Economy of the People's Republic of China

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The economy of the People's Republic of China is the second largest in the world after the US with a GDP of $10.21 trillion (2006) when measured on a purchasing power parity (PPP) basis.^{[citation needed]} It is the fourth largest in the world after the US, Japan and Germany, with a nominal GDP of US$2.527 trillion (2006) when measured in exchange-rate terms.^[1] China has been the fastest growing major nation for the past quarter of a century with an average annual GDP growth rate above 10%.^[2] China's per capita income has grown at an average annual rate of more than 8% over the last three decades drastically reducing poverty, but this rapid growth has been accompanied by rising income inequalities.^[3] The country's per capita income is classified as low by world standards, at about $2,000 (nominal, 107th of 179 countries/economies), and $7,800 (PPP, 82nd of 179 countries/economies) in 2006, according to the IMF.

Despite China's size, the abundance of its resources, and having about 20 percent of the world's population living within its borders, its role in the world economy traditionally has been relatively small. Since the late 1970s, however, the Chinese government has reformed the economy from a Soviet-type centrally planned economy that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy. Since being introduced, these reforms have helped lift millions of its citizens out of poverty, bringing the poverty rate down from 53% in 1981 to 8% in 2001.^[4] This economic system has been called "Socialism with Chinese characteristics" and can be considered as a type of mixed economy. Only about a third of the economy is now directly state-controlled. As of 2005, 70% of China's GDP was in the private sector. The smaller public sector was dominated by about 200 large state enterprises concentrated mostly in utilities, heavy industries, and energy resources.^[5]

Since the late 1970s and early 1980s, the economic reforms initially began with the shift of farming work to a system of household responsibility to start the phase out of collectivized agriculture, and later expanded to include the gradual liberalization of prices; fiscal decentralization; increased autonomy for state enterprises that increased the authority of local government officials and plant managers in industry thereby permitting a wide variety of private enterprise in services and light manufacturing; the foundation of a diversified banking system; the development of stock markets; the rapid growth of the non-state sector, and the opening of the economy to increased foreign trade and foreign investment. China has generally implemented reforms in a gradualist fashion, including the sale of equity in China's largest state banks to foreign investors and refinements in foreign exchange and bond markets in mid-2000s. As its role in world trade has steadily grown, its importance to the international economy has also increased apace. China's foreign trade has grown faster than its GDP for the past 25 years.^[6] The government's decision to permit China to be used by multinational corporations as an export platform has made the country a major competitor to other Asian export-led economies, such as South Korea, Singapore, and Malaysia.^[7]

China has emphasized raising personal income and consumption and introducing new management systems to help increase productivity. The government has also focused on foreign trade as a major vehicle for economic growth. The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978. Some economists believe that Chinese economic growth has been in fact understated during much of the 1990s and early 2000s, failing to fully factor in the growth driven by the private sector. Nevertheless, key bottlenecks continue to constrain growth. Available energy is insufficient to run at fully-installed industrial capacity,^[8] the transport system is inadequate to move sufficient quantities of such critical items as coal,^[9] and the communications system^[10] cannot yet fully meet the needs of an economy of China's size and complexity.

The two most important sectors of the economy have traditionally been agriculture and industry, which together employ more than 70 percent of the labor force and produce more than 60 percent of GDP. The two sectors have differed in many respects. Technology, labor productivity, and incomes have advanced much more rapidly in industry than in agriculture. Agricultural output has been vulnerable to the effects of weather, while industry has been more directly influenced by the government. The disparities between the two sectors have combined to form an economic-cultural-social gap between the rural and urban areas, which is a major division in Chinese society. China is the world's largest producer of rice and is among the principal sources of wheat, corn (maize), tobacco, soybeans, peanuts (groundnuts), and cotton. The country is one of the world's largest producers of a number of industrial and mineral products, including cotton cloth, tungsten, and antimony, and is an important producer of cotton yarn, coal, crude oil, and a number of other products. Its mineral resources are probably among the richest in the world but are only partially developed. Although China has acquired some highly sophisticated production facilities through trade and also has built a number of advanced engineering plants capable of manufacturing an increasing range of sophisticated equipment, including nuclear weapons and satellites, most of its industrial output still comes from relatively backward and ill-equipped factories. The technological level and quality standards of its industry as a whole are still fairly low.^[11]

Other major problems concern the labor force and the pricing system. There is large-scale underemployment in both urban and rural areas, and the fear of the disruptive effects of major, explicit unemployment is strong. The prices of certain key commodities, especially of industrial raw materials and major industrial products, are determined by the state. In most cases, basic price ratios were set in the 1950s and are often irrational in terms of current production capabilities and demands. China's increasing integration with the international economy and its growing efforts to use market forces to govern the domestic allocation of goods have exacerbated this problem. Over the years, large subsidies were built into the price structure, and these subsidies grew substantially in the late 1970s and 1980s.^[12] By the early 1990s these subsidies began to be eliminated, in large part due to China's admission into the World Trade Organization (WTO) in 2001, which carried with it requirements for further economic liberalization and deregulation. 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 two decades have unleashed individual initiative and entrepreneurship.

