The economy of the People’s Republic of China (PRC) is the second largest in the world when measured by Purchasing Power Parity with a Gross Domestic Product (GDP) of US $9.412 trillion in 2005. It is the world’s fastest growing major economy and its continued growth is critical to the overall health of the world economy and to the welfare of its population of 1.3 billion, most of whom have yet to enjoy western style affluence.
Since 1978 the PRC government has been reforming its economy from a Soviet-style centrally planned economy to a more market-oriented economy but still within the political framework provided by the Communist Party of China. The system is one type of a mixed economy.
Increased authority has been given to local officials and plant managers in industry. This has permitted a wide variety of small-scale enterprises in services and light manufacturing and opened the economy to increased foreign trade and foreign investment. The government has emphasized raising personal income and consumption. It has introduced new management systems to help increase productivity. The government has also focused on foreign trade as a major vehicle for economic growth.
The Central Committee of the Chinese Communist Party recently approved the draft for the 11th 5-year plan for 2006-2010. The plan calls for a further 45% increase in GDP and 20% reduction in energy usage by 2010.
Taxation has also proved to be a problem in stabilizing the Chinese economy. Officials are now planning on implementing tax cuts to certain economic sectors and industries in hopes that the tax cuts will help to regulate the economy. A primary goal of the tax cuts will be to assist in decreasing the investment disparity between rural and urban areas and to encourage government owned corporations to compete with foreign corporations.
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 This enabled some to move away from the restrictive dormitory life and boring factory work which characterize export industries in 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 an average 150 a month. The labor shortage was partially driven by the demographic trends as the proportion of people of working age falls as the result of strict family planning.
It was reported in the New York Times in April, 2006 that labor costs had continued to increase and a shortage of unskilled labor had developed with a million or more employees being sought. Operations that rely on cheap labor are contemplating relocations to cities in the interior or to countries such as Vietnam or Bangladesh. Many young people are attending college rather then opting for minimum wage factory work. The demographic shift resulting from the one-child policy continues to reduce the supply of young entry-level workers. Also, recent government efforts to advance economic development in the interior of the country are beginning to be effective at creating opportunities there.
Agriculture
China ranks first worldwide in farm output. Just under half of China's labor force is engaged in agriculture, even though only about 15.4% 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 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 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 (1979-1989) 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 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. 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 coalmines 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 Kazakhstan oil fields. Beijing is particularly interested in increasing China's natural gas production - currently just 10% of oil production - and is incorporating a natural gas strategy in its tenth 5-year plan (2001-2005), with the goal of expanding gas use from its current 2% share of 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. 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 causes of death in China. Almost all of the nation's 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 large-scale diversion of water from the Yangtze River 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.
Trade with the U.S.
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 and U.S. export restrictions. Intellectual property theft makes many Western companies wary of doing business in mainland China. Some Western politicians and manufacturers also say the value of the Yuan is artificially low and gives export from mainland China an unfair advantage. These and other issues are behind the recent push for greater protectionism by some in the US Congress, including a 27.5% consumer tax on imports.
© 2006-2007 East-West Economic Development Center