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Encyclopedia > Economy of the People's Republic of China

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Economy of China

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This article is on the economy of Mainland China. See also: Economy of Hong Kong, Economy of Macau, and Economy of Taiwan.


Economy - overview: Since 1978 the People's Republic of China (PRC) government has been moving the economy from a Soviet-style centrally planned economy to a more market-oriented economy but still within a rigid political framework of Communist Party of China control.

To this end the authorities have switched to a system of household responsibility in agriculture in place of the old collectivization, increased the authority of local officials and plant managers in industry, permitted a wide variety of small-scale enterprise in services and light manufacturing, and opened the economy to increased foreign trade and investment. The government has emphasized raising personal income and consumption and introducing new management systems to help increase productivity. The government also has focused on foreign trade as a major vehicle for economic growth. The result has been a quadrupling of GDP since 1978. In 1999, with its 1.25 billion people but a PPP[?] of just $3,800 per capita, mainland China became the second largest economy in the world after the USA.

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

During the 1980s, these reforms led to average annual rates of growth of 10% in agricultural and industrial output. Rural per capita real income doubled. Industry posted major gains especially in coastal areas near Hong Kong and accross the strait from Taiwan, where foreign investment helped spur output of both domestic and export goods. Mainland 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.

On the darker side, the leadership has often experienced in its hybrid system the worst results of socialism (bureaucracy, lassitude, corruption) and of capitalism (windfall gains and stepped-up inflation). Beijing thus has periodically backtracked, retightening central controls at intervals. At the end of 1988, in reaction to a surge of inflation caused by accelerated price reforms, the leadership introduced an austerity program.

Mainland China's economy regained momentum in the early 1990s. Deng Xiaoping's Chinese New Year's visit to southern China in 1992 gave economic reforms new impetus. The 14th Communist Party Congress later in the year backed up Deng's renewed push for market reforms, stating that the PRC's key task in the 1990s was to create a "socialist market economy." Continuity in the political system but bolder reform in the economic system were announced as the hallmarks of the 10-year development plan for the 1990s.

During 1993, output and prices were accelerating, investment outside the state budget was soaring, and economic expansion was fueled by the introduction of more than 2,000 special economic zones (SEZs) and the influx of foreign capital that the SEZs facilitated. Beijing approved additional long-term reforms aimed at giving still more play to market-oriented institutions and at strengthening the center's control over the financial system; state enterprises would continue to dominate many key industries in what was now termed "a socialist market economy". Chinese authorities called in speculative loans, raised interest rates, and reevaluated investment projects. The growth rate was thus tempered, and the inflation rate dropped from over 17% in 1995 to 8% in early 1996. In 1996, the mainland Chinese economy continued to grow at a rapid pace, at about 9.5%, accompanied by low inflation; the economy has been slowing since then, with official growth of 8.9% in 1997, 7.8% in 1998, and 7.1% for 1999.

From 1995-99 inflation dropped sharply, reflecting tighter monetary policies and stronger measures to control food prices. At the same time, the government struggled to (a) collect revenues due from provinces, businesses, and individuals; (b) reduce corruption and other economic crimes; and (c) keep afloat the large state-owned enterprises, most of which had not participated in the vigorous expansion of the economy and many of which had been losing the ability to pay full wages and pensions. From 50 to 100 million surplus rural workers are adrift between the villages and the cities, many subsisting through part-time low-paying jobs. Popular resistance, changes in central policy, and loss of authority by rural cadres have weakened the PRC's population control program, which is essential to maintaining growth in living standards. Another long-term threat to continued rapid economic growth is the deterioration in the environment, notably air pollution, soil erosion, and the steady fall of the water table especially in the north. China continues to lose arable land because of erosion and economic development.

Despite mainland China's impressive economic development during the past two decades, reforming the state enterprise sector and modernizing the banking system remain major hurdles. Over half of mainland China's large state-owned enterprises are inefficient and reporting losses. During the 15th National Congress of the Chinese Communist Party that met in September 1997, President Jiang Zemin announced plans to sell, merge, or close the vast majority of SOEs in his call for increased "public ownership" (privatization in euphemistic terms). The 9th National People's Congress endorsed the plans at its March 1998 session. The next few years will witness increasing tensions between a highly centralized political system and an increasingly decentralized economic system.

