Overview: After nearly a quarter century of reform and opening to the outside world, China’s economic system is the third largest in the world. In 2004 China had the world’s seventh largest gross domestic product (GDP) at US$1.4 trillion, resulting in a per capita GDP of US$1,000. The government has a goal of quadrupling the GDP by 2020 and increasing per capita GDP two-and-a-half times. Central planning has been cut back, and widespread market economy mechanisms and a reduced government role have been adopted since 1978. The government fosters a dual economic structure that involves the transition from a socialist, centrally planned economy to a socialist market economic system, or a “market economy with socialist characteristics.” Industry is marked by increasing technological advancements and productivity. People’s communes were eliminated by 1984—after more than 25 years—and the system of township-collective-household production was introduced in the agricultural sector. Private ownership of production assets is legal, although some nonagricultural and industrial facilities are still state owned and centrally planned. Restraints on foreign trade were relaxed with China’s accession to the World Trade Organization in 2001. Joint ventures are encouraged, especially in the coastal special economic zones and open coastal cities. A sign of the affluence the reformed economy has brought to China might be measured in the number of its millionaires (measured in U.S. dollars). In 2004 there were a reported 236,000 millionaires, an increase of 12 percent over two years earlier.
Chinese officials cite two major trends that have an effect on China’s market economy and future development: world multipolarization and regional integration. In relation to these trends, they see the roles of China and the United States in world affairs and with each other as very important. Despite successes, China’s leaders face a variety of challenges to the nation’s future economic development. They have to maintain a high growth rate, deal effectively with the rural work force, improve the financial system, continue to reform the state-owned enterprises, foster the productive private sector, establish a social security system, improve scientific and educational development, promote better international cooperation, and change the role of the government in the economic system. Despite whatever constraints the international market places on China, it became the world’s third largest trading nation in 2004, after the United States and Germany.
Gross Domestic Product (GDP)/Purchasing Power Parity (PPP): In 2004 China had a gross domestic product (GDP) of US$1.4 trillion, resulting in a per capita GDP of US$1,000. China’s PPP was estimated for 2003 at nearly US$6.5 trillion. Based on official Chinese data, the GDP growth rate for 2003 was 9.1 percent. PPP per capita in 2003 was estimated at US$5,000.
GOVERNMENT Budget: The state budget for 2002 was 1.8 trillion renminbi (RMB) in revenue and RMB2.2 trillion in expenditures. In the revenue column, 93.2 percent was from taxes and tariffs, 54.9 percent of which were collected by the central government and 45.1 percent by local authorities. The expenditures were for culture, education, science, and health care (18 percent); capital construction (14.3 percent); administration (13.5 percent); national defense (7.7 percent); agriculture, forestry, and water conservancy (5 percent); enterprise development (4.4 percent); subsidies to compensate price increases (3 percent); pensions and social welfare (1.7 percent); and other (32.4 percent). The overall budget deficit in 2002 was RMB314.9 billion, an amount equivalent to 2.9 percent of gross domestic product (GDP).
Inflation : China’s annual rate of inflation averaged 6 percent per year during the 1996–2002 period. Consumer prices experienced annual fluctuations, and the rate of inflation was estimated at 0.9 percent in 2003.
Special and Open Economic Zones: As part of its economic reforms and policy of opening to the world, between 1980 and 1984 China established special economic zones (SEZs) in Shenzhen, Zhuhai, and Shantou in Guangdong Province and Xiamen in Fujian Province, and designated the entire province of Hainan as a special economic zone. In 1984 China opened 14 other coastal cities to overseas investment (listed north to south): Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang, and Beihai. Then, beginning in 1985, Beijing decided to expand the coastal area by establishing the following open economic zones (listed north to south): Liaodong Peninsula, Hebei Province (which surrounds Beijing and Tianjin), Shandong Peninsula, Yangzi River Delta, Xiamen-Zhangzhou-Quanzhou Triangle in southern Fujian Province, Zhujiang (Pearl River) Delta, and Guangxi Zhuang Autonomous Region. In 1990 China decided to open the Pudong New Zone in Shanghai to overseas investment, as well as more cities in the Yangzi River Valley. Since 1992, the State Council has opened a number of border cities and all the capital cities of inland provinces and autonomous regions. In addition, 15 free-trade zones, 32 state-level economic and technological development zones, and 53 new- and high-tech industrial development zones have been established in large and medium-sized cities. As a result, a multilevel and diversified pattern of opening, integrating coastal areas with riverine, border and inland areas, has been formed in China.
