage of lower-cost labor for export-oriented manufacturing.2 These operations have helped some U.S. firms to remain internationally competitive and have supplied U.S. consumers with a variety of low-cost goods. China's large-scale purchases of U.S. Treasury securities (which totaled nearly $1.2 trillion at the end of 2011) have enabled the federal government to fund its budget deficits, which help keep U.S. interest rates relatively low.

However, the emergence of China as a major economic superpower has raised concern among many U.S. policymakers. Some claim that China uses unfair trade practices (such as an undervalued currency and subsidies given to domestic producers) to flood U.S. markets with low-cost goods, and that such practices threaten American jobs, wages, and living standards. Others contend that China's growing use of industrial policies to promote and protect certain domestic Chinese industries firms favored by the government, and its failure to take effective action against widespread infringement of U.S. intellectual property rights (IPR) in China, threaten to undermine the competitiveness of U.S. IP-intensive industries. In addition, while China has become a large and growing market for U.S. exports, critics contend that numerous trade and investment barriers limit opportunities for U.S. firms to sell in China, or force them to set up production facilities in China as the price of doing business there. Other concerns relating to China's economic growth include its growing demand for energy and raw materials and its emergence as the world's largest emitter of greenhouse gasses.

The Chinese government views a growing economy as vital to maintaining social stability. However, China faces a number of major economic challenges which could undermine future growth, including distortive economic policies that have resulted in over-reliance on fixed investment and exports for economic growth (rather than on consumer demand), government support for state-owned firms, a weak banking system, widening income gaps, growing pollution, and the relative lack of the rule of law in China. Many economists warn that such problems could undermine China's future economic growth. The Chinese government has acknowledged these problems and has pledged to address them by implementing policies to boost consumer spending, expand social safety net coverage, and encourage the development of less-polluting industries.

This report provides background on China's economic rise; describes its current economic structure; identifies the challenges China faces to keep its economy growing strong; and discusses the challenges, opportunities, and implications of China's economic rise for the United States.

THE HISTORY OF CHINA'S ECONOMIC DEVELOPMENT

China's Economy Prior to Reforms

Prior to 1979, China, under the leadership of Chairman Mao Zedong, maintained a centrally planned, or command, economy. …

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