FREE ESSAY ON CHINA'S ECONOMICS

CHINA'S ECONOMICS

Introduction
For various reasons, China has always been an important country in the world. With its
increasing large population, it was determined by other countries that is has a lot of
economic potentials. In just one decade and a half, China has transformed itself from a
giant that use to live in poverty into a wealthy powerhouse to the world economy. With
one-fifth of the world??s population, China is now producing 4% of world merchandise and
a proportion of global production. It has also one of the world??s oldest and most
influential civilizations. 
China has established three approaches to the world economy and they are establishing an
alternative socialist system (1950s); isolating itself from the system (the 1960s to mid
1970s); and participating in the system again from the 1970s. China??s economic system
was quite similar to Soviet Union??s because it is central planning system. However,
after the 1950s, this central planning is broken into regional planning by different
provinces in China. In another words, China has changed from a centrally based country in
a regionally based country, in which different provinces produces different goods and
servies. This change has encouraged the development of small enterprises, which are the
main driving forces of Chinese growth. In 1978, China has liberalised its economy and
start participating in the world economy. With its new market reforms in every sector,
China??s door has opened its economic door to foreign investors and freer trade in
special economical zones. Beginning in 1994, China's economic structural reforms have
begun new breakthroughs. Major changes have been made to sectors like personal
enterprises, taxation, finance, foreign investment and foreign trade. At the same time,
the Chinese government is speeding up its establishment of a socialist market economy
system. Hopefully, this socialist market economic system can be in place by 2010. (Roy
1-5)
Major Structural Reforms
Reforms already launched:
1. Reform of the state-owned enterprises has been furthered.
"h Some adjustment and reorganisation have been carried out in industries like textile,
coal, oil and weapon-makings. 
2. The social security system has made huge changes. 
"h People established re-employment centres that can help laid off workers to find jobs
in other economic sectors. Almost 99% of the laid-off staff and workers who were fired
from the state-owned enterprises are using this re-employment service centre. 
Reforms to be launched:
1. Financial reforms will be undertaken
"h To achieve the perfect management system, sectors like banks, securities, insurance
and trust businesses are becoming independent from each other for clearer financial
supervisions. 
"h Government is speeding up the reform of state-owned commercial banks, in order for the
banks to operate independently. 
"h In case when companies have bad credit and unpaid debts, banks are reinforcing strong
policies to ensure the quality of bank loans. 
"h To safeguard financial assets and eliminate corruption of people who have political
positions. 
2. To increase export to maximize the economy
"h People are expanding export productions.
"h People are improving the development of international tourism to increase non-trade
exchange earnings. (Online)
Economic Activity
GDP/GNP
China must have annual GDP growth greater than 5% to maintain social stability and
political survival. Economic freedom has increased China??s prosperity. With its Real GDP
of US$960.91 billion, it seems that is has increased its output by 7.8% from 1997. Within
the GDP, primary industry increased by 3.5%, secondary industry up by 9.2%, and tertiary
industry enlarged by 7.6%. The social labour productivity rose by 6.9% over 1997. In the
first half of 1999, GDP grew at the rate of 7.6%. (Morrison)
Beginning in 1979, China launched several economic reforms. To improve the standard of
living of farmers, government is now allowing them to sell a portion of their crops on
the free market. The government also established four special economic zones to attract
foreign investment and boost exports and imports. The decentralisation of economic
control of various enterprises was given to provincial and local governments. This
allowed enterprises to operate more freely and competitively, rather be controlled by the
central government. Some coastal regions and cities were designated as open cities and
development zones, which allowed people to experience free market reforms and to attract
foreign investment. Therefore, the state price controls on good and services were
gradually eliminated. 
Starting from the introduction of economic reforms, China's economy has grown
proportionately faster than during the pre-reform period (see Table 1). This Chinese
statistic shows the growth of real GDP from 1979 to 1998, which is making China one the
world's fastest growing economies. According to the World Bank, China's rapid development
has driven 200 million people out of poverty. 
Table 1. China's Average Annual Real GDP Growth: 1960-1998 
Time Period Average Annual % Growth 
1960-1978 (pre-reform) 5.3
1979-1998 (post-reform) 9.8
1990 3.8
1991 9.3
1992 14.2
1993 13.5
1994 12.7
1995 10.5
1996 9.7
1997 8.8
1998 7.8
Sources: Official Chinese government data reported by the World Bank, World Development
Report (various issues), and DRI/McGraw-Hill, World Economic Outlook, various issues. 