Agriculture, Forestry, and Fishing: China traditionally has struggled to feed its large population. Even in the twentieth century, famines periodically ravaged China’s population. Great emphasis has always been put on agricultural production, but weather, wars, and politics often mitigated good intentions. With the onset of reforms in the late 1970s, the relative share of agriculture in the gross domestic product (GDP) began to increase annually. Driven by sharp rises in prices paid for crops and a trend toward privatization in agriculture, agricultural output increased from 30 percent of GDP in 1980 to 33 percent of GDP by 1983. Since then, however, it has decreased in share as the services sector increased. By 2003 agriculture produced only 14.8 percent of China’s GDP but is still huge by any measure. Some 51.1 percent of the total national work force is engaged in agriculture, forestry, and fishing.
According to United Nations statistics, China’s cereal production is the largest in the world. In 2002 China produced 402 million tons, or 19.8 percent of total world production. Its plant oil crops—at 15 million tons in 2002—are a close second to those of the United States and amounted to 13.6 percent of total world production. More specifically, China’s principal crops in 2002 were rice (174.7 million tons), corn (121.3 million tons), sweet potatoes (108 million tons), wheat (90.2 million tons), sugarcane (90.1 million tons), and potatoes (75.2 million tons). Other grains, such as barley, buckwheat, millet, oats, rye, sorghum, and tritcale (a wheat-rye hybrid), added substantially to overall grain production. Crops of peanuts, rapeseed, soybeans, and sugar beets also were significant, as was vegetable production in 2002. Among the highest levels of production were cabbages, tomatoes, cucumbers, and dry onions. Fruit production also has become a significant aspect of the agricultural market. In 2002 China produced large crops of watermelons, cantaloupes, and other melons. Other significant orchard products were apples, citrus fruits, bananas, and mangoes. China, a nation of numerous cigarette smokers, produced 2.4 million tons of tobacco leaves.
Fertilizer use was a major contributor to these abundant harvests. In 2001–02, China consumed 22.4 million tons of nitrogenous fertilizers, or 27.3 percent of total world consumption and more than double the consumption of other major users such as India and the United States in the same period. Among the lesser used fertilizers, China also was a leader. It consumed 8.8 million tons of phosphate fertilizers (26.8 percent of the world total) and 4 million tons of potash fertilizers (17.8 percent of the world total).
With China’s accession to the World Trade Organization (WTO) in 2001, food export opportunities have opened up and brought about still more efficient farming. As a result, traditional areas such as grain production have decreased in favor of cash crops for domestic and export trade in vegetables and fruit.
China’s livestock herds are the largest in the world, far outstripping all of Europe combined and about comparable in size to all African nations combined. For example, in 2002 China had 49.3 percent of the world’s pigs, 21.7 percent of the world’s goats, and 7.7 percent of the world’s cattle. Converted into food production, China’s major livestock products in 2002 were pig meat (43.2 million tons), poultry eggs (24.6 million tons), cow’s milk (12.9 million tons), poultry meat (12.5 million tons), and beef and veal (5.4 million tons). Other meats of significant amounts were mutton, lamb, and goat. Major by-products were cattle hides (1.3 million tons), sheepskins (321,000 tons), and goatskins (319,000 tons). Honey (265,000 tons) and raw silk (100,000 tons) also were major products destined for the commercial market.