[edit] History

Main articles: Economic history of China, Economic history of the People's Republic of China, and Five-Year Plans of China

[edit] 1949-1980

In 1949, China followed a socialist heavy industry development strategy, or the "Big Push" strategy. Consumption was reduced while rapid industrialization was given high priority. The government took control of a large part of the economy and redirected resources into building new factories. Entire new industries were created. Most important, economic growth was jump-started. Tight control of budget and money supply reduced inflation by the end of 1950. Though most of it was done at the expense of suppressing the private sector of small to big businesses by the Three-anti/five-anti campaigns between 1951 to 1952. Some western scholars see these campaigns as anti-capitalist;^[13] however, the main target of the campaign is to reduce corruption and cut spendings as seen clearly from its goals. In the beginning of the Communist party's rule, the leaders of the party had agreed that for a nation such as China, which does not have any heavy industry and minimal secondary production, capitalism is to be utilized to help the building of the "New China" and finally merged into communism.^[14] Thus, any claim that these policies are "anti-capitalist" shows a lack of insight and the slightiest research.

Throughout the 1950s and 1960s a number of widespread changes occurred in China's economic policies and priorities. During the First Five-Year Plan period (1953-1957), a policy of continued rapid industrial development was furthered, though somewhat at the detriment of other economic sectors. The largest part of the state's investment was directed into the industrial sector, while agriculture, which employed more than 78.6 percent of the labor force, was compelled to depend on its own minimal capital resources for a significant portion of its fund necessities. The highest priority was given to industrial sectors, such as coal, electric power, iron and steel, building materials, basic chemicals, and heavy engineering. By following the Soviet model, the goal was to set up technologically sophisticated, large-scale, capital-intensive plants. Many new factories were built with Soviet technical and financial assistance, as they could not be purely supported by domestic resources.^[15]

During the first policy plan fast growth in heavy industry was achieved, but a few months after the introduction of the Second Five-Year Plan (1958-1962), which was to be on the same lines as the First, the policy of the Great Leap Forward was announced. In agriculture, this involved the formation of people's communes, the abolition of private plots, and the increasing of output through greater cooperation and physical effort. Construction of large factories was to be continued apace, and in addition to that was the initiative to create a massive auxiliary network of simple, small-scale industries and plants that were built and managed locally. However, the Chinese peasantry was unprepared for this communal system, and a plunge in agricultural output soon followed,.^[16]Liu Shaoqi. Concurrently, the irregular and haphazard backyard production drive failed to achieve the intended objectives as it turned out enormous quantities of expensively produced, low quality goods, most notably steel produced from low quality iron which can not be used to build. During that time, these failures were exacerbated all the more by the Sino-Soviet split which caused the cancellation of Soviet assistance which had provided technicians and blueprints. In consequence, by late 1960 the country was in the throes of an economic and humanitarian disaster. Mao Zedong self-exiled from politics and was succeeded by Liu Shaoqi, who made a complete about-turn in policy. He criticized the disasters as "30% fault of nature, 70% human error." Private plots were restored, the size of the communes was reduced, and greater independence was given to the production team. There was also a mass transfer of the unemployed from industry to the countryside, and industrial investment was temporarily slashed in order to free resources for farm production.^[17]

This policy, which led to an immediate improvement in the agricultural situation, was maintained until 1963, when it again became possible to redirect some resources to the capital goods industry. As a result, industrial production and construction gathered some momentum, but due effort was taken to try to avoid the earlier mistake of sacrificing food production to iron and steel and similar industries. Then, in 1966 the "Great Proletarian Cultural Revolution" began, initially as a campaign for Mao to retake power from Liu Shaoqi and to "eliminate the liberal bourgeoisie" from the Party. Unlike the Great Leap Foward, the Cultural Revolution did not have an explicit economic rationale. Nevertheless, industrial production was badly affected by the ensuing confusion and strife, when hundreds of millions of people simply stopped working, while notable politicans, factory owners, and even teachers were victims to the massive "uprisings".^[18]

The Cultural Revolution left some problematic legacies for the economy.^[19] In industry, wages had been frozen and bonuses cancelled. This had, when combined with the policies of employing more workers than necessary to absorb unemployment and hiring workers on a permanent basis, essentially eliminated incentives to work hard.^[20] In addition, technicians and many managers lost their authority and could not play an effective role in production in the wake of the movement. The entire urban system, moreover, provided less than minimal incentives to achieve efficiency in production.^[20] While overall output continued to grow, capital-output ratios declined. In agriculture, per capita output in 1977 was no higher than in 1957. In 1952, gross industrial output of China was estimated at 34,900 million yuan in current prices.^[21] GDP per capita grew a paltry 17% in the 1960s, and rose to 70% in the 1970s.

