China: Economy

Economic Reforms
Since 1978, China has reformed and opened its economy. The Chinese leadership has adopted a more pragmatic perspective on many political and socioeconomic problems and has reduced the role of ideology in economic policy. China's ongoing economic transformation has had a profound impact not only on China but on the world. The market-oriented reforms China has implemented over the past 2 decades have unleashed individual initiative and entrepreneurship. The result has been the largest reduction of poverty and one of the fastest increases in income levels ever seen. In 2010, China overtook Japan to become the world’s second-largest economy in terms of gross domestic product, behind the United States. It has sustained average economic growth of over 9.3% since 1989. In 2010 its $5.88 trillion economy was just over one-third the size of the U.S. economy.

China is firmly committed to economic reform and opening to the outside world. The Chinese leadership has identified reform of state industries, the establishment of a social safety net, reduction of the income gap, protection of the environment, and development of clean energy as government priorities. Government strategies for achieving these goals include large-scale privatization of unprofitable state-owned enterprises, development of a pension system for workers, establishment of an effective and affordable health care system, building environmental requirements into promotion criteria for government officials, and increasing rural incomes to allow domestic demand to play a greater role in driving economic growth. The leadership has also downsized the government bureaucracy.

In the 1980s, China tried to combine central planning with market-oriented reforms to increase productivity, living standards, and technological quality without exacerbating inflation, unemployment, and budget deficits. It pursued agricultural reforms, dismantling the commune system and introducing a household-based system that provided peasants greater decision-making in agricultural activities. The government also encouraged nonagricultural activities such as village enterprises in rural areas, promoted more self-management for state-owned enterprises, increased competition in the marketplace, and facilitated direct contact between Chinese and foreign trading enterprises. China also relied more upon foreign financing and imports.

During the 1980s, these reforms led to average annual growth rates of 10% in agricultural and industrial output. Rural per capita real income doubled. China became self-sufficient in grain production; rural industries accounted for 23% of agricultural output, helping absorb surplus labor in the countryside. The variety of light industrial and consumer goods increased. Reforms began in the fiscal, financial, banking, price-setting, and labor systems.

By the late 1980s, however, the economy had become overheated, with increasing rates of inflation. At the end of 1988, in reaction to a surge of inflation caused by accelerated price reforms, the leadership introduced an austerity program.

China's economy regained momentum in the early 1990s. During a visit to southern China in early 1992, China's paramount leader at the time, Deng Xiaoping, made a series of political pronouncements designed to reinvigorate the process of economic reform. The 14th Party Congress later in the year backed Deng's renewed push for market reforms, stating that China's key task in the 1990s was to create a "socialist market economy." The 10-year development plan for the 1990s stressed continuity in the political system with bolder reform of the economic system.

Following the Chinese Communist Party's October 2003 Third Plenum, Chinese legislators unveiled several proposed amendments to the state constitution. One of the most significant was a proposal to provide protection for private property rights. Legislators also indicated there would be a new emphasis on certain aspects of overall government economic policy, including efforts to reduce unemployment, which was officially 4.1% for urban areas in 2010 but is much higher when migrants are included. Other areas of emphasis include rebalancing income distribution between urban and rural regions and maintaining economic growth while protecting the environment and improving social equity. The National People's Congress approved the amendments when it met in March 2004. The Fifth Plenum in October 2005 approved the 11th Five-Year Plan aimed at building a "harmonious society" through more balanced wealth distribution and improved education, medical care, and social security. The 12th Five-Year Plan was debated in mid-October 2010 at the fifth plenary session of the 17th Central Committee of the CCP, and approved by the National People's Congress during its annual session in March 2011. The 12th Five-Year Plan seeks to transform China's development model from one reliant on exports and investment to a model based on domestic consumption. It also seeks to address rising inequality and create an environment for more sustainable growth by prioritizing more equitable wealth distribution, increased domestic consumption, and improved social infrastructure and social safety nets.