Forestry products, measured in annual roundwood production, also abound. In 2002 China produced 284.9 million cubic meters of roundwood, the world’s third largest after the United States and India, or about 8.4 percent of total world production. From the roundwood, some 9.4 million cubic meters of sawnwood were produced that year.
China also leads the world in fish production. In 2001 it caught 16.5 million tons of fish, far out-catching the second-ranked nation, the United States, with its 4.9 million tons. Aquaculture also was substantial in world terms. In the same year, China harvested 26 million tons of fish, an amount more than 10 times the second-ranked nation, India, with its 2.2 million tons. The total fish production in 2002 was 44.3 million tons. Of this total, 62.7 percent was from aquaculture, an increasing sector, and 37.3 percent was from fish caught in rivers, lakes, and the sea.
Mining and Minerals: Mineral resources include large reserves of coal and iron ore, and there are adequate to abundant supplies of nearly all other industrial minerals. Besides being a major coal producer, China is the world’s fifth largest producer of gold and in the twenty-first century has become an important producer and exporter of rare metals needed in high-technology industries. The rare earth reserves at the Bayan Obi mine in Inner Mongolia are thought to be the largest in any single location in the world. Outdated mining and ore-processing technologies are being replaced with modern techniques, but China’s rapid industrialization requires imports of minerals from abroad. In particular, iron ore imports from Australia and the United States have soared in the early 2000s as steel production rapidly outstripped domestic iron ore production.
The major areas of production in 2001 were coal (1.1 billion tons), iron ore (220 million tons), crude petroleum (163.9 million tons), natural gas (30.3 million cubic meters), antimony ore (150 million tons), tin concentrates (95 million tons), nickel ore (51.5 million tons), tungsten concentrates (38.5 million tons), unrefined salt (34.1 million tons), vanadium (30 million tons), and molybdenum ore (28.2 million tons). In order of magnitude, bauxite, gypsum, barite, magnesite, talc and related minerals, manganese ore, fluorspar, and zinc also were important. In addition, China produced 1.9 million tons of silver, 185,000 tons of gold, 950,000 carats of industrial diamonds, and 235,000 carats of gem diamonds in 2001. The mining sector accounted for less than 0.8 percent of total employment in 2002 but produced about 5.3 percent of total industrial production.
Industry and Manufacturing: Industry and construction produced 52.9 percent of China’s gross domestic product (GDP) in 2003. Industry (including mining, manufacturing, construction, and power) contributed 51.1 percent of GDP in 2002, and occupied 20.5 percent of the workforce. The manufacturing sector produced 44.5 percent of GDP in 2002 and accounted for 11.3 percent of total employment. China is the world’s leading manufacturer of chemical fertilizers, cement, and steel. 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. By 2002 the share in gross industrial output by state-owned and state-holding industries had decreased to 41 percent, and the state-owned companies themselves contributed only 16 percent of China’s industrial output.
An example of an emerging heavy industry is automobile production, which 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 production reached 2.3 million. In 2002 production figures rose to nearly 3.3 million and then jumped again the next year to 4.4 million. Domestic sales have kept pace with production. After respectable annual increases in the mid- and late 1990s, sales soared in the early 2000s, reaching 3 million sold in 2003 and expected by some forecasters to reach 5 million sold per year by 2009. So successful has China’s automotive industry been that it began exporting car parts in 1999. China began to make plans to move in major ways into the automobile and components export business starting in 2005. A new Honda factory in Guangzhou was being built in 2004 for the sole purpose of 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, an increase of 34.4 percent over 2002. By 2004 China had become the world’s fourth largest automotive vehicle producer.
Concomitant with automotive production and other steel-consuming industries has been rapidly increasing steel production in China. Iron-ore production kept up with steel production in the early 1990s but was soon left behind by imported iron ore and other metals in the early 2000s. Steel production in 2000 was an estimated 140 million tons but expected to reach more than 350 million tons a year by the end of the decade.