Economists who worries about China's rapid economic growth are mainly concentrating on
two factors: large-scale capital investment (by large domestic savings and foreign
investment) and rapid productivity growth. These two factors appear to interdependent of
each other. Economic reforms led to higher efficiency in the economy, which boosted
output and increased resources for more investment in the economy. Most of the Chinese
are known to have a high rate of savings. When reforms began in 1979, domestic savings as
a percentage of GDP turned out to be 32% (nearly as high as Japan's at the time).
Eventually, savings as a percentage of GDP has steadily risen; it was 42.7% in 1998,
among the highest savings rates in the world. 
In U.S. dollars, China's GDP in 1998 was $968 billion with its per capita GDP of $769
billion. Such data would indicate that China's economy and living standards were
significantly lower than those of the United States, Japan, and Germany. China's 1998 GDP
was about 45% the size of Germany's, 23% of Japan's, and 11% that of the United States.
Surprisingly, China's per capita GDP was only 2.4% of the United States (see Table 2).
The following data shows that China's per capita GDP is $3,701. However, it falls far
below the PPP per capita GDP levels of some major developed countries. For example, it is
only 12% of U.S. levels. The International Monetary Fund estimates that China might
surpass the United States as the world's largest economy in the year 2007. However, even
if that does occur, it would take China significantly longer time to achieve U.S.
standard of living levels. 
Table 2. Comparisons of U.S., Japanese, German, and Chinese GDP and Per Capita GDP In
Nominal U.S. Dollars and PPP: 1998
Country Nominal GDP ($Billions) GDP in PPP ($Billions) Nominal Per Capita GDP Per Capita
GDP in PPP
U.S. 8,500 8,500 31,414 31,414
Japan 4,190 2,969 29,860 23,228
Germany 2,109 1,637 26,024 21,376
China 948 4,610 769 3,701
Source: DRI/McGraw Hill. World Economic Outlook, Volume I 1st Quarter, 1999, p.A-27. 
Employment/unemployment
By the end of 1998, China's employment was 699.57 million, 3.57 million more than at the
end of the previous year. Of the total, 32.32 million people were in urban private
enterprises. In 1998, great changes were made in the re-employment program, which enabled
6.09 million laid-off staff and workers of state-owned enterprises to find new jobs. By
the end of 1998, the registered unemployment rate in the urban areas was 3.1% with no
significant changes from the previous year. The income of people that are living in urban
and rural areas increased steadily, and their living standard continued to rise. With the
falling price levels, the growth of the per-capita disposable income of urban residents
rise 5.8%, and that of rural residents increased by 4.3%. The registered unemployment
rate in the urban areas is 3.5% in 1999. The number of people laid off in 1997 was 15
million, two-thirds from state owned enterprises. If privatisation of state enterprises
continues, it is estimated that 15 million more workers would be laid off over the next
two years (although the unemployment number may vary in different provinces). In some
undeveloped provinces, the ratio of laid off to working labour was 3:1 in 1998.
(Morrison)
Inflation
Inflation has reached 25.5% in 1994 and has become a prime concern of the government.
Therefore, the government has planned a tight credit policy which helped to bring
inflation figures down to 17.1% in 1995, 8.3% in 1996, and 4.1% in 1997. Due to
statistics, the year-end figures for 1997 shows an average inflation of 2.8% for CPI.
This steady drop in inflation during 1997 was due to large stockpiles of inventory such
as wheat and cereals, which produced more competition in the economy. It looks like
steady deflation would continue for the next few years. In 1998, the total retail sales
of consumer goods amounted to US$352.14 billion, up by 6.8% compared with 1997. Despite
the deflation, the actual growth was 9.7%. (China: Economic Overview)
Value of currency
During the period of the Asian financial crisis, China has enforced a policy of
maintaining the stability of RMB. There has also been a favourable balance in China??s
current account for five consecutive years. Foreign direct investments have continued to
flow in. All these made it possible for RMB to remain stable in 1998. Now, its exchange
rate against the US dollar is at US$1: RMB 8.2789. Unlike HK dollar, value of RMB might
change over the year because RMB is not pegged to the US dollar.