Agriculture
China is the world's most populous country and one of the largest producers and consumers of agricultural products. According to the UN World Food Program, in 2003, China fed 20% of the world's population with only 7% of the world's arable land (estimated at 121.7 million hectares in 2010, down from 129.9 million hectares in 1997). Almost 40% of China's labor force is engaged in agriculture, even though only 15% of the land is suitable for cultivation and agriculture contributes only about 10.3% of China's GDP (2009). China is among the world's largest producers of rice, corn, wheat, soybeans, vegetables, tea, and pork. Cotton is the major non-food commodity. China hopes to further increase agricultural production through improved plant stocks, fertilizers, new technologies (such as biotechnology), irrigation, and using more sustainable methods of production. The Chinese Government has also acknowledged that climate change poses a severe threat to the farming sector. Incomes for Chinese farmers are increasing more slowly than for urban residents, leading to an increasing wealth gap between the cities and countryside. Inadequate port facilities and a lack of warehousing and cold storage installations impede both domestic and international agricultural trade.

China is now one of the most important markets for U.S. exports; in 2010, U.S. exports to China totaled $91.9 billion, an all-time high. U.S. agricultural exports continue to play a major role in bilateral trade, totaling $17.9 billion in 2010 and thus making China the United States' largest agricultural export market. Leading categories include: soybeans ($11.3 billion), cotton ($1.988 billion), and hides and skins ($822 million).

Industry
Industry accounts for about 46.8% of China's GDP (2010 est.). Major industries are mining and ore processing; iron; steel; aluminum; coal; machinery; textiles and apparel; armaments; petroleum; cement; chemicals; fertilizers; consumer products including footwear, toys, and electronics; automobiles and other transportation equipment including rail cars and locomotives, ships, and aircraft; telecommunications equipment; commercial space launch vehicles; and satellites. China has become a preferred destination for the relocation of global manufacturing facilities. Its strength as an export platform has contributed to incomes and employment in China. The state-owned sector still accounts for about 40% of GDP (2010 est.). In recent years, authorities have been giving greater attention to the management of state assets--both in the financial market as well as among state-owned enterprises--and progress has been noteworthy.

Regulatory Environment
Though China's economy has expanded rapidly, its regulatory environment has not kept pace. Since Deng Xiaoping's open market reforms, the growth of new businesses has outpaced the government's ability to regulate them. This has created a situation where businesses, faced with mounting competition and poor oversight, will be willing to take drastic measures to increase profit margins, often at the expense of consumer safety. This issue acquired more prominence starting in 2007, with the United States placing a number of restrictions on problematic Chinese exports. The Chinese Government recognizes the severity of the problem, concluding in 2007 that nearly 20% of the country's products are substandard or tainted, and is undertaking efforts in coordination with the United States and others to better regulate the problem. The U.S. Food and Drug Administration (FDA) takes advantage of its presence in Beijing, Shanghai, and Guangzhou to monitor food safety issues, and in early 2011 the U.S. Consumer Product Safety Commission opened its first-ever foreign office in Beijing to enhance cooperation and intensify exchanges with Chinese product safety regulators.

Energy
Driven by strong economic growth, China's demand for energy is surging rapidly. China is the world's largest energy consumer and the world's second-largest net importer of crude oil after the United States. China is also the fifth-largest energy producer in the world. The International Energy Agency estimates that China will contribute 36% to the projected growth in global energy use, with its demand rising by 75% between 2008 and 2035. China's electricity generation is expected to increase to 10,555 billion kilowatt hours (Bkwh) by 2035, over three times the amount in 2009, according to U.S. Energy Information Administration. In 2010, China led the world in clean energy investment with $51.1 billion and had installed wind capacity of 41.8 gigawatts, the most in the world.

