Congressional Research Service, "China's Economic Conditions," March 3, 2009

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Summary
Since the initiation of economic reforms 30 years ago, China has become one of the world’s fastest-growing economies.  From 1979 to 2008 China’s real gross domestic product (GDP) grew at an average annual rate of nearly 10%; it grew 13% in 2007 (the fastest annual growth since 1994). However, the current global economic crisis has hit China hard – real GDP growth slowed to 9% in 2008, and many analysts predict the economy will slow even more sharply in 2009. Millions of workers have reportedly already lost their jobs.  This is of great concern to the Chinese government, which views healthy economic growth as critical to maintaining social stability. China also faces a number of other challenges to its economic growth and stability, including pervasive government corruption, an inefficient banking system, over-dependence on exports and fixed investment for growth, the lack of rule of law, severe pollution, and widening income disparities.  The Chinese government has indicated that it intends to create a “harmonious society” over the coming years that would promote more balanced economic growth and address a number of economic and social issues.  The severity of the current global economic crisis has induced the Chinese government to seek means to quickly promote greater domestic demand; in November the government announced plans to implement a $586 billion economic stimulus package, largely aimed at infrastructure projects.  

Trade and foreign investment plays a major role in China’s booming economy.  From 2004 to 2008, the value of total Chinese merchandise trade doubled. It is estimated that in 2008 China was the world’s second largest merchandise exporter and the third largest importer.  Over half of China’s trade is conducted by foreign-invested firms in China. In 2008, foreign direct investment (FDI) in China totaled $92 billion, making it the third largest global destination for FDI. The combination of large trade surpluses, FDI flows, and large-scale purchases of foreign currency have helped make China the world’s largest holder of foreign exchange reserves at $1.9 trillion at the end 2008.  The global financial crisis is having a significant impact on China’s trade, as exports and imports in November and December 2008 and January 2009 declined on a year-on-year basis.  FDI flows have also declined sharply during this period.

China’s economy and its economic policies are of major 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. China’s large holdings of U.S. securities have helped keep U.S. interest rates relatively low.  Many analysts hope that China will make positive contributions to a global economic recovery. On the other hand, the surge in U.S. imports of Chinese products has put competitive pressures on various U.S. industries.  Many U.S. policymakers have argued that China maintains a number of economic policies that violate its commitments in the World Trade Organization and/or are harmful to U.S. economic interests, such as its currency policy.  Concerns have also been raised over China’s rising demand for energy and raw materials (and the impact of that demand has on world prices), increased pollution levels, China’s growing FDI (such as in energy and raw materials) around the world, including countries where the United States has political and human rights concerns, and the potential implications of China’s large holdings of U.S. debt.  The global economic crisis has also raised concerns over the future pace of Chinese economic reforms. 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.

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