Energy: As with other economic categories, China is a major producer and consumer of energy resources. In 2001, the most recent year available for United Nations statistics, China produced 807.2 million tons of oil equivalent and consumed 770.4 million tons. Per capita consumption was 599 kilograms, only a quarter of North Korea’s estimated consumption, a third of that in Hong Kong, and well below the average for Asia. China’s energy consumption has been dramatically on the rise since the inception of its economic reform program in the late 1970s. Electric power generation—mostly by coal-burning plants—has been in particular demand as China’s electricity use in the 1990s increased by between 3 percent and 7 percent per year. In 2003 electricity use increased by 15 percent over the previous year, and supplies could not keep up with demand, thus slowing economic development. Government statistics indicate that the overall demand for electric power for 2004 was projected to be around 2 trillion kilowatt hours but by June of that year, a 60 billion kilowatt-hour shortfall had been projected. Energy production failed to keep up with industrial demands, resulting in power cutoffs throughout most of the country.
China is largely self-sufficient in all energy forms. Its coal production is the highest in the world. Some 66.1 percent of China’s energy was produced from coal in 2002. The coal reserves are among the world’s largest, and mining technology has been improving since the 1990s. Coal has been exported since the early 1970s.
Petroleum produced 23.4 percent and natural gas 2.7 percent of China’s energy requirements in 2002. The petroleum reserves are large, but of varying quality and in disparate locations. There are oil deposit blocks in the northwest and offshore tracts believed to be among the world’s largest. There are substantial natural gas reserves in the north, northwest, and offshore. China has been an exporter of petroleum since the early 1970s. Yet, China is a net importer of crude petroleum because the high grades of petroleum it needs are not available domestically. Imports of mineral fuels totaled 7.2 percent of the cost of total imports in 2002. In 2004 Russia agreed to expand its oil exports to China. With deliveries sent by railroad, the two sides expected oil deliveries to China to reach 10 million tons in 2005 and 15 million tons in 2006. However, China’s total petroleum imports were expected to exceed 100 million tons in 2005.
China’s hydroelectric potential is the greatest in the world and the sixth largest in capacity. However, in 2002 hydroelectric power produced only 7.8 percent of China’s energy needs. The Three Gorges hydropower project on the Yangzi River started delivering power to eastern and central provinces in July 2003 and is expected to produce 84.7 billion kilowatt hours per year when the project is completed in 2009.
Construction: As might be expected in a rapidly developing nation, 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 percent over the previous year. In 2002 there was a 16.4 percent increase, followed by a 30 percent increase in 2003.
Services: In 2003 the services sector produced 32.3 percent of China’s gross domestic product (GDP). Prior to the onset of economic reforms in 1978, China’s services sector was represented by state-operated shops, rationing, and regulated prices. With reform came private markets and individual entrepreneurs and a comparatively free-wheeling commercial sector. Urban areas now are filled with shopping malls and dotted with Western-style retail shops and fast-food chains. An array of Western-style fast-food chains, trendy restaurants, night clubs, and consumer shops of all kinds are within close proximity to Mao Zedong’s mausoleum in Beijing. Other east coast cities have followed suit, and some cities in the interior are not far behind. If anything, as the Economist Intelligence Unit points out, the retail sector “suffers from oversupply.” Joint-venture hotels abound in China’s major cities.
Banking and Finance: Banking reform was initiated in China in 1994, and the Commercial Banking Law took effect in July 1995. The aims of these actions were to strengthen the role of the central bank—the People’s Bank of China—and to allow private banks to be established. The People’s Bank of China was established in 1948. It issues China’s currency and implements the nation’s monetary policies. China’s oldest bank, founded in 1908, is the Bank of Communications Limited, a commercial enterprise located in Shanghai. China’s second oldest bank was established in 1912 as the Bank of China. Since 2004 it has become a shareholding company known as the Bank of China Limited. This bank handles foreign exchange and international financial settlements. The Agricultural Bank of China was founded in 1951 and is mainly involved in rural financing and providing services to agricultural, industrial, commercial, and transportation enterprises in rural areas. Other major banks include the China Construction Bank; established in 1954 as the People’s Construction Bank of China, it has been a state-owned commercial bank since 1994, with 15,401 business outlets inside and outside China, including six overseas branches and two overseas representative offices. In late 2004, moves were underway to restructure the China Construction Bank into a shareholding bank called the China Construction Bank Corporation, with the state holding the controlling shares. The China International Trust and Investment Corporation was founded in 1979 to assist economic and technological cooperation, finance, banking, investment, and trade. The Industrial and Commercial Bank of China was founded in 1984 to handle industrial and commercial credits and international business. The Agricultural Development Bank of China, Export and Import Bank of China, and State Development Bank all were founded in 1994. China’s first private commercial national bank, the China Minsheng Banking Corporation, was opened in 1996. Commercial banks are supervised by the China Banking Regulatory Commission, which was established in 2003.
