Since the 1970s China's economy has changed from a closed, centrally planned system to a more market-oriented one that plays a major role in the global economy - in 2010 China became the world's largest exporter. Reforms began with the phasing out of collectivized agriculture, and expanded to include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, creation of a diversified banking system, development of stock markets, rapid growth of the private sector, and opening to foreign trade and investment.

 

China generally has implemented reforms in a gradualist fashion. In recent years, China has renewed its support for state-owned enterprises in sectors it considers important to "economic security," explicitly looking to foster globally competitive national champions. After keeping its currency tightly linked to the US dollar for years, in July 2005 China revalued its currency by 2.1% against the US dollar and moved to an exchange rate system that references a basket of currencies. From mid 2005 to late 2008 cumulative appreciation of the renminbi against the US dollar was more than 20%, but the exchange rate remained virtually pegged to the dollar from the onset of the global financial crisis until June 2010, when Beijing allowed resumption of a gradual appreciation.

 

The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2010 stood as the second-largest economy in the world after the US, although in per capita terms the country is still lower middle-income. The dollar values of China's agricultural and industrial output each exceeded those of the US, although China was second to the US in the value of services it produced.

 

The Chinese government faces numerous economic development challenges, including: (a) reducing its high domestic savings rate and correspondingly low domestic demand; (b) sustaining adequate job growth for tens of millions of migrants and new entrants to the work force; (c) reducing corruption and other economic crimes; and (d) containing environmental damage and social strife related to the economy's rapid transformation. Economic development has progressed further in coastal provinces than in the interior, and approximately 200 million rural laborers and their dependents have relocated to urban areas to find work.

 

One demographic consequence of the "one child" policy is that China is now one of the most rapidly aging countries in the world. Deterioration in the environment - notably air pollution, soil erosion, and the steady fall of the water table, especially in the north - is another long-term problem. China continues to lose arable land because of erosion and economic development. The Chinese government is seeking to add energy production capacity from sources other than coal and oil, focusing on nuclear and alternative energy development.

 

In 2009, the global economic downturn reduced foreign demand for Chinese exports for the first time in many years, but China rebounded quickly, outperforming all other major economies in 2010 with GDP growth around 10%. The economy appears set to remain on a strong growth trajectory in 2011, lending credibility to the stimulus policies the regime rolled out during the global financial crisis. The government vows to continue reforming the economy and emphasizes the need to increase domestic consumption in order to make the economy less dependent on exports for GDP growth in the future, but China likely will make only marginal progress toward these rebalancing goals in 2011.

 

Two economic problems China currently faces are inflation - which, late in 2010, surpassed the government's target of 3% - and local government debt, which swelled as a result of stimulus policies, and is largely off-the-books and potentially low-quality.

 

GDP (purchasing power parity)
$9.854 trillion (2010 est.)
country comparison to the world: 3
$8.95 trillion (2009 est.)
$8.204 trillion (2008 est.)
note: data are in 2010 US dollars

 

GDP (official exchange rate)
$5.745 trillion (2009 est.)

 

GDP - real growth rate
10.1% (2010 est.)
country comparison to the world: 5
9.1% (2009 est.)
9% (2008 est.)

 

GDP - per capita
$7,400 (2010 est.)
country comparison to the world: 128
$6,800 (2009 est.)
$6,200 (2008 est.)

 

GDP - composition by sector
agriculture: 9.6%
industry: 46.8%
services: 43.6% (2009 est.)

Labor force
819.5 million (2009 est.)
country comparison to the world: 1

 

Labor force - by occupation
agriculture: 39.5%
industry: 27.2%
services: 33.2% (2008 est.)

 

Unemployment rate
4.3% (September 2009 est.)
country comparison to the world: 40
4.2% (December 2008 est.)
note: official data for urban areas only; including migrants may boost total unemployment to 9%; substantial unemployment and underemployment in rural areas

 

Population below poverty line
2.8%
note: 21.5 million rural population live below the official "absolute poverty" line (approximately $90 per year); an additional 35.5 million rural population live above that level but below the official "low income" line (approximately $125 per year) (2007)

 

Household income or consumption by percentage share
lowest 10%: 3.5%
highest 10%: 15%
note: data are for urban households only (2008)

 

Distribution of family income - Gini index
41.5 (2007)
country comparison to the world: 54
40 (2001)

 

Investment (gross fixed)
47.8% of GDP (2009 est.)
country comparison to the world: 1

 

Budget
revenues: $1.149 trillion
expenditures: $1.27 trillion (2009 est.)

 

Public debt
17.5% of GDP (2010 est.)
country comparison to the world: 112

16.9% of GDP (2009 est.)

 

Inflation rate (consumer prices)
5% (2010 est.)
country comparison to the world: 144
-0.7% (2009 est.)