Coal continues to make up the bulk of China's energy consumption (71% in 2009), and China is the largest producer and consumer of coal in the world. As China's economy continues to grow, China's coal demand is projected to rise significantly, although coal's share of China's overall energy consumption is expected to decrease. China's continued reliance on coal as a power source has contributed significantly to China's emergence as the world's largest emitter of acid rain-causing sulfur dioxide and green house gases, including carbon dioxide.

China's 12th Five-Year Plan (2011-2015) continues the government’s policies encouraging greater energy conservation measures, development of renewable energy sources, and increased attention to environmental protection. China is exploring cleaner energy sources, including natural and shale gas, wind, solar, biomass, hydropower, and nuclear power, to reduce reliance on coal. China's renewable energy law calls for 15% of its energy to come from non-fossil fuel sources by 2020. In addition, the share of electricity generated by nuclear power is projected to grow from 1% in 2000 to 5% in 2020.

Since 1993, China has been a net importer of oil, a large portion of which comes from the Middle East. Net imports were approximately 4.3 million barrels per day in 2009. China's use of oil will continue to increase rapidly, particularly in response to the quick expansion of its vehicle fleets. Vehicle sales in China in 2010 rose 32% to over 18 million. China is interested in diversifying the sources of its oil imports and has invested in oil fields around the world. China recently concluded long-term loan-for-oil deals totaling $50 billion with Russia, Brazil, Venezuela, Kazakhstan, Angola, and Ecuador. In recent years, China’s National Offshore Oil Corporation (CNOOC) has also invested in several U.S. oil and natural gas fields in Texas, Colorado, and Wyoming. Beijing also plans to increase China's natural gas use through imports and domestic production. Gas currently accounts for only 4% of China's total energy consumption. China has set an ambitious target of increasing the share of natural gas in its overall energy mix to 10%.

During the July 2009 inaugural meeting of the U.S.-China Strategic and Economic Dialogue (S&ED), the two countries negotiated a memorandum of understanding (MOU) to enhance cooperation on climate change, energy, and the environment in order to expand and enhance cooperation on clean and efficient energy, to protect the environment, and to ensure energy security. The two sides also signed an MOU on cooperation on energy efficiency in buildings.

In November 2009, during President Barack Obama’s state visit to China, the United States and China announced the establishment of the U.S.-China Clean Energy Research Center (CERC), which will focus on energy efficiency, clean coal including carbon capture and storage, and clean vehicles; signed the Renewable Energy Partnership; launched the U.S.-China Electric Vehicles Initiative; announced the bilateral Energy Efficiency Action Plan under the Ten-Year Framework on Energy and Environment; and inaugurated the U.S.-China Energy Cooperation Program, a public-private partnership focused on joint collaborative projects on renewable energy, smart grid, clean transportation, green building, clean coal, combined heat and power, and energy efficiency. The two countries also announced the launch of the U.S.-China Shale Gas Initiative, which will accelerate China's development of shale gas resources.

During President Hu’s January 2011 state visit to the United States, the U.S. Department of Energy announced joint work plans under the U.S.-China CERC on building efficiency, clean coal, and clean vehicles, and started negotiations on a U.S.-China Eco-City Initiative to integrate energy efficiency and renewable energy into city design and operation in the two countries. In May 2011, the United States hosted the second U.S.-China Energy Efficiency Forum, and similar forums on biofuels and renewable energy are currently being planned.

Environment
One of the serious negative consequences of China's rapid industrial development has been increased pollution and degradation of natural resources. China surpassed the United States as the world's largest emitter of carbon dioxide and other greenhouse gases in 2007. A World Health Organization report on air quality in 272 cities worldwide concluded that seven of the world's 10 most polluted cities were in China. According to China's own evaluation, two-thirds of the 338 cities for which air-quality data are available are considered polluted--two-thirds of those moderately or severely so. Almost all of the nation's rivers are considered polluted to some degree and half of the population lacks access to clean water. Ninety percent of urban bodies of water are severely polluted. Various studies estimate pollution costs the Chinese economy 7%-10% of GDP each year.

