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Congressional Research Service (CRS)

 

China’s Economic Rise: History, Trends, Challenges, and Implications for the United States

Wayne M. Morrison, Specialist in Asian Trade and Finance

August 21, 2014

http://fas.org/sgp/crs/row/RL33534.pdf

[full-text, 42 pages]

 

Summary

Prior to the initiation of economic reforms and trade liberalization 35 years ago, China

maintained policies that kept the economy very poor, stagnant, centrally controlled, vastly

inefficient, and relatively isolated from the global economy. Since opening up to foreign trade and

investment and implementing free market reforms in 1979, China has been among the world’s

fastest-growing economies, with real annual gross domestic product (GDP) growth averaging

nearly 10% through 2013. In recent years, China has emerged as a major global economic and

trade power. It is currently the world’s second-largest economy, largest trading economy, secondlargest

destination of foreign direct investment (FDI), largest manufacturer, and largest holder of

foreign exchange reserves.

 

The global economic crisis that began in 2008 greatly affected China’s economy. China’s exports,

imports, and FDI inflows declined, GDP growth slowed, and millions of Chinese workers

reportedly lost their jobs. The Chinese government responded by implementing a $586 billion

economic stimulus package, loosening monetary policies to increase bank lending, and providing

various incentives to boost domestic consumption. Such policies enabled China to effectively

weather the effects of the sharp global fall in demand for Chinese products, while several of the

world’s leading economies experienced negative or stagnant economic growth. From 2008 to

2011, China’s real GDP growth averaged 9.6%. However, the economy has shown signs of

slowing in recent years. Real GDP grew by 7.7% in both 2012 and 2013.

 

Some economists forecast that China will overtake the United States as the world’s largest

economy within a few years. However, the ability of China to maintain a rapidly growing

economy in the long run will depend largely on the ability of the Chinese government to

implement comprehensive economic reforms that more quickly hasten China’s transition to a free

market economy; rebalance the Chinese economy by making consumer demand, rather than

exporting and fixed investment, the main engine of economic growth; boost productivity and

innovation; address growing income disparities; and enhance environmental protection. The

Chinese government has acknowledged that its current economic growth model needs to be

altered and has announced several initiatives to address various economic challenges. In

November 2013, the Communist Party of China held the Third Plenum of its 18th Party Congress,

which issued a communique outlining a number of broad policy statements on reforms that would

be implemented by 2020. Many of the proposed reforms are measures that would seek to boost

competition and economic efficiency. For example, the communique stated that the market would

now play a “decisive” role in allocating resources in the economy.

 

China’s economic rise has significant implications for the United States and hence is of major

interest to Congress. On the one hand, China is a large (and potentially huge) export market for

the United States. Many U.S. firms use China as the final point of assembly in their global supply

chain networks. China’s large holdings of U.S. Treasury securities help the federal government

finance its budget deficits. However, some analysts contend that China maintains a number of

distortive economic policies (such as protectionist industrial policies and an undervalued

currency) that undermine U.S. economic interests. They warn that efforts by the Chinese

government to promote indigenous innovation, often through the use of subsidies and other

distortive measures, could negatively affect many leading U.S. industries. This report surveys the

rise of China’s economy, describes major economic challenges facing China, and discusses the

implications of China’s economic rise for the United States.

 

Contents

The History of China’s Economic Development ............................................................................. 2

China’s Economy Prior to Reforms ........................................................................................... 2

The Introduction of Economic Reforms .................................................................................... 2

China’s Economic Growth and Reforms: 1979-the Present ...................................................... 3

Causes of China’s Economic Growth ........................................................................................ 4

Measuring the Size of China’s Economy ......................................................................................... 6

China as the World’s Largest Manufacturer .............................................................................. 8

Changes in China’s Wage Advantage ........................................................................................ 9

Foreign Direct Investment (FDI) in China..................................................................................... 11

China’s Growing FDI Outflows ..................................................................................................... 15

China’s Merchandise Trade Patterns .............................................................................................. 17