 

Central bank discount rate
2.79% (31 December 2009)
country comparison to the world: 129
2.79% (31 December 2008)

 

Commercial bank prime lending rate
5.31% (31 December 2009 est.)
country comparison to the world: 148
5.31% (31 December 2008 est.)

 

Stock of narrow money
$3.838 trillion (31 December 2010 est)
$3.242 trillion (31 December 2009 est)

 

Stock of broad money
$10.08 trillion (31 December 2010 est.)
$8.933 trillion (31 December 2009 est.)

 

Stock of domestic credit
$8.156 trillion (31 December 2010 est.)
country comparison to the world: 4
$7.24 trillion (31 December 2009 est.)

 

Market value of publicly traded shares
$5.008 trillion (31 December 2009 est.)
country comparison to the world: 4
$2.794 trillion (31 December 2008)
$6.226 trillion (31 December 2007 est.)

 

Agriculture - products
rice, wheat, potatoes, corn, peanuts, tea, millet, barley, apples, cotton, oilseed; pork; fish

Industries
mining and ore processing, iron, steel, aluminum, 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

Industrial production growth rate
11% (2009 est.)
country comparison to the world: 12

Electricity - production
3.451 trillion kWh (2008 est.)
country comparison to the world: 2

Electricity - consumption
3.438 trillion kWh (2008 est.)
country comparison to the world: 2

Electricity - exports
16.64 billion kWh (2008)

Electricity - imports
3.842 billion kWh (2008)

Oil - production
3.991 million bbl/day (2009 est.)
country comparison to the world: 5

Oil - consumption
8.2 million bbl/day (2009 est.)
country comparison to the world: 3

Oil - exports
388,000 bbl/day (2008 est.)
country comparison to the world: 32

Oil - imports
4.393 million bbl/day (2008)
country comparison to the world: 4

Oil - proved reserves
20.35 billion bbl (1 January 2010 est.)
country comparison to the world: 13

Natural gas - production
82.94 billion cu m (2009)
country comparison to the world: 8

Natural gas - consumption
87.08 billion cu m (2009)
country comparison to the world: 9

Natural gas - exports
3.32 billion cu m (2009)
country comparison to the world: 31

Natural gas - imports
7.462 billion cu m (2009)
country comparison to the world: 27

Natural gas - proved reserves
3.03 trillion cu m (1 January 2010 est.)
country comparison to the world: 13

Current account balance
$272.5 billion (2010 est.)
country comparison to the world: 1
$297.1 billion (2009 est.)

Exports
$1.506 trillion (2010 est.)
country comparison to the world: 2
$1.204 trillion (2009 est.)

Exports - commodities
electrical and other machinery, including data processing equipment, apparel, textiles, iron and steel, optical and medical equipment

Exports - partners
US 20.03%, Hong Kong 12.03%, Japan 8.32%, South Korea 4.55%, Germany 4.27% (2009)

Imports
$1.307 trillion (2010 est.)
country comparison to the world: 3
$954.3 billion (2009 est.)

Imports - commodities
electrical and other machinery, oil and mineral fuels, optical and medical equipment, metal ores, plastics, organic chemicals

Imports - partners
Japan 12.27%, Hong Kong 10.06%, South Korea 9.04%, US 7.66%, Taiwan 6.84%, Germany 5.54% (2009)

Reserves of foreign exchange and gold
$2.622 trillion (31 December 2010 est.)
country comparison to the world: 1
$2.426 trillion (31 December 2009 est.)

Debt - external
$406.6 billion (31 December 2010 est.)
country comparison to the world: 22
$349.3 billion (31 December 2009 est.)

Stock of direct foreign investment - at home
$574.3 billion (31 December 2010 est.)
country comparison to the world: 9
$473.1 billion (31 December 2009 est.)

Stock of direct foreign investment - abroad
$278.9 billion (31 December 2010 est.)
country comparison to the world: 15
$229.6 billion (31 December 2009 est.)

Exchange rates
Renminbi yuan (RMB) per US dollar - 6.7852 (2010), 6.8314 (2009), 6.9385 (2008), 7.61 (2007), 7.97 (2006)

last updated on January 12, 2011

 

 

Five myths about China's economy
Sunday, April 11, 2010

China's stunning economic rise is one of the biggest stories of this generation. In just three decades since beginning to embrace market economics, China has left its desperate poverty behind to become the world's top exporting nation. The transformation has occurred so quickly that myths and misperceptions abound about the challenges and opportunities that China poses to America and the rest of the world.

 

1. China will quickly overtake the United States as the world's most powerful economy.
According to a November poll by the Pew Research Center, 44 percent of Americans believe that China is already the world's top economic power, while 27 percent put the United States in that position. That perception is completely at odds with the facts. This year, China's economy is expected to produce about $5 trillion in goods and services. That would put it ahead of Japan as the world's second-biggest national economy, but it would still be barely one-third the size of the $14 trillion U.S. economy and well behind the European Union, if taken as a whole.