Agriculture
Most of mainland China's labor force is engaged in agriculture, even though only under 10% of the land is suitable for cultivation. There are 329 million Chinese farmers--roughly half the work force--mostly laboring on small pieces of land relative to U.S. farmers. Virtually all arable land is used for food crops, and China is among the world's largest producers of rice, potatoes, sorghum, millet, barley, peanuts, tea, and pork. Major non-food crops, including cotton, other fibers, and oil seeds, furnish mainland China with a large proportion of its foreign trade revenue. Agricultural exports, such as vegetables and fruits, fish and shellfish, grain and grain products, and meat and meat products, are exported to Hong Kong. Yields are high because of intensive cultivation, but mainland China hopes to further increase agricultural production through improved plant stocks, fertilizers, and technology.

Industry
Major state industries are iron, steel, coal, machine building, light industrial products, armaments, and textiles. These industries completed a decade of reform (1979-89) with little substantial management change. The 1999 industrial census revealed that there were 7,930,000 industrial enterprises at the end of 1999; total employment in state-owned industrial enterprises was about 24 million. The automobile industry is expected to grow rapidly in the coming decade, as is the petrochemical industry. Machinery and electronic products have become China's main exports.

Energy and Mineral Resources
Over the past decade mainland China has managed to keep its energy growth rate at just half the rate of GDP growth, a considerable achievement. Although energy consumption slumped in absolute terms and economic growth slowed during 1998, mainland China's total energy consumption may double by 2020 according to some projections. Mainland China is expected to add approximately 15,000 megawatts of generating capacity a year, with 20% of that coming from foreign suppliers. Beijing, due in large part to environmental concerns, would like to shift China's current energy mix from a heavy reliance on coal, which accounts for 75% of China's energy, toward greater reliance on oil, natural gas, renewable energy, and nuclear power.

The PRC has closed some 30,000 coal mines over the past 5 years to cut overproduction. This has reduced coal production by over 25%. Since 1993, China has been a net importer of oil; today imported oil accounts for 20% of the processed crude in China. Net imports are expected to rise to 3.5 million barrels per day by 2010. China is interested in developing oil imports from Central Asia and has invested in Kazhakstan[?] oil fields. Beijing is particularly interested in increasing mainland China's natural gas production --currently just 10% of oil production--and is incorporating a natural gas strategy in its tenth 5-year plan (2001-05), with the goal of expanding gas use from its current 2% share of mainland China's energy production to 4% by 2005 (gas accounts for 25% of U.S. energy production).

Beijing also intends to continue to improve energy efficiency and promote the use of clean coal technology. Only one-fifth of the new coal power plant capacity installed from 1995 to 2000 included desulphurization equipment. Interest in renewable sources of energy is growing, but except for hydropower, their contribution to the overall energy mix is unlikely to rise above 1%-2% in the near future. Mainland China's energy section continues to be hampered by difficulties in obtaining funding, including long-term financing, and by market balkanization due to local protectionism that prevents more efficient large plants from achieving economies of scale.

Environment
A harmful by-product of China's rapid industrial development has been increased pollution. A 1998 World Health Organization report on air quality in 272 cities worldwide concluded that seven of the 10 most-polluted cities were in China. According to the PRC's own evaluation, two-thirds of the 338 cities for which air-quality data are available are considered polluted--two-thirds of them moderately or severely so. Respiratory and heart diseases related to air pollution are the leading cause of death in China. Almost all of the nations rivers are considered polluted to some degree, and half of the population lacks access to clean water. Ninety percent of urban water bodies are severely polluted. Water scarcity also is an issue; for example, severe water scarcity in Northern China has forced the government to plan a largescale diversion of water from the Yangtze to northern cities, including Beijing and Tianjin. Acid rain falls on 30% of the country. Various studies estimate pollution costs the Chinese economy about 7% of GDP each year.