Water scarcity also is an issue, particularly in Northern China, where groundwater is being extracted at an increasingly unsustainable rate, seriously constricting future economic growth if stronger conservation measures are not taken or additional water not diverted. The central government is currently focused on the latter option, investing an estimated $60 billion in the South-North Water Diversion Project, a large-scale diversion of water from the Yangtze River to northern cities, including Beijing and Tianjin.

The question of environmental impacts associated with the Three Gorges Dam project has generated controversy among environmentalists inside and outside China. Critics claim that erosion and silting of the Yangtze River threaten several endangered species, while Chinese officials say the dam will help prevent devastating floods and generate clean hydroelectric power that will enable the region to lower its dependence on coal, thus lessening air pollution. There are also major concerns about whether water supply in the Yangtze is adequate to support the project.

China's leaders are increasingly paying attention to the country's severe environmental problems. In 1998, the State Environmental Protection Administration (SEPA) was officially upgraded to a ministry-level agency, the Ministry of Environmental Protection (MEP). In recent years, China has strengthened its environmental legislation and made some progress in stemming environmental deterioration. Beijing invested heavily in pollution control as part of its campaign to host a successful Olympiad in 2008, though some of the gains were temporary in nature. Some cities have seen improvement in air quality in recent years. The United States and China have been engaged in an active program of bilateral environmental cooperation since the mid-1990s, with a more recent emphasis on clean energy technology and the design of effective environmental policy. China has similar energy and environmental cooperation programs with Japan and European Union countries.

In 2008, China and the United States formed the Ten-Year Framework on Energy and Environment (TYF). The TYF facilitates the exchange of information and best practices between the two countries to foster innovation and develop solutions to the pressing energy and environment problems both countries face. The framework is comprised of seven action plans (clean air, clean water, clean and efficient transportation, clean and efficient electricity, energy efficiency, protected areas, and wetlands conservation) as well as the EcoPartnerships program, which seeks to encourage action plan collaboration at the sub-national level (states, cities, businesses, and universities) between the U.S. and China. Seven original EcoPartnerships were announced with the formation of the TYF in 2008, with six new partnerships signed during the third annual S&ED in May 2011. More information about the TYF and EcoPartnerships can be found here: http://www.state.gov/g/oes/env/tenyearframework/index.htm

During the July 2009 S&ED, the two countries negotiated an MOU to enhance cooperation on climate change, energy, and the environment, which further elaborated the role of the TYF and established a new dialogue and cooperation mechanism on climate change. During the May 2011 S&ED, the U.S. and China affirmed their efforts to work together to achieve a positive outcome at the UN Climate Change Conference in Durban, South Africa.

The first U.S.-China Renewable Energy Forum was held concurrently with the second annual S&ED in May 2010 in Beijing. Forums were held on energy efficiency, biofuels, and on promoting opportunities for U.S.-China collaboration to advance clean energy, including through $150 million in bilateral private and public funding for the CERC. Five-year work plans for the U.S. and Chinese CERC research teams were signed during President Hu Jintao’s January 2011 visit.

In November 2010, U.S. and Chinese government officials convened the third meeting of the bilateral forum under the U.S.-China MOU on combating illegal logging and associated trade. During the meeting, the United States and China exchanged information on a variety of initiatives, including those with other countries, and explored ways to enhance bilateral cooperation. They discussed cooperation with the private sector and civil society in both countries and reviewed their experience with an ongoing trade data exchange. The delegations also reviewed outcomes from the meeting of the Asia-Pacific Regional Dialogue to Promote Trade in Legally Harvested Forest Products that was hosted by the U.S. in July. During the May 2011 S&ED, the U.S. and China agreed to hold the fourth bilateral forum on combating illegal logging and associated trade.