 

One reason China's economy is so big is simply that it has 1.3 billion people. But China's per capita gross domestic product is only one-seventh the U.S. level. And in household living standards, China lags even further. Each year, an average Chinese household consumes one-fourteenth the value of goods and services purchased by an average American household.

 

And despite its chronic losses in manufacturing jobs, the United States is still the world leader in that arena because its manufacturers excel at high-value products such as airplanes and high-tech equipment, while China still mainly produces low-cost clothing and consumer electronics. In terms of the value of goods, the United States produces more than 20 percent of global manufacturing, or about double China's share.

 

2. China's vast holdings of U.S. Treasury bonds mean it can hold Washington hostage in economic negotiations.

China has the biggest holdings of U.S. Treasury bonds of any country -- around $1 trillion. Many people think this means China is "America's banker" and that, like a bank, it can withdraw its line of credit by selling off its Treasuries whenever Washington does something Chinese leaders don't like.

But China's Treasury holdings are not like regular loans that a bank extends to a company. They are more like deposits: safe, liquid and carrying a very low interest rate. Like a depositor, China has little ability to tell its bank how to run its business. It can only vote with its feet, by taking its deposits elsewhere -- but its deposits are so huge, there is no other "bank" in the world that can take them. The European and Japanese bond markets are not big enough to absorb that much Chinese cash, nor can China buy enough oil fields, ore mines or real estate to soak up its money. And it can't simply invest all its dollars at home, because doing so could lead to rampant inflation. So like it or not, Washington and Beijing are stuck with each other -- and neither has the power to hold the other hostage.

 

3. Letting its currency grow in value is the most important thing China can do to reduce its trade surplus.

Some American companies, unions and politicians complain that by keeping a fixed exchange rate between the yuan and the dollar, China is unfairly making its goods cheaper on the world market, thus driving its trade surplus at the expense of its trading partners. Certainly, the exchange rate is important, but it's a mistake to think that letting the yuan rise in value would magically make China's trade surplus disappear. In the late 1980s, Japan allowed the yen to double in value, but its trade surplus didn't budge. Conversely, in 2009 China kept the value of the yuan fixed against the dollar, and its trade surplus fell by a third.

 

Secretary Treasury Timothy Geithner was in Beijing on Thursday and discussed the currency issue with Chinese economic officials. Most observers -- including China's top economic policymakers -- agree that the yuan should rise in value. But for that move to offer any benefits, it must be accompanied by other policy shifts. By far the most important thing China can do to reduce its trade surplus is to stimulate domestic demand (including demand for imports), something it has started to do through a massive infrastructure spending program. There's some evidence that Chinese households are also beginning to spend more freely as wages rise and people feel optimistic about the future.

 

4. China's hunger for resources is sucking the world dry and making major contributions to global warming.

It's true that China is now the biggest producer of carbon dioxide and other greenhouse gases that contribute to global warming. And it's true that China uses more energy to produce a dollar of its GDP than most other countries, including the United States. But on a per-person basis, China's use of resources is still modest compared with that of rich countries. For instance, despite its rapid increase in car use, China consumes about 8 million barrels of oil a day. The United States consumes about 20 million barrels a day. Put another way, China, with nearly a quarter of the world's population, accounts for less than one-tenth of the world's oil consumption. The United States, with only 5 percent of world population, accounts for nearly a quarter of global oil consumption. Whose appetite is really the bigger problem?

 

Moreover, unlike the United States, China has recognized that it cannot let its fossil-fuel appetite grow forever and is working hard to improve efficiency. Chinese fuel-economy standards for new cars are higher than America's, for instance, and on average, coal-fired power plants are more efficient in China than in the United States.

 

5. China's economy has grown mainly through the cruel exploitation of cheap labour.

Every time a developing economy starts growing fast, richer countries accuse it of "cheating" by keeping its wages and exchange rate artificially low. But this isn't cheating; it's a natural stage of development that comes to an end in every country, as it will in China. China has grown in much the same way as other economies we now view as mature and responsible success stories -- including Japan, South Korea and Taiwan. Those nations invested heavily in infrastructure and education, and quickly moved their workers from low-productivity jobs in rural areas to more productive jobs in cities. When rural labor was abundant, wages were low, but they rose rapidly after those surplus workers joined the urban labor force.

 

China is hitting that spot now: The number of young people of workforce entry age (15 to 24) is projected to fall by one-third over the next 12 years. With young workers more scarce, wages have nowhere to go but up. This is already happening: Last month, Guangdong province (China's main export hub) raised its minimum wage by 20 percent.

 

China still has plenty of workers moving from the countryside to the cities, but the age of ultra-cheap Chinese labor will soon be gone.

By Arthur Kroeber

(the managing director of GaveKal-Dragonomics, an economic research firm in Beijing.)