China's communist leaders are increasingly paying attention to the country's severe environmental problems. In March 1998, the State Environmental Protection Administration (SEPA) was officially upgraded to a ministry-level agency, reflecting the growing importance the PRC Government places on environmental protection. In recent years, the PRC has strengthened its environmental legislation and made some progress in stemming environmental deterioration. In 1999, the PRC invested more than 1% of GDP in environmental protection, a proportion that will likely increase in coming years. During the 10th 5-Year Plan the PRC plans to reduce total emissions by 10%. Beijing in particular has invested heavily in pollution control as part of its successful campaign to win the competition to host the 2008 Olympic Games.

The PRC is an active participant in the climate change talks and other multilateral environmental negotiations. It is a signatory to the Basel Convention governing the transport and disposal of hazardous waste and the Montreal Protocol on Substances That Deplete the Ozone Layer, as well as the Convention on the International Trade in Endangered Species of Wild Flora and Fauna and other major environmental agreements.

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 hydroelectric power generated by the project will enable the region to lower its dependence on coal, thus lessening air pollution.

The U.S.-China Forum on Environment and Development, co-chaired by the U.S. Vice President and the Chinese Premier, has been the principal vehicle of an active program of bilateral environmental cooperation since its inception in 1997. Despite positive reviews of the Forum's achievements from both sides, the PRC has often compared the U.S. program, which lacks a foreign assistance component, with those of Japan and several European Union (EU) countries that include generous levels of aid.

Science and Technology
Science and technology have always preoccupied the PRC's leaders. The PRC's technocrats--both Jiang Zemin and Zhu Rongji were trained as electric power engineers--have a great reverence for science. Hu Jintao was trained as a hydraulic engineer. 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 bureaucracy that remains largely isolated from industry and academia, although the reforms of the past decade have begun to address this problem.

Chinese science strategists see China's greatest opportunities in newly emerging fields such as biotechnology and computers where there is still a chance for China to become a significant competitor. Most Chinese students who went abroad have not returned, but they have built a dense network of transpacific contacts that will greatly facilitate U.S.-China scientific cooperation in the coming years. The United States is often held up as the standard of modernity in China. Photos of the Space Shuttle often appear in Chinese advertisements as a symbol of advanced technology. The PRC's small space program, which will put a man in space within the next year, is a focus of national pride.

The U.S.-P.R.C. Science and Technology Agreement remains the framework for U.S.- PRC cooperation in this field. A 5-year agreement to extend the science and technology agreement was signed in April 1996. There are currently more than 30 active protocols under the agreement, covering cooperation in areas such as marine conservation, renewable energy, and health. Japan and the European Union also have high-profile science and technology cooperation with mainland China.

Trade and Investment
According to IMF statistics, mainland China's global trade totaled $353 billion in 1999; the trade surplus[?] stood at $36 billion. Mainland China's primary trading partners include Japan, Taiwan, the U.S., South Korea, Hong Kong, Germany, Singapore, Russia, and the Netherlands. According to U.S. statistics, mainland China had a trade surplus with the U.S. of $68.7 billion in 1999.

The PRC has experimented with decentralizing its foreign trading system and has sought to integrate itself into the world trading system. In November 1991, the PRC joined the Asia-Pacific Economic Cooperation (APEC) group, which promotes free trade and cooperation in economic, trade, investment, and technology issues. In 2001, China will serve as APEC chair, and Shanghai will host the annual APEC leaders meeting.

During his 1999 visit to the United States, Premier Zhu Rongji signed a bilateral Agricultural Cooperation Agreement, which lifted longstanding Chinese prohibitions on the import of citrus, grain, beef, and poultry. In November 1999, the United States and People's Republic of China reached a historic bilateral market-access agreement to pave the way for the PRC's accession to the World Trade Organization (WTO). As part of the far-reaching trade liberalization agreement, the PRC agreed to lower tariffs and abolish market impediments after it joins the world trading body. Chinese and foreign businessmen, for example, will gain the right to import and export on their own--and to sell their products without going through a government middleman. Average tariff rates on key U.S. agricultural exports will drop from 31% to 14% in 2004 and on industrial products from 25% to 9% by 2005. The agreement also opens new opportunities for U.S. providers of services like banking, insurance, and telecommunications. After reaching a bilateral WTO agreement with the EU and other trading partners in summer 2000, the PRC must now work on a multilateral WTO accession package before joining the world trade body. To increase exports, the PRC has pursued policies such as fostering the rapid development of foreign-invested factories, which assemble imported components into consumer goods for export.