The U.S. Environmental Protection Agency (EPA) has cooperated with Chinese environmental agencies for many years, based on an MOU signed in 1980. In October 2010, EPA Administrator Lisa Jackson and Minister of Environmental Protection Zhou Shengxian signed a new MOU to expand cooperation across areas including water pollution and environmental law enforcement. The two agencies also co-chaired a session on electronic waste during the May 2011 S&ED.

China is an active participant in climate change talks and other multilateral environmental negotiations, taking environmental challenges seriously but pushing for the developed world to help developing countries. China is a member of the Major Economies Forum on Energy and Climate, and participates actively in the bilateral Climate Change Policy Dialogue. It signed on to the 2009 Copenhagen Accord in 2010 and inscribed a commitment to reducing its carbon intensity levels by 40%-45% by 2020 from 2005 levels. During President Hu’s January 2011 visit, the U.S. and China agreed to implement the 2010 Cancun agreements and support efforts to achieve positive outcomes at the 2011 UN conference in South Africa.

China is a signatory to the Basel Convention governing the transport and disposal of hazardous waste and the Montreal Protocol for the Protection of the Ozone Layer, as well as the Convention on International Trade in Endangered Species and other major environmental agreements.

Water
Water scarcity is a critical issue in China. Recently, severe drought in northern China posed a serious threat to sustained economic growth and local livelihoods. Since the 1980s, China has experienced increased severity and frequency of water shortages due to variations in rainfall; excessive withdrawals of groundwater sources, polluted water resources, and inefficiencies in water usage. In normal water years, half of China’s 662 cities have insufficient water supplies. Almost 94% of metropolitan areas with populations of more than one million people struggle to meet their annual water demands. Eleven percent of China’s population lack access to improved drinking water sources (up from 33% in 1990); while 45% of the population lacks access to improved sanitation.

In addition, poor water quality continues to pose a challenge to environmental and human health. On a daily basis 300 million people drink contaminated water in China. Nine million cases of diarrhea linked to water pollution occur annually in China, based on China’s 2003 National Health Survey. Approximately 61,000 people in China die annually from diarrhea related to polluted water--half of them are rural children.

The Government of China has responded to this crisis through large investments in the water sector, including storage, conveyance and treatment. Recent water and energy policies stressed conservation measures requiring municipalities and industry to consume less water. Large construction projects, such as the South-North Water Transfer project, are directed at addressing the water crisis. However, the question of environmental impacts associated with such projects has generated controversy among environmentalists inside and outside China. Critics assert that the magnitude and cost of building and operating large conveyance systems could result in unintended consequences that may overwhelm planned benefits. These consequences may include higher water prices, damage to local and downstream environments, additional treatment facilities for water that is currently too polluted to use, or further water shortages. China has announced its intention to funnel billions of renminbi of additional investment into water conservation projects during the 12th Five-Year Plan (2011-2015).

Science and Technology
Science and technology have always been a priority for China's leaders. Deng called it "the first productive force." Distortions in the economy and society created by party rule have severely hurt Chinese science, according to some Chinese science policy experts. The Chinese Academy of Sciences, modeled on the Soviet system, puts much of China's greatest scientific talent in a large, underfunded apparatus that remains largely isolated from industry, although the reforms of the past decade have begun to address this problem.

China is making significant investments in science and technology. Chinese science strategists see China's greatest opportunities in fields such as biotechnology and computers, where China is becoming an increasingly significant player. More overseas Chinese students are choosing to return home to work after graduation, and they have built a dense network of trans-Pacific contacts that will greatly facilitate U.S.-China scientific cooperation in coming years. The Chinese Government has increased incentives for students to return, such as salaries similar to those they would receive in the West. The U.S. space program is often held up as the standard of scientific modernity in China. China’s small but growing space program, which successfully completed its third manned orbit in September 2008, is a focus of national pride. During National Aeronautics and Space Administration (NASA) Administrator Charles Bolden’s October 2010 visit to China both sides agreed that transparency, reciprocity, and mutual benefit should serve as the foundation for future dialogue.