[edit] 1980-1990

See also: Economic reform in the People's Republic of China

Since 1979, China began to make major reforms to its economy. The Chinese leadership adopted a pragmatic perspective on many political and socioeconomic problems, and sharply reduced the role of ideology in economic policy. Political and social stability, economic productivity, and public and consumer welfare were considered paramount and indivisible. In these years, the government emphasized raising personal income and consumption and introducing new management systems to help increase productivity. The government also had focused on foreign trade as a major vehicle for economic growth. 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. Reforms began in the agricultural, industrial, fiscal, financial, banking, price setting, and labor systems.^[22]

Rural and agricultural reforms began with major price increases for agricultural products in 1979.^[23] In 1981 the authorities began to dismantle the collectively farmed land, and it was with the introduction of the household responsibility system that these fields were contracted out to private families to work, which provided peasants greater decision-making in agricultural activities. During this time, the size of private plots (land actually owned by individuals) was increased, and most restrictions on selling agricultural products in free markets were lifted.^[24]

China's people's communes were largely eliminated by 1984 after more than 25 years in existence. Also by that time, much longer-term contracts for land were encouraged (generally 15 years or more), and the concentration of land through subleasing of parcels was made legal. In 1985 the government announced that it would dismantle the system of planned procurements with state-allocated production quotas in agriculture. Peasants who had stopped working the land were encouraged to find private employment in the countryside or in small towns. They did not obtain permission to move to major cities, however at the time.^[25]

With production being introduced in the agricultural sector, private ownership of production assets became legal, although many major non-agricultural and industrial facilities were still state-owned and centrally planned. The government also encouraged non-agricultural 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 Chinese and foreign trading enterprises. China also relied more upon foreign financing and imports. Restraints on foreign trade were relaxed and joint ventures encouraged.^[26]

Urban economic reform was aimed at integrating China more fully with the international economy. The development of the private sector was allowed and it was permitted to compete with state firms in a number of service sectors, and increasingly in infrastructure operations, such as construction.^[28] Authorities rationalized the pricing structure and transferred investment somewhat away from the metallurgical and machine-building industries and toward light and high-technology industries, while an emphasis on resolving the energy, transportation, and communications bottlenecks was retained. Individuals were allocated state jobs for which they had specialized training, skills, or talents, and material incentives for individual effort and a consumer ethos were created in order to encourage people to work harder and be more productive. Resource allocation by state planning was reduced and enterprises were made ultimately responsible for their own profits and losses.^[29]

Central government (mandatory) planning was reduced and the profit remission system was replaced with contracting and tax-based systems.^[30] The reduction in the scope of mandatory planning was based on the assumption that market forces can more efficiently allocate many resources. This assumption, in turn, requires a rational pricing system that takes into account any and all extant technologies and scarcities. Because extensive subsidies were built into the economic system, however, price reform became an extremely sensitive issue. The fear of inflation also served as a constraint on price reform. Nevertheless, the fact that products produced in excess of amounts targeted in the plan could be sold, in most cases, at essentially free market prices had created a two-tiered price system that was designed to gradually wean the economy from the administratively fixed prices of an earlier era.

Several measures were taken to improve the incentives for enterprise managers so as to increase the efficiency of their firms. Enterprises were allowed to keep a substantial share of increases in production, so managers could be rewarded.^[31] This combined with the permission for enterprises to buy and sell surplus goods on essentially a free market basis meant that the prices thus obtained were often far higher than for goods produced to meet plan quotas.^[31] Managerial authority within firms was strengthened, and bonuses were restored and allowed to grow to significant proportions.^[31] Managers also were given greater authority to hire, transfer, suspend, lay off, recall, promote, discharge, assign, reward or discipline workers.^[32] The state plan also diverted some resources into the light industrial sector, for example, it gave some light industrial enterprises that produced high-quality goods priority in energy consumption.^[31]

During the 1980s, these reforms led to average annual rates of growth of 10% in agricultural and industrial output. The variety of light industrial and consumer goods increased. Industry posted major gains especially in coastal areas near Hong Kong and across the strait from Taiwan, where foreign investment helped spur output of both domestic and export goods. 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. Efforts to create a freer labor market were also part of the overall stress on achieving greater efficiency. As with price reform, tampering with a system that kept many citizens living more comfortably and securely than would an economically more rational system risked serious repercussions in relations with the public. Changes had proceeded slowly in this sensitive area.^[33]