Specific contributions
From several observations, it is known that the fastest growing provinces are Zhejiang,
Jiangsu, Guangdong, Fujian, and Shandong. These places are where the state-owned
industries have fallen most sharply. From 1981 to 1994, the shares of state-owned
industry in each of the five provinces dropped by more than 40% for it was creating a lot
of non-state owned enterprises. On the other hand, in the western regions, the
state-owned enterprises have experienced a much slower structure reformation. 
The decline of importance of the coastal provinces was caused by the fast growth of
enterprises in provinces like Jiangsu and Zhejiang. It can also be caused by
foreign-invested enterprises in Guangdong as well as private enterprises in Wenzhou,
Zhejiang. The output of these enterprises grew at an annual average rate of 25 %, that
is, 14 % higher than that of the state-owned industrial enterprises. The five fastest
growing provinces are construction of free enterprise or indirect macro-management
because they all attract foreign investments. In contrast, the inland areas lack
foreign-invested enterprises and private enterprises. 
The fasted growth province, Guangdong, has an annual average GDP growth rate of 12%,
while Jiangsu and Guizhou grew at an annual average growth rate of 6%. However, this
increasing difference of provinces' growth performance could lead to serious economic and
political tensions among regions. (Decentralisation and Provinces' Growth Performances)
Government production of public goods/services
State economy includes all enterprises that are funded by governments of various levels.
Because of the economic reform, companies and business that use to receive government
funding now have none. To increase growth without arising regional crisis, the government
is using the good old-fashioned Keynesian approach ?V spend big on public programmes.
Last year, government investment in telecommunications has increased by 53.4% and funding
in agriculture and water conservation increased by 47.8%, as well as cement production
jumped by 37.2%. The Statistical has shown that government owned retail sales grew at
9.4% pa in 1998. Due to the socialist system, most of the companies in this economy are
state-planned production companies. The main financial burden that these state companies
have to carry is the workers' life long security, that is, paying for a worker's child
delivery bill and covering the funeral expenses of the dead retired worker. Along with
other reasons, more than half of such companies are currently not profitable. Therefore,
government is slowly re-organising small state-owned companies and selling them to
private entrepreneurs. At the same time, they are transforming large ones into
corporations. To maintain social stability, the government has to make sacrifices in this
economic sector. (Roy 48)
Economic Stability
Fiscal policy
China??s political and economic system??s lack of transparency and constant enforcement
has created many uncertainties for foreign investors. The complexity of national and
local laws has made foreign trade and investment more difficult in China. China??s main
problem has always been the incompleteness of economic reforms and the absence of
political reforms. This was due to the fact that Communist Party Officials are
functioning as China??s ruling class. They are a self-selected group accountable to
nobody. 
Fiscal reforms
China has made the following new pledges: 
1. To eliminate high tariffs. 
2. To have a more balanced and equitable access for foreign companies. 
They also made the following decisions about State-Owned-Enterprises: 
1. Lend to those enterprises that can survive in the market. 
2. For enterprises without a lot of hope for survival, better performing ones will
acquire them. 
3. Support bankruptcy for extremely insolvent enterprises. 
Mr. Jiang Zemin, China??s new President has brought some strong changes in China. However
other countries in the World Trade Organisation (WTO) are saying that China??s should
obtain lower tariff and freer trades because the use of high tariffs made it difficult to
export to China. Import taxes in the form of value-added tax (VAT) and other taxes are
added to tariffs on items entering China. This highly discouraged trade inflow.
In 1995, the National People's Congress (NPC) established banking reforms, including the
Peoples Bank of China Law. This new law gives NPC more authority in its functioning. It
also abolishes loan and corruption from politicians. The reforms has sped up the
commercialisation of the big four State-owned specialised banks, which include
Agricultural Development Bank of China, Export and Import Credit Bank of China, and State
development Bank. As a result, the Chinese government has opened its doors to some
foreign banks to emerge new banks in China. The new banks are more efficient than the big
four and offer much better quality of service. 