When first allowed in the mid-1980s, foreign banks were restricted to certain cities and could deal only with transactions by foreign companies in China. After those restrictions were relaxed following China’s accession to the World Trade Organization in 2001, some foreign banks have been allowed to provide services to local residents and businesses. In 2004 there were some 70 foreign banks with more than 150 branches in China.
There are stock exchanges in Beijing, Shanghai (the third largest in the world), and Shenzhen, and futures exchanges in Shanghai, Dalian, and Zhengzhou. They are regulated by the China Securities Regulatory Commission.
Tourism: China has become a major tourist destination, especially since its opening to the world in the late 1970s. By 2002 China had some 8,880 tourist hotels and a burgeoning hospitality industry, much of it joint ventures with foreign partners. Sources vary as to how many tourists and visitors arrive in China each year. The figures for 2002, for example, varied between 36.8 million and 97.9 million tourists and visitors to China. However, 80.8 million (82.5 percent of the total) visits were made by individuals arriving via the Hong Kong and Macau special administrative regions, including those who made multiple and often same-day trips to China. Others came from Taiwan (4 percent), Japan (3 percent), South Korea (2.2 percent), Russia, (1.3 percent), and the United States (1.1 percent). There is agreement on the monetary value of this sector. In 2002 visitors to China spent some US$20.3 billion. At the same time, China was increasingly a source of tourists, with more than US$15 billion spent on tourism in other countries in 2002.
Labor: China’s total employed labor force at the end of 2002 was 634 million persons. of these, 51.2 percent were in agriculture, forestry, and fishing; 20.5 percent were in mining, manufacturing, energy, and construction industries; and 28.2 percent were in the services sector and other categories. In 2004 some 25 million persons were employed by 743,000 private enterprises. The All-China Federation of Trade Unions (ACFTU) is the state-sanctioned labor organization with which other official labor organizations affiliate. The 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 at the end of 2002, out of an estimated 248 million urban workers. An independent trade union group, the Workers’ Autonomous Federation, was founded in 1989, with the goal of establishing a separate trade union movement, but many of its leaders were arrested during the June 1989 Tiananmen incident.
Official Chinese statistics reveal that 7.3 percent of the total work force, some 25.6 million persons, were unemployed in 2002. Unofficially, it was believed that there might have been some 150 million unemployed in rural areas in 2001. 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.
Foreign Economic Relations: The government traditionally has decided the composition of China’s foreign trade. However, since the initiation of reforms in 1978, increasing numbers of private partnerships have developed, and trade is primarily dictated by the marketplace. After years of disagreement over trade practices with its largest export partner, the United States, China agreed to a range of economic reforms designed to open Chinese markets to private and foreign investment, and the U.S. Congress granted China permanent most-favored-nation status in 2000. In 2001 China acceded to the World Trade Organization. As a result of its efforts in the global marketplace, by 2004 China had become the world’s third largest trading power behind the United States and Germany.