A decision was made in 1978 to permit foreign direct investment in several small "special economic zones" along the coast.^[34] The country lacked the legal infrastructure and knowledge of international practices to make this prospect attractive for many foreign businesses, however.^[34] In the early 1980s steps were taken to expand the number of areas that could accept foreign investment with a minimum of red tape, and related efforts were made to develop the legal and other infrastructures necessary to make this work well.^[35] This additional effort resulted in making 14 coastal cities and three coastal regions "open areas" for foreign investment. All of these places provide favored tax treatment and other advantages for foreign investment. Laws on contracts, patents, and other matters of concern to foreign businesses were also passed in an effort to attract international capital to spur China's development.^[36] The largely bureaucratic nature of China's economy, however, posed a number of inherent problems for foreign firms that wanted to operate in the Chinese environment, and China gradually had to add more incentives to attract foreign capital.^[37]

The common threads of these reforms were the search for efficiency and an assumption that management of the economy by large governmental bureaucracies was unlikely to produce that result.^[28] The changes in China's economic thinking and strategy since 1978 were so great — with the potential repercussions for important vested interests so strong — that actual practice had inevitably lagged considerably behind declaratory policy.^[38] Notable during this period were the swings in economic policy between an emphasis on market-oriented reforms and a return to at least partial reliance on centralized planning. Indeed, by the end of 1989 China's economic policy had again begun to place greater emphasis on centralized planning and on large state-run enterprises, signifying a marked slowdown of the reforms.^[38] The leadership often experienced in its hybrid system the worst results of socialism (lassitude, political corruption, disrespect of personal property) and of capitalism (windfall gains, a huge and widening gap between rich and poor, stepped-up inflation). The government thus periodically backtracked, re-tightening central controls at intervals. By the late 1980s, the economy became 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.^[39]

[edit] 1990-2000

China's economy regained momentum in the early 1990s. During a Chinese New Year visit to southern China in early 1992, China's paramount leader at the time Deng Xiaoping made a series of political pronouncements designed to give new impetus to and reinvigorate the process of economic reform. The 14th National Communist Party Congress later in the year backed up Deng's renewed push for market reforms, stating that China'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. The government approved additional long-term reforms aimed at giving still more play to market-oriented institutions and at strengthening central control over the financial system; state enterprises would continue to dominate many key industries in what was now termed a "socialist market economy". Fearing hyperinflation, the 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 Chinese economy continued to grow at a rapid pace, at about 9.5%, accompanied by low inflation. The economy slowed for the next 3 years, influenced in part by the Asian Financial Crisis, with official growth of 8.9% in 1997, 7.8% in 1998 and 7.1% for 1999. From 1995-1999, inflation dropped sharply, reflecting tighter monetary policies and stronger measures to control food prices. The year 2000 showed a modest reversal of this trend. Gross domestic product in 2000 grew officially at 8.0% that year, and had quadrupled since 1978. In 1999, with its 1.25 billion people but a GDP of just $3,800 per capita (PPP), China became the second largest economy in the world after the US.

The Asian financial crisis affected China at the margin, mainly through decreased foreign direct investment and a sharp drop in the growth of its exports. However, China had huge reserves, a currency that was not freely convertible, and capital inflows that consisted overwhelmingly of long-term investment. For these reasons it remained largely insulated from the regional crisis and its commitment not to devalue had been a major stabilizing factor for the region. However, China faced slowing growth and rising unemployment based on internal problems, including a financial system burdened by huge amounts of bad loans, and massive layoffs stemming from aggressive efforts to reform state-owned enterprises (SOEs).

Despite China's impressive economic development during the past two decades, reforming the state sector and modernizing the banking system remained major hurdles. Over half of China's state-owned enterprises were inefficient and reporting losses. During the 15th National Communist Party Congress 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 "non-public ownership" (feigongyou or privatization in euphemistic terms). The 9th National People's Congress endorsed the plans at its March 1998 session. In 2000, China claimed success in its three year effort to make the majority of large state owned enterprises (SOEs) profitable.

[edit] 2000-present

Following the Chinese Communist Party's Third Plenum, held in October 2003, 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 (now in the 8-10% range in urban areas), to rebalance income distribution between urban and rural regions, and to maintain 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 Economic Program (2006-2010) aimed at building a "harmonious society" through more balanced wealth distribution and improved education, medical care, and social security. On March 2006, the National People's Congress approved the 11th Five-Year Program. The plan called for a relatively conservative 45% increase in GDP and a 20% reduction in energy intensity (energy consumption per unit of GDP) by 2010.