China’s Major Trading Partners ............................................................................................... 20

Major Chinese Trade Commodities ......................................................................................... 21

China’s Growing Appetite for Energy ..................................................................................... 23

China’s Regional and Bilateral Free Trade Agreements .......................................................... 24

Major Long-Term Challenges Facing the Chinese Economy ........................................................ 25

China’s Incomplete Transition to a Market Economy ............................................................. 25

Industrial Policies and SOEs ............................................................................................. 25

The Banking System ......................................................................................................... 26

An Undervalued Currency ................................................................................................ 26

Overdependence on Exporting and Fixed Investment....................................................... 27

Growing Pollution ............................................................................................................. 30

Corruption and the Relative Lack of the Rule of Law ...................................................... 31

Plans Announced by the Chinese Government to Reform and Restructure the Economy ............ 32

The Central Government Five-Year Plans ............................................................................... 32

The Drive for “Indigenous Innovation” ................................................................................... 33

Economic Policies Outlined in the November 2013 Third Plenum ......................................... 34

Challenges to U.S. Policy of China’s Economic Rise ................................................................... 36

 

Figures

Figure 1. Chinese Real GDP Growth: 1979-2013 ........................................................................... 4

Figure 2. Projections of U.S. and Chinese Annual Real GDP Growth Rates: 2014-2030 ............... 6

Figure 3. Projections for Chinese and U.S. GDP on a PPP Basis: 2000-2030 ................................. 8

Figure 4. Gross Value Added Manufacturing in China, the United States, and Japan: 2004-2012 ..................................................................................................................................... 9

Figure 5. Average Monthly Wages for Selected Countries: 2000-2013 ......................................... 10

Figure 6. Industrial Output by Foreign-Invested Firms in China as a Share of National Output Total: 1990-2011 ............................................................................................................. 11

Figure 7. Share of China’s Exports and Imports Attributed to Foreign-Invested Enterprises in China: 1990-June 2014 ...................................... 12

Figure 8. Annual FDI Flows to China: 1985-2013 ........................................................................ 13

Figure 9. Largest Recipients of Global FDI Inflows in 2013 ........................................................ 14

Figure 10. Chinese Data on Annual U.S. FDI Flows to China: 1985-2013 ................................... 15

Figure 11. China’s Annual FDI Outflows: 2000-2013 ................................................................... 17

Figure 12. China’s Merchandise Trade: 2000-2013 ....................................................................... 19

Figure 13. Annual Change in China’s Merchandise Exports and Imports: 1990-2014 ................. 19

Figure 14. China’s Share of Global Merchandise Exports: 1990-2013 ......................................... 20

Figure 15. China’s Net Oil Imports: 1997-2013 ............................................................................ 24

Figure 16. Chinese Gross Savings, Gross Fixed Investment, and Private Consumption as a Percent of GDP: 1990-2013 .................................................... 28

Figure 17. Chinese Disposable Personal Income as a Percent of GDP: 2000-2013 ...................... 29

Figure 18. Sources of Chinese GDP Growth: 2007-2013 .............................................................. 29

Figure 19. Current Account Balances as a Percent of GDP for China and the United States: 2000-2013 .............................................. 37

 

Tables

Table 1. Comparisons of Chinese, Japanese, and U.S. GDP and Per Capita GDP in Nominal U.S. Dollars and a Purchasing Power Parity Basis: 2013 .......................................... 8

Table 2. Chinese Data on Major Sources of FDI Flows to China: 1979-2013 .............................. 14

Table 3. Major Destinations of Chinese Overseas Direct Investment in 2012: Flows and Stock ...................................................................................... 16

Table 4. China’s Merchandise World Trade: 1979-2014* ............................................................. 18

Table 5. China’s Major Trading Partners in 2013 .......................................................................... 21

Table 6. Major Chinese Exports: 2013 .......................................................................................... 22

Table 7. Major Chinese Imports: 2013 .......................................................................................... 22

 

Contacts

Author Contact Information........................................................................................................... 38

 

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