Imports: China’s imports rose by 36 percent in 2004, totaling US$561.4 billion. In 2003, for which fuller statistics are available, China’s imports totaled US$397.4 billion. Of these imports, the major components were machinery and equipment, mineral fuels, plastics, and iron and steel. The major trading partners were Japan (18.1 percent), Taiwan (12.8 percent), South Korea (9.7 percent), and the United States (9.2 percent). The 2003 amount reflected the rising trend in imports during the pervious seven years. In 1996 China’s imports totaled US$138.8 billion and reached US$225 billion by 2000.
Exports: China’s exports rose by 35.4 percent in 2004, totaling US$593.4 billion. In 2003, for which fuller statistics are available, China’s exports reached US$436.1 billion, with machinery and equipment, textiles and clothing, footwear, toys, and mineral fuels as the major commodities. The major trading partners were the United States (21.5 percent), Hong Kong (trading as a separate economy, mostly for reexport purposes, 18 percent), Japan (14.9 percent), and South Korea (4.8 percent). One of the burgeoning exports, toys (both hi-tech and simple, of which China provides about 75 percent of the total worldwide), also has a growing domestic market (US$6 billion a year). The 2003 total reflected the rising trend in exports during the previous seven years. In 1996 China’s exports totaled US$151 billion and reached US$249.2 billion by 2000.
Trade Balance: China had a favorable trade balance of US$32 billion in 2004 and US$38.7 billion in 2003. These amounts reflect the general trend of a favorable trade balance during the pervious eight years. In 1996 China’s trade balance was US$12.2 billion. It peaked at US$43.4 billion in 1998 and had declined to US$24.1 billion by 2000 before starting its new increase.
Balance of Payments: China’s current account balance in 2002 was US$35.4 billion. Added to this total was US$49.3 billion in foreign direct investment (exceeding that invested in the United States). When other investments, assets, and liabilities are brought into the calculation, the overall balance of payments was US$75.2 billion in 2002, as compared with US$10.7 billion in 2000 and US$47.4 billion in 2001.
External Debt: According to United Nations statistics for 2001, China had US$91.7 billion total external and public or publicly guaranteed long-term debt. China’s debt had grown steadily during the 1990s, peaked at US$112.8 billion in 1997, and then declined annually thereafter. In 2003 China had US$412.2 billion in its international reserve account, 97.8 percent of which was from foreign exchange, not including the Bank of China’s foreign exchange holdings.
Foreign Aid and Foreign Investment: China is the recipient of bilateral and multilateral official development assistance and official aid to individual recipients. In 2001 it received US$1.4 billion in such disbursements, or about US$1.10 per capita. This total was down from the 1999 figures of US$2.4 billion and US$1.90 per capita. Some of this aid comes to China in the form of socioeconomic development assistance through the United Nations (UN) system. China received US$112 million in such UN assistance annually in 2001 and 2002, the largest portion coming from the UN Development Programme (UNDP).
China also obtains foreign capital through foreign loans, direct foreign investment, and other investment by foreign businesses. To date, foreign businesses from more than 170 countries and regions have invested in Chinese joint-venture enterprises since 1980. Most joint-venture activities are located in coastal cities and increasing numbers in inland cities as well. Some 300 of the 500 top transnational companies in the world have invested in China, and foreign investments have become an important capital source for China’s economic development. In 1999 foreign direct investment totaled US$40.3 billion. Between 1979 and 1999, cumulative foreign direct investment totaled US$305.9 billion, of which US$40.3 billion was invested in 1999 alone. In that year, China had approved the establishment of 342,000 foreign-funded enterprises, of which more than 100,000 have gone into operation. Contracted foreign direct investment reached nearly US$82.8 billion in 2002, US$115 billion in 2003, and US$72.7 billion in the first half of 2004.
Currency and Exchange Rate: China’s currency is the renminbi (RMB, people’s currency) or yuan. The exchange rate in February 2005 was RMB1 = US$0.12. The RMB is made up of 100 fen or 10 jiao. Coins are issued in denominations of 1, 2, and 5 fen; 1 and 5 jiao, and 1 yuan. Banknotes are issued in denominations of 1, 2, and 5 jiao; and 1, 2, 5, 10, 50, and 100 renminbi.