China's economy grew at an average rate of 10% per year during the period 1990-2004, the highest growth rate in the world. China's GDP grew 10.0% in 2003, and even faster, 10.1%, in 2004, and 9.9% in 2005 despite attempts by the government to cool the economy. China's total trade in 2006 surpassed $1.76 trillion, making China the world's third-largest trading nation after the U.S. and Germany. Such high growth is necessary if China is to generate the 15 million jobs needed annually — roughly the size of Ecuador or Cambodia — to employ new entrants into the job market.

Nevertheless, serious imbalances exist behind the spectacular trade performance, high investment flows, and high GDP growth. High numbers of non-performing loans weigh down the state-run banking system. Inefficient state-owned enterprises (SOEs) are still a drag on growth, despite announced efforts to reform, sell, merge, or close the vast majority of SOEs.

Social and economic indicators have improved since reforms were launched, but rising inequality is evident between the more highly developed coastal provinces and the less developed, poorer inland regions. According to World Bank estimates, around 300 million people in China in 2007 — mostly in rural areas of the lagging inland provinces — still live in poverty, on consumption of less than $1 a day (roughly the size of the United States population).^[40] About 47% of the Chinese population lives under $2 a day.^[41]

[edit] Government role

See also: Government of the People's Republic of China

Since 1949 the government, under China's socialist political and economic system, has been responsible for planning and managing the national economy.^[42] In the early 1950s, the foreign trade system was monopolized by the state. Nearly all the domestic enterprises were state-owned and the government had set the prices for key commodities, controlled the level and general distribution of investment funds, determined output targets for major enterprises and branches, allocated energy resources, set wage levels and employment targets, operated the wholesale and retail networks, and steered the financial policy and banking system. In the countryside from the mid-1950s, the government established cropping patterns, set the level of prices, and fixed output targets for all major crops.

Since 1978 when economic reforms were instituted, the government role in the economy has lessened to a great degree. Industrial output by state enterprises slowly declined, although a few strategic industries have today remained predominantly state-owned. While the role of the government in managing the economy has been reduced and the role of both private enterprise and market forces increased, the government maintains a major role in the urban economy. With its policies on such issues as agricultural procurement the government also retains a major influence on rural sector performance. The State Constitution of 1982 specified that the state is to guide the country's economic development by making broad decisions on economic priorities and policies, and that the State Council, which exercises executive control, was to direct its subordinate bodies in preparing and implementing the national economic plan and the state budget. A major portion of the government system (bureaucracy) is devoted to managing the economy in a top-down chain of command with all but a few of the more than 100 ministries, commissions, administrations, bureaus, academies, and corporations under the State Council are concerned with economic matters.

Each significant economic sector is supervised and controlled by one or more of these organizations, which includes the People's Bank of China, National Development and Reform Commission, Ministry of Finance, and the ministries of agriculture; coal industry; commerce; communications; education; light industry; metallurgical industry; petroleum industry; railways; textile industry; and water resources and electric power. Several aspects of the economy are administered by specialized departments under the State Council, including the National Bureau of Statistics, Civil Aviation Administration of China, and the tourism bureau. Each of the economic organizations under the State Council directs the units under its jurisdiction through subordinate offices at the provincial and local levels.

The whole policy-making process involves extensive consultation and negotiation.^[43] Economic policies and decisions adopted by the National People's Congress and the State Council are to be passed on to the economic organizations under the State Council, which incorporates them into the plans for the various sectors of the economy. Economic plans and policies are implemented by a variety of direct and indirect control mechanisms. Direct control is exercised by designating specific physical output quotas and supply allocations for some goods and services. Indirect instruments — also called "economic levers" — operate by affecting market incentives. These included levying taxes, setting prices for products and supplies, allocating investment funds, monitoring and controlling financial transactions by the banking system, and controlling the allocation of key resources, such as skilled labor, electric power, transportation, steel, and chemicals (including fertilizers). The main advantage of including a project in an annual plan is that the raw materials, labor, financial resources, and markets are guaranteed by directives that have the weight of the law behind them. In reality, however, a great deal of economic activity goes on outside the scope of the detailed plan, and the tendency has been for the plan to become narrower rather than broader in scope. A major objective of the reform program was to reduce the use of direct controls and to increase the role of indirect economic levers. Major state-owned enterprises still receive detailed plans specifying physical quantities of key inputs and products from their ministries. These corporations, however, have been increasingly affected by prices and allocations that were determined through market interaction and only indirectly influenced by the central plan.

