Economy and Trade
China is the world’s second-largest economy after the United States, although in per capita terms it remains low-to-middle income. Until 1978, China had a centrally planned economy and was largely closed to the outside world. In the 1990s, the government restructured China’s state-owned enterprises, and encouraged foreign investment. Following WTO membership in December 2001, the process of “lifting the bamboo curtain” accelerated, and China is now the leading exporter of electronics, textiles, and other manufactured goods. It has a massive current-account surplus. After pegging its currency to the US dollar, China revalued the yuan in July 2005. The currency has since appreciated by some 20% against a basket of currencies. China is struggling to maintain growth at above 8%, in the face of reduced demand for its exports. Agriculture contributes 12% of GDP, but employs 45% of the workforce. Industry contributes 48%, and services 40%. The main trading partners are the United States, Japan, South Korea, Germany, and Taiwan.
Economic Policy over 12 Months
2008 was a turning point for China. The government was previously confident that it would continue to be able to grow GDP by in excess of 10% a year through the “pillar” of export-led growth. However, by October 2008, the country’s leadership acknowledged this goal would be impossible, owing to reduced global demand for Chinese exports.
The government of Prime Minister Wen Jiabao has since sought to rebalance the economy, away from exports and towards domestic consumer demand. David Dollar, the World Bank’s country director, said, in March 2009: “We’re encouraging China to look to a new growth model that depends more on domestic demand and domestic needs.”
Between September and November 2008, China took various initiatives designed to keep economic growth above the psychologically important figure of 8%. These included interest-rate cuts, reduced bank reserve ratio requirements, export tax rebates, and the abolition of stamp duty on stock purchases.
The government unveiled a massive US$586bn economic stimulus package in November 2008. The stimulus funds, which are to be used from 2008 to 2010, represent about 15% of China’s annual GDP.
Several measures are aimed at sections of the population who are suffering hardship as a result of the economic downturn, including rural dwellers. Citizens are being offered rebates on the purchase of refrigerators, air conditioners, televisions, and washing machines.
The stimulus package also included an easing of credit restrictions, an expansion of social welfare services, and massive spending on infrastructure. The government also intends to accelerate the phasing-out of backward and pollution-causing production processes in industries, including cars, iron, and steel.
The People’s Bank of China cut rates five times between September 2008 and March 2009, by which time the benchmark interest rate had fallen to 5.31%. The central bank signaled there was scope for further cuts.
The government is sticking with its target of 8% growth in 2009. The Communist Party believes that, if growth falls below this level, it would cause mass unemployment, and spark social unrest. However, external forecasters believe that 8% is an unrealistic target. In March 2009, the World Bank reduced its forecast for 2009 growth from 7.5% to 6.5%, saying China could not “escape the impact of global weakness.”
The country’s latest five-year plan, approved in March 2006, made environmental protection a top priority, and channels investment into all forms of renewable energy—including wind, solar, and hydroelectric power.
Economic Performance over 12 Months
China has ridden out the economic downturn far better than Europe or the United States, although the slump in the United States and Europe has hurt its export sector, causing factory closures and job losses. By March 2009, the Beijing government estimated that 20 million rural migrant workers had lost their jobs and returned home.
Economic growth fell from 13% in 2007 to 9% in 2008. By the fourth quarter of 2008, it had fallen again, this time to 6.8%. Organizations including the World Bank and the OECD predict that growth will range between 6.5% and 7.5% in 2009, the slowest rate for more than seven years. The slowdown was also, paradoxically, partly brought on by earlier government measures intended to prevent the economy from overheating.
Inflation has been falling as a result of the slowdown, and the official figures in early 2009 pointed to deflation not inflation. The rate soared to a 12-year high of 8.7% in February 2008, largely due to shortages of grain and pork. However, it had entered negative territory (−1.7%) by February 2009. A World Bank report published in December 2008 said: “After absorbing higher food and energy prices, headline inflation has receded and, with sharply lower raw commodity prices, inflation is not a concern at this point.”
There are also signs in early 2009 that China’s economy is stabilizing. “The nation is weathering the global slowdown better than many countries, because its banks were largely unscathed by the financial crisis, and the government quickly implemented the stimulus,” the World Bank said, in a quarterly report published in March 2009.
However, the World Bank warned that falling exports are likely to slow both investment and job creation in China. The bank said it expected 16–17 million non-farm jobs to disappear during 2009, and argued that the best way to avoid social unrest would be to introduce a more effective welfare system.
The World Bank also indicated that, even though China’s leadership regards maintaining growth at or above 8% as critical to maintaining social stability and securing its own legitimacy, the country will not suffer in the event of growth falling below this level. However the Washington-based institution told Beijing that introducing “a social safety net” would ease the transition to slower growth.
As a result of its strong exports and modest imports, China holds about US$2 trillion in foreign-exchange reserves, mainly in the US dollar. Its current account surplus stood at US$440 billion, as of end of 2008, up 20% over the previous year, according to government statistics.
Support for Inward Investment and Imports
There are several inward investment agencies, which are able to offer assistance as part of a one-stop shop approach. The Beijing government said, in March 2009, that it would accelerate reforms of the administrative procedures for the examination and approval of foreign direct investment projects. In particular, the government said it would give greater autonomy to local authorities, and to economic and technological development zones in weighing up individuals proposals.
Tax Exemptions
The central government will consider allocating additional incentives to inward investors’ fields including high technology, biotechnology, and renewable energy. Local government authorities are already competing vigorously with each other to attract investment, and foreign investors tend to be offered a range of incentives to encourage them to locate in a particular province.
Statistics
GDP growth: 9.8% (2008, est.)
GDP per capita: US$6,100
CPI: 6% (2008, est.)
Key interest rate: 5.31% (March 2009, Xinhua news agency)
Exchange rate: RMB per US dollar—6.82 (March 2009, xe.com)
Unemployment: 4.2% in urban areas (Beijing government, figure could be 9% if rural areas are included)
FDI: US$758.9 billion
Current account surplus US$368.2bn (2008, est.)
Population: 1.338 billion (July 2009, est.)
Source: CIA World Factbook except where stated
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