Monetary policy
In 1994, Consumer Price Index was up by 24%. This is a sign of China??s failure for the
interest rates being set by the government and not economically. Monetary policy is
useless in China because the central bank is not independent. Inflationary pressure
resulted in money supply growth of 34.4% in 1994. China is not allowed to use the raising
interest rates tool for fighting inflationary demand because it fears that the effect on
state owned industries that survived on borrowed working capital. The raise in interest
rates would greatly effect state-owned firms as they already borrow money from banks to
pay their interest bills.
Monetary reform
Formerly Bank of China, it was transformed into a central bank in 1983. Its
responsibilities include: 
1. Making and improving financial polices to meet government rules.
2. Controlling the supply of money. 
3. Setting exchange and interest rates. 
4. Setting policies concerning credit. 
5. Controlling both domestic and foreign banking activities. 
6. For practical purposes, the bank of China is the overseas agent of Central Bank.
Therefore, privately owned firms are left to fund their own funds from sources outside
the state banking system which include foreign investments, foreign currency borrowing,
domestic share sales, bond issues, credit unions, non-bank financial institutions and
unofficial private banks. The new interest rate for 6-month loans is now 9.5% and
officials say, Over the next five years our monetary policy direction will be a
moderately tightening one. 
Banking system 
China now has specialist banks and other financial institutions, which include: 
1. The big-four State-Owned Specialised banks i.e. Agricultural Bank of China, Bank of
China, Industrial and Commercial bank of China and The People??s Construction Bank; 
2. China International Trust and Investment Corporation; 
3. The Industrial / Commercial Bank of China; 
4. Bank of Communications, etc. 
Since the central bank in China is not independent, the transparency in the banking
sector is then very poor. This makes the precise measurement of banks?? loans to become
more difficult. The accounting principles are inconsistent and poorly understood by
bankers. Interest rates are still be dictated by the bank and government instead of
allowing the market to determine it. However, with the new reforms and laws to its state
owned enterprises, China may be on its way to a substantial economic recovery with a
bright future in sight. (Grace Bosede)
Economic Equity
Income distribution/Standard of living
Less than 60% of Chinese are covered by unemployment insurance. In 1997, most of the laid
off workers received payments of less than 10% of the average national wage. There are
virtually no social securities or pensions in China. Therefore, some people live at
starvation level. 
However, the high rate of China's economic growth last year has provided people with
higher standard of living. Urban residents who use to make 27% of the national income are
now making more than 50%. There is also a great difference depending on the specific
provinces in which people work in (see Table 3).
Table 3. Comparison of per capita income between urban and rural sectors in 1995
Province Urban 
Per Capita Income
(RMB) Rural 
Per Capita Income
(RMB)
Anhui 2,767 973
Fujian 3,508 1,578
Guangdong 5,877 2,182
Zhejiang 4,691 2,225
Source: Internet article: How to Benefit from the Booming Retail Market in China
Because China has a large population, the government rarely interferes with income
distributions of individuals. However, there is more interference from the government in
the state owned businesses than the privately own ones. Therefore, private businesses
that try to maximize their profits often exploit workers who are in serious need of
money. The average per capita income of urban resident raise from RMB1,826 in 1992 to
RMB3,179 in 1994. Recent figures show that the high growth rate will continue for some
time (Table 4).
Table 4. Urban per capita income
Year Average Income
(RMB) Growth Rate
1992 1,826.1 18.3%
1993 2,336.5 28.0%
1994 3,179.4 36.1%
Source: Internet article: How to Benefit from the Booming Retail Market in China
China has now developed large shopping centres and department stores in many provinces in
order to bring up the standard of living, as well as to encourage consumer spending
(Table 5).
Table 5. Consumer spending in different provinces.
Rank Area 1994 ( RMB billion ) 1993 ( RMB billion ) Rate
1 Guangdong 175.67 131.40 +33.7%
2 Jiangsu 124.73 93.50 +33.4%
3 Shandong 113.24 84.23 +34.4%
4 Zhejiang 96.37 67.44 +42.9%
5 Sichuan 93.33 71.79 +30.0%
6 Liaoning 86.80 67.22 +29.1%
7 Shanghai 77.07 62.19 +23.9%
8 Henan 70.25 49.72 +41.3%
9 Hubei 68.50 50.05 +36.9%
10 Beijing 66.67 53.18 +25.4%
Source: Internet article: How to Benefit from the Booming Retail Market in China
International Trade and Competitiveness
Trading pattern
China??s international trade in 1928 was only 2.3% of the world total. In 1977, when
China??s economy was still isolated, its trade was 0.6%. It did not gain an important
economic position until 1993. As one of the WTO members, China has opened many closed
sectors under the Western influences. The Washington-based Institute of International
Economics estimates that Western exports to China could rise annually by US$21 billion. 