Total economic enterprise in China is apportioned along lines of directive planning (mandatory), indicative planning (indirect implementation of central directives), and those left to market forces. In the early 1980s during the initial reforms enterprises began to have increasing discretion over the quantities of inputs purchased, the sources of inputs, the variety of products manufactured, and the production process. Operational supervision over economic projects has devolved primarily to provincial, municipal, and county governments. The majority of state-owned industrial enterprises, which were managed at the provincial level or below, were partially regulated by a combination of specific allocations and indirect controls, but they also produced goods outside the plan for sale in the market. Important, scarce resources — for example, engineers or finished steel — may have been assigned to this kind of unit in exact numbers. Less critical assignments of personnel and materials would have been authorized in a general way by the plan, but with procurement arrangements left up to the enterprise management.

In addition, enterprises themselves are gaining increased independence in a range of activity. While strategically important industry and services and most of large-scale construction have remained under directive planning, the market economy has gained rapidly in scale every year as it subsumes more and more sectors.^[44] Overall, the Chinese industrial system contains a complex mixture of relationships. The State Council generally administers relatively strict control over resources deemed to be of vital concern for the performance and health of the entire economy. Less vital aspects of the economy have been transferred to lower levels for detailed decisions and management. Furthermore, the need to coordinate entities that are in different organizational hierarchies generally causes a great deal of informal bargaining and consensus building.^[44]

Consumer spending has been subject to a limited degree of direct government influence but is primarily determined by the basic market forces of income levels and commodity prices. Before the reform period, key goods were rationed when they were in short supply, but by the mid-1980s availability had increased to the point that rationing was discontinued for everything except grain, which could also be purchased in the free markets. Collectively owned units and the agricultural sector were regulated primarily by indirect instruments. Each collective unit was "responsible for its own profit and loss," and the prices of its inputs and products provided the major production incentives.

Vast changes were made in relaxing the state control of the agricultural sector from the late 1970s. The structural mechanisms for implementing state objectives — the people's communes and their subordinate teams and brigades — have been either entirely eliminated or greatly diminished.^[45] Farm incentives have been boosted both by price increases for state-purchased agricultural products, and it was permitted to sell excess production on a free market. There was more room in the choice of what crops to grow, and peasants are allowed to contract for land that they will work, rather than simply working most of the land collectively. The system of procurement quotas (fixed in the form of contracts) has been being phased out, although the state can still buy farm products and control surpluses in order to affect market conditions.^[46]

Foreign trade is supervised by the Ministry of Commerce, customs, and the Bank of China, the foreign exchange arm of the Chinese banking system, which controls access to the foreign currency required for imports. Ever since restrictions on foreign trade were reduced, there have been broad opportunities for individual enterprises to engage in exchanges with foreign firms without much intervention from official agencies.

Although the government still dominates the economy in parts, the extent of its control has been limited by the sheer volume of economic activity. Furthermore, the concept of government supervision of the economy had changed from one of direct state control to one of indirect guidance of a more dynamic economy.

[edit] Regional economies

China's underdeveloped transportation system — combined with important differences in the availability of natural and human resources and in industrial infrastructure — has produced significant variations in the regional economies of China.

Economic development has generally been more rapid in coastal provinces than in the interior, and there are large disparities in per capita income between regions. The three wealthiest regions are along the southeast coast, centred on the Pearl River Delta; along the east coast, centred on the Lower Yangtze River; and near the Bohai Gulf, in the Beijing-Tianjin-Liaoning region. It is the rapid development of these areas that is expected to have the most significant effect on the Asian regional economy as a whole, and Chinese government policy is designed to remove the obstacles to accelerated growth in these wealthier regions.

See also: List of administrative regions by GDP, List of administrative regions by GDP per capita, and List of cities by GDP per capita.

[edit] Development strategies

Template:China regional economic strategies

See also: List of administrative divisions by Human Development Index (HDI).

These strategies are aimed at the relatively poorer regions in China in an attempt to prevent widening inequalities:

• Great Western Development, designed to increase the economic situation of the western provinces through capital investment and development of natural resources.
• Revitalize Northeast China, to rejuvenate the industrial bases in the northeastern China. It covers 3 provinces: Heilongjiang, Jilin, and Liaoning.
• Rise of Central China Plan, to accelerate the development of its central regions. It covers 6 provinces: Shanxi, Henan, Anhui, Hubei, Hunan, and Jiangxi.
• Third Front, focused on the southwestern provinces.

Foreign investment abroad:

• Go Global, to encourage its enterprises to invest overseas.

[edit] Hong Kong and Macau

Main articles: One Country, Two Systems, Economy of Hong Kong, and Economy of Macau

In accordance with the One Country, Two Systems policy, the economies of the former European colonies, Hong Kong and Macao, are separate from the rest of the PRC, and each other. Both Hong Kong and Macau are free to conduct and engage in economic negotiations with foreign countries, as well as participating as full members in various international economic organizations such as the World Customs Organization, the World Trade Organization and the Asia-Pacific Economic Cooperation forum, often under the names "Hong Kong, China" and "Macao, China".

