Overview
China’s economic performance has been marked by high rates of growth for over 25 years. GDP growth in the early 2000s consistently exceeded 10% until suffering a slump following the global financial crisis. China holds the world’s largest foreign reserves, at more than US$3trn. in mid-2011. It is among the top recipients of foreign direct investment and is the world’s largest producer and consumer of coal. In 2005 China made the transition from receiver of foreign aid to donor. It is a key player in Africa’s development, responsible for US$7·8bn. of direct investment by the end of 2008.
The first steps towards a more market-oriented economy were taken by Deng Xiaoping in the late 1970s. He opened the economy to foreign trade and investment, decentralized industrial management and allowed the private sector to flourish. In 2001 China became a member of the WTO, establishing trade relations with many countries. Much of China’s recent dynamism has come from ‘collective’ enterprises, particularly those at township and village level run by managers under the auspices of local government. Local governments have an incentive to see enterprises run efficiently as officials are allowed to keep surplus revenues. However, this has led to abuses. In 2009 the government recovered more than US$13·8bn. in misdirected funds.
Private entrepreneurs and foreign investors have played an important role in manufacturing output. Even before 1978 the economy was heavily skewed towards manufacturing but thereafter output increased and there was a structural shift away from large state-owned enterprises (SOEs), although SOEs remain a significant part of the economy. Many new enterprises are labour-intensive as distinct from the capital-intensive SOEs. Growth has been fuelled by low added value and labour-intensive exports. But the country has moved up the added value curve and Chinese firms are predicted to become increasingly competitive with higher added value producers, such as South Korea. The Twelfth Five-Year Plan aims to shift the economy toward a consumer-based growth model.
There are threats to continued growth. Inefficient production and outmoded equipment have led to a deterioration of the environment, especially in the north. Air pollution, soil erosion and a declining water table are particular problems. The government aims to diversify its energy sources, relying less on coal and more on nuclear and alternative energy sources.
The global economic crisis of 2008 reduced the rate of growth and the inflow of FDI but China’s recovery was among the earliest and most spectacular. GDP growth was 7·9% in the second quarter of 2009, up from a two-decade low of 6·1% in the first quarter of that year. Growth was rooted in a stimulus package of 4trn. yuan (US$586bn. or 13% of 2008 GDP), including fiscal spending and interest rate cuts, as well as expansionary monetary policy. Central government committed 1·18trn. yuan, with the rest coming from local government, banks and SOEs. Although exports declined by around 17% in 2009, other countries fared worse and China’s share of world exports increased to nearly 10% (up from 3% in 1999), making it the world’s largest merchandise exporter in 2010. Growth in 2010 stood at more than 10%, which saw China overtake Japan as the world’s second largest economy. Inflation has been an important social and economic issue, with the consumer price index increasing by 5·4% in 2011 and food prices increasing by 11·8%.
Efforts to restructure the economy away from investment and export-led growth towards private consumption were interrupted by the global crisis. Nonetheless, structural reforms to redirect the export-oriented economy include increased worker mobility and improved public sector efficiency. SOEs continue to dominate ‘strategic’ industries and remain burdened by excess labour. China also faces the growing burden of an ageing population. Those aged 60 and over accounted for 13·7% of the total population in 2011, an increase of 0·47% from the previous year. This is projected to increase to about 31% of the total population by 2050. For continued long term growth, there is a need for further job creation. Other challenges include rising property costs, high levels of local government debt, the lack of enforcement of intellectual property rights and endemic corruption. Corruption is concentrated in sectors with a high degree of state involvement. The number of government officials caught embezzling more than 1m. yuan (US$146,000) increased by 19% in 2009, while in 2007 the US-based Carnegie Endowment for International Peace put the direct cost of corruption at US$86bn. per year.
The World Bank estimates that the number of people living below the poverty line declined from 65% in 1981 to 4% in 2007. After China joined the WTO in 2001, poverty declined from 16% to 4% in six years. However, those who still have consumption levels below one dollar a day are located mainly in remote and resource-poor regions, particularly in the west and the interior. In 2011 the income of urban households was more than three times as high as that of rural households. The number of migrant workers in 2011 increased by 10·6m. to 252·8m.