Economic reforms have transferred China into a major trading partner for many countries.
Chinese exports rose from $14 billion in 1979 to $184 billion in 1998, while imports grew
from $16 billion to $140 billion. China's ranking as a trading power rose from 27th in
1979 to 10th in 1998. China's trade volume fell slightly in 1998 over 1997 for it is too
affected by the global financial crisis. China??s exports rise by 0.5% after the rising
of 20.9% in 1997, while imports dropped by 1.5%. Due to statistics, China has been
running trade deficits in some years and surpluses in others. Over the past 5 years,
China has run trade surpluses. In 1998 the surplus totalled about $44 billion (see Table
6). Merchandise trade surpluses and the large amount of foreign investment have made
China to become the world's second largest foreign exchange reserves, with a total $145
billion at the end of 1998. During the first nine months of 1999, China's exports
increase by 2.1%, while imports rise by 19.3%. 
Table 6. China's Merchandise World Trade: 1979- September 1999
($Billions) 
Exports 
Imports Trade Balance
1979 13.7 15.7 -2.0
1980 18.1 19.5 -1.4
1981 21.5 21.6 -0.1
1982 21.9 18.9 2.9
1983 22.1 21.3 0.8
1984 24.8 26.0 -1.1
1985 27.3 42.5 -15.3
1986 31.4 43.2 -11.9
1987 39.4 43.2 -3.8
1988 47.6 55.3 -7.7
1989 52.9 59.1 -6.2
1990 62.9 53.9 9.0
1991 71.9 63.9 8.1
1992 85.5 81.8 3.6
1993 91.6 103.6 -11.9
1994 120.8 115.6 5.2
1995 148.8 132.1 16.7
1996 151.1 138.8 12.3
1997 182.7 142.2 40.5
1998 183.8 140.2 43.6
Jan.-Sept. 1998 134.2 98.6 35.6
Jan.-Sept 1999 137.0 117.6 19.4
Source: International Monetary Fund, Direction of Trade Statistics and official Chinese
statistics. 
Trading partners
China's trade data differs significantly from its major trading partners?? statistics.
This is due to the fact that a large share of China's trade (both exports and imports)
passes through Hong. China treats a large share of its exports through Hong Kong as
Chinese exports to a foreign country. However, China treats the imports from Hong Kong as
provincial trading.
According to Chinese trade data, its top five trading partners in 1998 were Japan, the
United States, the European Union (EU), Hong Kong, and South Korea (see Table 7). Chinese
data shows that United States is its second largest export partner and the third largest
source of its imports. China's trade with many of its Asian trading partners fell in
1998, while trade with the United States and the EU rose. 
Table 7. China's Top 10 Trading Partners: 1998 
($Billions and % Change over 1997) 
1998 Merchandise Trade ($) % Change over 1997 
Country Total Trade Exports Imports Total Trade Exports Imports
All Countries 323.9 183.8 140.2 -0.4 0.5 -1.5
Japan 57.9 29.7 28.2 -4.8 -6.7 -2.7
U.S.* 54.9 38.0 17.0 12.1 16.1 4.1
EU15 48.4 27.9 20.4 12.6 17.2 6.3
Hong Kong 45.4 38.8 6.7 -10.6 -11.5 -4.7
S. Korea 21.3 6.3 15.0 -11.6 -31.3 0.4
Taiwan** 20.5 3.9 16.6 3.3 13.9 1.1
Singapore 8.2 3.9 4.2 -7.2 -9.1 -5.4
Russia 5.4 1.8 3.6 -10.5 -9.7 -10.9
Australia 5.0 2.3 2.7 -5.2 13.9 -17.2
Indonesia 3.6 1.2 2.5 -19.6 -36.4 -8.1
Source: Official Chinese trade data. 