The U.S.-China Science and Technology Agreement remains the framework for bilateral cooperation in this field. During President Hu’s January 2011 visit, the U.S. and China renewed the science and technology agreement, extending the framework for an additional 5 years. The agreement is among the longest-standing U.S.-China accords, and includes over 11 U.S. Federal agencies and numerous branches that participate in cooperative exchanges under the science and technology agreement and its nearly 60 protocols, memoranda of understanding, agreements, and annexes. The agreement covers cooperation in areas such as marine conservation, renewable energy, and health. Biennial Joint Commission Meetings on Science and Technology bring together policymakers from both sides to coordinate joint science and technology cooperation. Executive Secretaries meetings are held biennially to implement specific cooperation programs. Japan and the European Union also have high-profile science and technology cooperative relationships with China.

Trade
The U.S. trade deficit with China rose to $273.1 billion in 2010. This represents almost 55% of the total U.S. trade deficit. While U.S. exports to China grew by a third in 2010 to an all-time high of $91.9 billion, U.S. imports from China increased 23.1% to $364.9 billion. The top three U.S. exports to China in 2010 were electrical machinery ($11.5 billion), nuclear reactors and related machinery ($11.2 billion), and oil seeds and related products ($11 billion).

China remained the third-largest market for U.S. exports, accounting for 7.2% of U.S. goods exports in 2010. U.S. agricultural exports continue to play a major role in bilateral trade, totaling $17.9 billion in 2010 and thus making China the United States' largest agricultural export market. Leading categories include: soybeans ($11.3 billion), cotton ($1.988 billion), and hides and skins ($822 million).

Export growth continues to play an important role in China's rapid economic growth. To increase exports, China pursues policies such as fostering the rapid development of foreign-invested factories, which assemble imported components into consumer goods for export, and liberalizing trading rights. Since the adoption of the 11th Five-Year Program in 2005, however, China has placed greater emphasis on developing a consumer demand-driven economy to sustain economic growth and address global imbalances.

Foreign Investment
China's investment climate has changed dramatically in a quarter-century of reform. In the early 1980s, China restricted foreign investments to export-oriented operations and required foreign investors to form joint-venture partnerships with Chinese firms. Foreign direct investment (FDI) grew quickly during the 1980s, but slowed in late 1989 in the aftermath of Tiananmen. In response, the government introduced legislation and regulations designed to encourage foreigners to invest in high-priority sectors and regions. Since the early 1990s, China has allowed foreign investors to manufacture and sell a wide range of goods on the domestic market and authorized the establishment of wholly foreign-owned enterprises, now the preferred form of FDI. However, the Chinese Government's emphasis on guiding FDI into manufacturing has led to market saturation in some industries, while leaving China's services sectors underdeveloped. China is one of the leading FDI recipients in the world, receiving a record $105.7 billion in 2010 according to the Chinese Ministry of Commerce.

As part of its World Trade Organization (WTO) accession, China undertook to eliminate certain trade-related investment measures and to open up specified sectors that had previously been closed to foreign investment. Many new laws, regulations, and administrative measures to implement these commitments have been issued. Despite some reforms, major barriers to foreign investment remain, including restrictions on entire sectors, opaque and inconsistently enforced laws and regulations, and the lack of a rules-based legal infrastructure.

Opening to the outside remains central to China's development. Foreign-invested enterprises produce about half of China's exports, and China continues to attract large investment inflows. Foreign exchange reserves were $2.622 trillion at the end of 2010, and have now surpassed those of Japan, making China's foreign exchange reserves the largest in the world. As a result of its “going out” policy, China's outbound foreign direct investment, especially in energy and natural resources, has also surged in recent years, reaching $59 billion in 2010, up from a yearly average of $2 billion in the 1990s.

Sources:

CIA World Factbook (September 2011)
U.S. Dept. of State Country Background Notes ( September 2011)

Glossary