Congressional Research Service, "China's Economic Conditions," July 13, 2007

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Summary
Since the initiation of economic reforms in 1979, China has become one of the world’s fastest-growing economies. From 1979 to 2005 China’s real gross domestic product (GDP) grew at an average annual rate of 9.7%. Real GDP grew by 11.1% in 2006, and during the first quarter of 2007, it rose by 11.1% over the same period in 2006. China is expected to continue to enjoy rapid economic growth over the next several years, provided that it continues to implement needed reforms, particularly in regard to its inefficient state-owned enterprises and the state banking system. If projected growth levels continue, China could become the world’s largest economy within a decade or so.

Trade and foreign investment continues to play a major role in China’s booming economy. In 2006, exports rose by 27% to $969 billion, while imports were up by 20% to $792 billion. This produced an trade surplus of about $177 billion. From 2003 to 2006, the value of total Chinese trade doubled. On the basis of current trends, China could surpass the United States in 2007 to become the second largest merchandise exporter (after the European Union). Well over half of China’s trade is conducted by foreign firms operating in China. The combination of trade surpluses, foreign direct investment flows, and large-scale purchases of foreign currency have helped make China the world’s largest holder of foreign exchange reserves at $1.3 trillion as of June 2007.

Although the economy has shown remarkable growth in recent years, Chinese officials have expressed concern over a number of areas that they perceive as threatening future growth, including rising inflation, over-dependence on exports and fixed investment for growth, widening income gaps, and growing pollution. The government has indicated its goal over the coming years to create a “harmonious society” that would promote more economic balanced growth and address a number of economic and social issues.

China’s economy continues to be a concern to many U.S. policymakers. On the one hand, U.S. consumers, exporters, and investors have greatly benefitted from China’s rapid economic and trade growth. On the other hand, the surge in Chinese exports to the United States has put competitive pressures on various U.S. industries. Many U.S. policymakers have argued that China often does not play by the rules when it comes to trade and they have called for greater efforts to pressure China to fully implement its World Trade Organization (WTO) commitments and to change various economic policies deemed harmful to U.S. economic interests, such as its currency policy, its use of subsidies to support state-owned firms, and trade and investment barriers to U.S. goods and services. In addition, China’s rising demand for energy and raw materials has raised prices for such commodities and has sharply increased pollution levels, which may have important global implications.

This report provides an overview of China’s economic development, challenges China faces to maintain growth, and the implications of China’s rise as a major economic power for the United States. This report will be updated as events warrant.

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