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Congressional Research Service, "China's Economic Conditions," May 26, 2005

This CRS report was written by Wayne M. Morrison, specialist in Asian Trade and Finance.
May 26, 2005

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Since the initiation of economic reforms in 1979, China has become one of the world’s fastest-growing economies. From 1979 to 2003, China’s real GDP grew at an average rate of 9.3%; it is estimated to have risen by 9.5% in 2004. Many economists speculate that China could become the world’s largest economy at some point in the near future, provided that the government is able to continue and deepen economic reforms, particularly in regard to its inefficient state-owned enterprises (SOEs) and the state banking system. Progress in reforming these sectors in recent years has been somewhat mixed.

Trade continues to play a major role in China’s booming economy. In 2004, exports rose by 35% to $593 billion, while imports grew by 36% to $561 billion — making China the world’s third-largest trading economy (after the United States and Germany). China’s trade boom is largely the result of large flows of foreign direct investment (FDI) into China ($64 billion in 2004). Over half of China’s trade is accounted for by foreign-invested firms in China.

China experienced some inflationary pressures in 2004, fueled in part by speculation in real estate, over-investment in certain industries, and rising costs for energy and raw materials. The government responded by raising interest rates and using administrative controls to slow investment in certain sectors.

In December 2001, China became a member of World Trade Organization (WTO), which requires it to significantly reduce a wide variety of tariff and nontariff barriers over the next few years. China’s WTO accession is expected to have a significant impact on its economy by greatly diminishing the level of trade protectionism afforded by China to various sectors. Several of China’s heavily protected industries (such as automobile manufacturing), various services (such as banking) and certain agricultural sectors (such as corn), could be negatively affected by China’s WTO commitments, while many of its labor-intensive industries (especially textiles and apparel) will likely benefit significantly. A major challenge facing the Chinese government is to develop an adequate social safety net to assist workers that are displaced by economic reforms.

China’s economy continues to be a concern to U.S. policymakers. On the one hand, China’s economic growth presents huge opportunities for U.S. exporters. On the other hand, the surge in Chinese exports to the United States has put competitive pressures on many U.S. industries. Many U.S. policymakers have argued that greater efforts should be made to pressure China to fully implement its WTO commitments and to change various economic policies deemed harmful to U.S. economic interests, such as its pegging of its currency (the yuan) to the U.S. dollar and its use of subsidies to support its SOEs.

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