The U.S. is one of China's primary suppliers of power-generating equipment, aircraft and parts, computers and industrial machinery, raw materials, and chemical and agricultural products. However, U.S. exporters continue to have concerns about fair market access due to China's restrictive trade policies.

Foreign Investment
Foreign investment stalled in late 1989 in the aftermath of the Tiananmen protests. In response, the government introduced legislation and regulations designed to encourage foreigners to invest in high-priority sectors and regions.

In 1990, the government eliminated time restrictions on the establishment of joint ventures[?], provided some assurances against nationalization, and allowed foreign partners to become chairs of joint venture boards. In 1991, the PRC granted more preferential tax treatment for wholly foreign-owned businesses and contractual ventures and for foreign companies which invest in selected economic zones or in projects encouraged by the state, such as energy, communications, and transportation. It also authorized some foreign banks to open branches in Shanghai and allowed foreign investors to purchase special "B" shares of stock in selected companies listed on the Shanghai and Shenzhen Securities Exchanges. These "B" shares are sold to foreigners but carry no ownership rights in a company. In 1999, mainland China received nearly $39 billion in foreign direct investment.

Opening to the outside remains central to mainland China's development. Foreign-invested enterprises produce about 45% of China's exports, and China continues to attract large investment inflows. Foreign exchange reserves totaled about $155 billion in 1999.

GDP: purchasing power parity - $6 trillion (2002 est.)

GDP - real growth rate: 8% (official estimate) (2002 est.)

GDP - per capita: purchasing power parity - $4,600 (2002 est.)

GDP - composition by sector:
agriculture: 18%
industry: 49%
services: 33% (2001 est.)

Population below poverty line: 10% (2001 est.)

Household income or consumption by percentage share:
lowest 10%: 2%
highest 10%: 30% (1998)

Inflation rate (consumer prices): -0.8% (2002 est.)

Labor force: 706 million (2000 est.)

Labor force - by occupation: agriculture 50%, industry 23%, services 27% (2001 est.)

Unemployment rate: urban unemployment roughly 10%; substantial unemployment and underemployment in rural areas (2002 est.)

Budget:
revenues: $161.8 billion
expenditures: $191.8 billion, including capital expenditures of $NA (2000)

Industries: iron and steel, coal, machine building, armaments, textiles and apparel, petroleum, cement, chemical fertilizers, footwear, toys, food processing, automobiles, consumer electronics, telecommunications

Industrial production growth rate: 13.5% (2002 est.)

Electricity - production: 1.308 trillion kWh (2000)

Electricity - production by source:
fossil fuel: 82%
hydro: 17%
nuclear: 1%
other: 0% (1998)

Electricity - consumption: 1.206 trillion kWh (2000)

Electricity - exports: 10.25 billion kWh (2000)

Electricity - imports: 400 million kWh (2000)

Agriculture - products: rice, wheat, potatoes, sorghum, peanuts, tea, millet, barley, cotton, oilseed[?]; pork; fish

Exports: $312.8 billion f.o.b. (2002 est.)

Exports - commodities: machinery and equipment; textiles and clothing, footwear, toys and sporting goods; mineral fuels, chemicals

Exports - partners: US 22%, Hong Kong 19%, Japan 17%, Germany, South Korea, Netherlands, UK, Singapore, Taiwan (1999)

Imports: $165.8 billion (c.i.f., 1999)

Imports - commodities: machinery and equipment, plastics, chemicals, iron and steel, mineral fuels

Imports - partners: Japan 20%, US 12%, Taiwan 12%, South Korea 10%, Germany, Hong Kong, Russia, Singapore (1999)

Debt - external: $149.4 billion (2002 est.)

Economic aid - recipient: $NA

Currency: 1 yuan = 10 jiao (see also: Renminbi)

Exchange rates: yuan per US$1 - 8.2793 (January 2000), 8.2783 (1999), 8.2790 (1998), 8.2898 (1997), 8.3142 (1996), 8.3514 (1995)
note: beginning 1 January 1994, the People's Bank of China quotes the midpoint rate against the US dollar based on the previous day's prevailing rate in the interbank foreign exchange market

Fiscal year: calendar year

See also : People's Republic of China



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