*U.S. trade data on U.S.-China trade differ significantly with Chinese trade data. 
**China and Taiwan do not maintain direct trade links. Most trade takes place via Hong
Kong. 
However, the US trade data differs significantly with Chinese trade data. According to
the U.S. trade data, it indicates that U.S. market is an important market to China's
export, but it is not reflected in Chinese trade data. Based on U.S. data on Chinese
exports to the US, it is shown the exports have grown from 15.3% in 1986 to an estimated
38.7% in 1998. This would indicate that the United States is China's largest export
market. The importance of the U.S. market for China's exports has increased in 1998
because of the global financial crisis in Asia. China has survived the financial crisis
because U.S. imports from China have continued to rise, whereas imports by several East
Asian economies from China have fallen. 
There is an increasing level of Chinese exports from foreign funded enterprises (FFEs) in
China. According to Chinese data, the total share of Chinese exports produced by FFEs has
risen from 0.1% in 1980 to 44.1% in 1998. Many of these FFEs are owned by Hong Kong and
Taiwan investors because they have shifted their labour-intensive, export-oriented, firms
to China to take advantage of low-cost labour. A large percentage of the products made by
such firms are exported to the United States. 
Export and imports/Foreign trade
China has gained more access to export markets through the long term restructuring of the
Chinese economy. Reforms initiated by President Jiang Zemin and Prime Minister Zhu Rogji
have tended to languish under political pressure and economic and cultural inertia.
Another cause of increasing export is the wider opening of China's industrial and
agricultural sectors to Western style management and competitive discipline.
The strategy that Chinese used was a currency devaluation to promote export growth. This
would inevitably be followed by a new round of defensive devaluation throughout the
region, accompanied by further capital outflows, deepening liquidity problems, a return
to protectionism and delay in recovery. (Roy 57)
China's cheap labour force has made it internationally competitive in many low cost,
labour-intensive countries. As a result, manufactured products comprise an increasingly
larger share of China's trade. The share of Chinese manufactured exports to total exports
rose from 50% in 1980 to 89% in 1998, while manufactured imports as a share of total
imports rose from 65% to 84%. A large share of China's manufactured imports is comprised
of intermediates like chemicals, electronic components, and textile machinery that are
used in manufacturing products in China. Major Chinese imports in 1998 included
electrical machinery, textile products, specialised machinery, plastics, and
telecommunications and recording equipment (see Table 8). China's major exports included
articles of apparel and clothing, electrical machinery, textiles, office machines, and
telecommunications and recording equipment (see Table 9). 
Table 8. Major Chinese Imports: 1998 
Commodity Total ($Billions) % of Total Imports
Electrical machinery, apparatus, appliances & parts, and household electrical appliances
$16.5 11.8%
Textile yarns, fabrics, and made-up articles 11.1 7.9
Specialized machinery for particular industries 8.3 5.9
Plastics in primary form 8.2 5.8
Telecommunications and sound recording and reproducing apparatus and equipment 7.9 6.6
Total top 5 52.0 37.0
Source: Official Chinese trade statistics 
Table 9. Major Chinese Exports: 1998 
Commodity Total ($Billions) % of Total Exports
Articles of apparel and clothing accessories $30.0 16.3%
Electrical machinery, apparatus, appliances & parts, and household electrical appliances
13.9 7.6 
Textile yarns, fabrics, and made-up articles 12.8 7.0 
Office machines and data processing machines 11.9 6.5 
Telecommunications and sound recording and reproducing apparatus and equipment 11.1 6.0 
Total top 5 79.7 43.4
Source: Official Chinese trade data. 
China has pursued a trade strategy of import substitution. This means Chinese only import
the goods necessary to its economic development that cannot produce itself, and once it
attains a domestic production capability, it stops importing those goods. This approach
even carried over to China's exports, which have consciously been used primarily as a
means of generating foreign exchange for the purchase of advanced foreign technology.