See also: Closer Economic Partnership Arrangement with Hong Kong and Macau.

[edit] Macroeconomic trends

The table below shows the trend of the GDP of China at market prices estimated by the IMF with figures in millions (Chinese yuan).^[47][48] For purchasing power parity comparisons, the US dollar is exchanged at 2.05 CNY only.

[edit] Systemic problems

The government has in recent years struggled to contain the social strife and environmental damage related to the economy's rapid transformation; collect public receipts due from provinces, businesses, and individuals; reduce corruption and other economic crimes; sustain adequate job growth for tens of millions of workers laid off from state-owned enterprises, migrants, and new entrants to the work force; and 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 were 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 China's population control program. Another long-term threat to continued rapid economic growth has been the deterioration in the environment, notably air and water pollution, soil erosion, growing desertification and the steady fall of the water table especially in the north. China also has continued to lose arable land because of erosion and infrastructure development.

[edit] 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 in 2007, with a number of restrictions being placed on problematic Chinese exports by the United States. The Chinese Government recognizes the severity of the problem, recently concluding that up to 20% of the country's products are substandard or tainted.

[edit] Inflation

In November, 2007 inflation rose to about 7% on an annual basis.^[49] The food and fuel sectors were major problem areas, with meat and fuel posing special difficulties.

Shortages of gasoline and diesel fuel developed in the fall of 2007 due to reluctance of refineries to produce fuel at low prices set by the state. These prices were slightly increased in November, 2007 with fuel selling for $2.65 a gallon, still slightly below world prices. Price controls were in effect on numerous basic products and services, but were ineffective with food, prices of which were rising at an annual rate of 18.2% in November, 2007.^[50][51]

Pork is an important part of the Chinese economy with a per capita consumption of a fifth of a pound per day. The worldwide rise in the price of animal feed associated with increased production of ethanol from corn resulted in steep rises in pork prices in China in 2007. Increased cost of production interacted badly with increased demand resulting from rapidly rising wages. The state responded by subsidizing pork prices for students and the urban poor and called for increased production. Release of pork from the nation's strategic pork reserve was considered.^[52]

[edit] Economic overheating

Another significant hurdle for the Chinese economy has been perceived overheating and inflation in the economy, due to the rapid growth of the last decade. Chinese officials deny that the economy as a whole is over-heating, although they do admit that certain areas are "heating up" with little control. The recent economic growth has been the result of large scale investments, which has been far from efficient in comparison to other countries such as India.^[53] According to Chinese government research, the return rate of investment in India is higher than that of China's, with a larger gap in comparison with developed countries.^[53]

Taxation has also proved to be a problem in stabilizing the Chinese economy with tax cuts being planned for certain economic sectors and industries. A primary goal of the tax cuts have been to assist in decreasing the investment disparity between rural and urban areas, and to encourage government owned corporations to compete better with foreign corporations.

[edit] Labor shortages and rising export costs

See also: Labor section below.

By 2005, there were signs of stronger demand for labor with workers being able to choose employment which offered higher wages and better working conditions, enabling some to move away from the restrictive dormitory life and boring factory work which have characterized export industries in provinces such as Guangdong and Fujian. Minimum wages began rising toward the equivalent of 100 U.S. dollars a month as companies scrambled for employees, with some paying as much as $150 a month on average. The labor shortage was partially driven by the demographic trends, as the proportion of people of working age fell as the result of strict family planning.^[54]

It was reported in The New York Times in April 2006 that labor costs continued to increase and a shortage of unskilled labor had developed with a million or more employees being sought. Operations which relied on cheap labor were contemplating relocations to cities in the interior or to other low-cost countries such as Vietnam or Bangladesh. Many young people were attending college rather than opting for minimum-wage factory work. The demographic shift resulting from the one-child policy continued to reduce the supply of young entry-level workers. Also, government efforts to advance economic development in the interior of the country were beginning to be effective at creating better opportunities there.^[55] A follow-up article in The New York Times in late August 2007 reported acceleration of this trend. The minimum wage a young unskilled factory worker could be hired at had increased to $200 with experienced workers commanding more. There was strong demand for young workers willing to work long hours and live in dormitory conditions, while older workers, over forty, were considered unsuitable. Rising wages were being, to a certain extent, offset by increases in productivity, but in 2007, a slight rise in the cost of imports from China was recorded by the United States government: "After falling since its inception in December, 2003, the price index for imports from China rose 0.4 percent in July, 2007, the largest monthly increase since the index was first published in December 2003. The July increase was the third consecutive monthly advance. Over the past year, import prices from China increased 0.9 percent."^[56][57]