China's imports fall mainly into one of two categories: raw materials (food, energy,
lumber, wool and synthetic fibres, fertilizer, chemicals, steel, etc.) from the
developing countries, and advanced technology (machinery, software, etc.) from the
developed countries. Chinese exports, in keeping with China's comparative advantage, are
mostly relatively cheap labour-intensive manufactured goods, which are particularly
attractive in lower-income countries. In other words, China generally buys in the core
and sells in the periphery. Thinking that higher-tech products earn higher profits on the
capitalist world market, China is running trade surpluses with developing countries and
trade deficits with developed countries. China's foreign trade has grown exponentially
since the opening to the world market. Exports comprised about 2% of China's GDP in 1980;
in 1996, they account for 10%. (Roy 89)
Total trade between China and the United States rise from $4.8 billion in 1980 to $85.4
billion in 1998, making China the 4th largest U.S. trading partner. China has become a
major supplier to the U.S. market with its variety of low-cost U.S. consumer goods, such
as toys and games, textiles and apparel, shoes, and consumer electronics. China has been
a major buyer of U.S. aircraft, fertilizers, and machinery. In recent years, U.S. imports
from China have far exceeded U.S. exports to China. In 1998, U.S. imports from China
totalled $71.2 billion while U.S. exports to China were only $14.3 billion. As a result,
the U.S. trade deficit with China has increased to nearly $57 billion in 1998.
(China-U.S. Trade Issues). 
Foreign investment
China has kept out all foreign investment until 1979, the heavy restrictions were
loosened to allow all kinds of foreign investment in China. This way, China can gain more
access to foreign technology. Western investors began to rush into China in the 1970s but
decreased in numbers in the early 1980s because they realised that China is still a
difficult place for them to do business. Several reasons for this is that China has many
regulations, corruption scandals and the assumptions that foreigners are wealthy and
therefore should pay extra for everything. In the early 1990s, the Chinese government has
reformed and clarified many laws concerning foreign investment to stimulate foreign
investment in China. (Roy 90)
In 1998, foreign capital investment in China has reached US$58.9 billion, with foreign
direct investment (FDI) of US$45.6 billion. Within the countries that made direct
investment in China, Hong Kong ranked first with 40.6% of China's total foreign
investment (see Table 10). 
Table 10. Foreign Direct Investment 
Countires % in total
Hong Kong 40.6
United States 8.6
Singapore 7.5
Japan 7.5
Source: China's economic conditions. 
In the first quarter of 1999, FDI totalled to US$7.34 billion. In the first half of 1999,
FDI reached US$18.6 billion. As a result, FDI has brought new technology and more
capitals into China.
Conclusion
Further Outlooks
1999-2002 is the switch period for China from its command economy to a market economy.
Therefore the Chinese government develops macro economic policies reinforce things like
reform, development and stability. The government??s main objectives in this period are
to maintain a low inflation economy and improve employment rate while the restructuring
is under its way. The long term outlook for the Chinese economy remains mixed. China has
been able to weather out the effects of the Asian financial crisis, although this has
done at the cost of delaying economic reforms to the SOEs and banking system. Continued
support of money-losing SOEs draws resources away from more potentially productive
enterprises, and thus undermines future growth. China's commitment to join the WTO
appears to represent a major commitment on the part of the Chinese government to
significantly reform its economy and provide greater access to its markets. Some China
observers believe that the Chinese government views accession to the WTO as an important,
though painful, step to making Chinese firms more efficient and able to compete in world
market (by exposing them to competition from abroad). In addition, the government hopes
that liberalized trade rules will attract more foreign investment to China. 
Economists argue that over the long-run greater market openness in China would boost
competition, improve productivity, and lower costs for consumers, as well as for firms
using imported goods as inputs for production. Economic resources would be more likely
redirected away from money-losing activities towards more profitable ventures, especially
those in China's growing private sector. As a result, China would likely experience more
rapid economic growth (than would occur under current economic policies). Goldman Sachs
estimates that WTO membership would double China's trade and foreign investment levels by
the year 2005 and raise real GDP growth by an additional 0.5% per year. 
In the short run, however, widespread economic reforms (if implemented) could result in
disruptions in certain industries, especially unprofitable SOEs, due to increased foreign
competition. As a result, many firms would likely go bankrupt and many workers could lose
their jobs. How the government handles these disruptions will strongly determine the
extent and pace of future reforms. The central government appears to be counting on trade
liberalization to boost foreign investment and spur overall economic growth; this would
enable laid-off workers to find new jobs in high growth sectors, especially in China's
growing private sector. However, the Chinese government is deeply concerned with
maintaining social stability. If trade liberalization was followed by a severe economic
slowdown, leading to widespread bankruptcies and layoffs, the central government might
choose to delay (or even rescind) certain economic reforms rather than risk possible
political upheaval. 