[edit] Financial and banking system

Main articles: Chinese financial system and Banking in the People's Republic of China

Most of China's financial institutions are state governed. The chief instruments of financial and fiscal control are the People's Bank of China (PBC) and the Ministry of Finance, both under the authority of the State Council. The People's Bank of China replaced the Central Bank of China in 1950 and gradually took over private banks. It fulfills many of the functions of other central and commercial banks. It issues the currency, controls circulation, and plays an important role in disbursing budgetary expenditures. Additionally, it administers the accounts, payments, and receipts of government organizations and other bodies, which enables it to exert thorough supervision over their financial and general performances in consideration to the government's economic plans. The PBC is also responsible for international trade and other overseas transactions. Remittances by overseas Chinese) are managed by the Bank of China (BOC), which has a number of branch offices in several countries.

Other financial institutions that are crucial, include the China Development Bank (CDB), which funds economic development and directs foreign investment; the Agricultural Bank of China (ABC), which provides for the agricultural sector; the China Construction Bank (CCB), which is responsible for capitalizing a portion of overall investment and for providing capital funds for certain industrial and construction enterprises; and the Industrial and Commercial Bank of China (ICBC), which conducts ordinary commercial transactions and acts as a savings bank for the public.

China's economic reforms greatly increased the economic role of the banking system. Enterprises and individuals can go to the banks to obtain loans outside the state plan, and this has proved to be a major source of financing both for start-up companies and businesses and for the expansion, modernization or privatization of existing enterprises. Even though nearly all investment capital was previously provided on a grant basis according to the state plan, policy has since the start of the reform shifted to a loan basis through the various state-directed financial institutions. Increasing amounts of funds are made available through the banks for economic and commercial purposes. Foreign sources of capital have also become increasingly prominent. China has received loans from the World Bank and several United Nations programs, as well as from countries (particularly Japan) and, to a lesser extent, commercial banks. Hong Kong has been a major conduit of this investment, as well as a source itself.

With two stock exchanges (Shanghai Stock Exchange and Shenzhen Stock Exchange), mainland China's stock market had a market value of $1 trillion by January 2007, which became the third largest stock market in Asia, after Japan and Hong Kong.^[58] It is estimated to be the world's third largest by 2016.^[59]

[edit] Currency system

See also: Renminbi, Chinese yuan, and Currency of China

The renminbi (“people’s currency”) is the currency of the mainland, denominated as the yuan, subdivided into 10 jiao or 100 fen. The renminbi is issued by the People's Bank of China, the monetary authority of the PRC. The ISO 4217 abbreviation is CNY, although also commonly abbreviated as "RMB". The Latinised symbol is ¥. The yuan is generally considered by outside observers to be undervalued by about 30%.^[60]

The renminbi is held in a floating exchange-rate system managed primarily against the US dollar. On July 21, 2005 China revalued its currency by 2.1% against the US dollar and, since then has moved to an exchange rate system that references a basket of currencies and has allowed the renminbi to fluctuate at a daily rate of up to half a percent.

The rate of exchange (Chinese yuan per US$1) in mid-2007 was RMB 7.45, while in early 2006 was RMB 8.07:US $1 = 8.2793 yuan (January 2000), 8.2783 (1999), 8.2790 (1998), 8.2898 (1997), 8.3142 (1996), 8.3514 (1995).

Beginning January 1, 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.

There is a complex relationship between China's balance of trade, inflation, measured by the consumer price index and the value of its currency. Despite allowing the value of the yuan to "float", China's central bank has decisive ability to control its value with relationship to other currencies. Inflation in 2007, reflecting sharply rising prices for meat and fuel, is probably related to the worldwide rise in commodities used as animal feed or as fuel. Thus rapid rises in the value of the yuan permitted in December, 2007 are possibly related to efforts to mitigate inflation by permitting the renminbi to be worth more.^[61]

[edit] Tax system

Main article: Tax system in China

From the 1950s to the 1980s, the central government's revenues derived chiefly from the profits of the state enterprises, which were remitted to the state. Some government revenues also came from taxes, of which the most important was the general industrial and commercial tax.

The trend, however, has been for remitted profits of the state enterprises to be replaced with taxes on those profits. Initially, this tax system was adjusted so as to allow for differences in the capitalization and pricing situations of various firms, but more-uniform tax schedules were introduced in the early 1990s. In addition, personal income and value-added taxes were implemented at that time.

[edit] Agriculture

Main articles: Agriculture in the People's Republic of China and Agriculture in China

China is the world's most populous country and one of the largest producers and consumers of agricultural products. According to the United Nations World Food Program, in