The Chinese government has recently taken a number of steps in preparation for China's
WTO entry. For example, In January 2000, Zhen Peiyan, Chairman of China's State Planning
Commission, stated that the government would eliminate all restrictive regulations
against private enterprises in China in preparation for China's WTO accession. Currently,
private firms in China face a variety of discriminatory government policies, including
lack of access to borrowing from state banks, that have made it difficult for such firms
to develop. China's entry into the WTO will require the government to establish a level
playing field for Chinese firms to compete against foreign firms. This could greatly
expand the role of the private sector in China's economic development and accelerate
China's transition to a market-oriented economy. 
Economic Growth - China want to expand its domestic demand to promote its economy. For
the next few years, domestic demand, that is, the consumption and investment will
slightly increase. Researchers say that after the year 2000, the impact of the financial
crisis will gradually reduce, whereas the international environment will gradually
improve. China??s economic growth rate is expected to be about 7% and its CPI to be
around 3% in this period.
Investment - Foreign and local investments in fixed assets will continue to be the main
driving force in China??s economic growth. Due to the changes in policies, it is known
that investment in the state sector will increase, as well as the investment in the
non-state sector will also speed up gradually. The estimated average increase in the
investment in fixed assets will be 12% or so in 1999-2002. The Chinese government has
also pursued policies to improve the amount of foreign investment. Foreign Direct
Investment is expected to rise after 2000. 
Employment - In the period between 1999 and 2002, the working population will be over 11
million and 85% of them will enter the labour market. As the reform of the state-owned
enterprises continues and the economic restructuring speeds up, it is estimated that the
registered unemployment rate will be 3.5%. China is speeding up the development of its
economy to create more employment outlets and to deepen labour market reforms. The
government is also thinking of building of a social security system that will improve the
standards of living among people in the future. (Roy 57)
Table 11 China: Overall Economic Performance
1992 1993 1994 1995 1996 1997 1998
GDP and Major Components (% change from previous year, excepted as noted) 
Nominal GDP (billion US$) 483.00 601.10 540.90 697.60 816.90 903.00 960.90
Real GDP 14.20 13.50 12.60 10.50 9.60 8.80 7.80
Total Consumption 14.20 9.30 8.00 9.20 9.30 6.10 6.80
Private Consumption 14.30 9.40 7.70 10.10 9.60 5.80 6.10
Government Consumption 13.60 9.10 9.10 5.90 8.40 7.20 8.90
Total Investment (1) 12.90 24.90 15.60 15.50 10.40 7.10 14.40
Private Investment 
Government Investment 
Exports of Goods and Services (2) 18.20 8.00 31.90 22.90 1.50 20.90 0.50
Imports of Goods and Services (3) 26.30 29.00 11.20 14.20 5.10 2.50 -1.50
Fiscal and External Balances (% of GDP) 
Budget Balance -0.97 -0.85 -1.23 -1.00 -0.78 -0.78 -1.50
Merchandise Trade Balance (f.o.b.) 0.87 -2.03 0.99 2.41 1.51 4.46 5.48
Current Account Balance 1.33 -1.98 1.42 0.23 0.89 3.29 3.03
Capital Account balance -0.05 3.91 4.68 4.74 4.89 2.54 0.00
Economic Indicators (% change from previous year, except as noted) 
GDP Deflator 7.90 14.60 19.50 13.10 6.10 1.50 -1.30
CPI 6.40 14.70 24.10 17.10 8.30 2.80 -0.80
M2 31.30 32.40 34.50 29.50 25.30 19.58 15.30
Short-term Interest rate (%) 8.10 8.80 9.00 9.00 9.72 7.65 6.34
Exchange Rate (Local Currency/US$) (4) 5.50 5.76 8.62 8.35 8.31 8.28 8.28
Unemployment Rate (%) 2.30 2.60 2.80 2.90 3.00 3.10 3.10
Population (millions) 1172.0 1185.0 1199.0 1211.0 1224.0 1236.0 1248.1
Source: APEC Members Economy Report