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Macroeconomics Eyeing China? Consider These Economic Indicators. International Markets Hong Kong vs. Mainland China: Understanding the Differences. Economy in Where We Work China publication. This page in: EN dropdown. Email Print. Tweet Share Share LinkedIn. Stumble Upon. For next year we expect growth to slow to 5. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact.
China's economy has enjoyed 30 years of explosive growth, making it the world's largest. The Chinese government's spending has been a significant driver of its growth. China's economy is measured by its gross domestic product. Here is China's growth rate by year, showing how it has slowed since the China fueled its former spectacular growth with massive government spending.
The government owns strategically important companies that dominate their industries. Government ownership allowed China to direct the companies to high-priority projects. China requires several things of foreign companies who want to do business in China or work with Chinese companies. One is that they often must share their technology.
Chinese companies use this knowledge to make the products themselves. The People's Bank of China, the nation's central bank, tightly controls the yuan to dollar value. It does this to manage the prices of exports to the United States. It wants them to be a little cheaper than those produced in America. It can achieve this because China's cost of living is lower than the developed world.
By managing its exchange rate, China can take advantage of this disparity. China's growth has reduced poverty. Only 3. Companies will try to sell to this market, the largest in the world, and tailor their products to Chinese tastes. Growth is making China a world economic leader. China is now the world's biggest producer of aluminum and steel. Chinese tech companies quickly became market leaders. Huawei is the world's top telecommunications equipment maker.
It is quickly becoming a world leader in developing 5G technology. Lenovo is a world-class maker of personal computers. Xiaomi is one of China's top smartphone brands. On May 10, , President Trump announced he was considering raising tariffs on nearly all remaining products from China. A protracted and escalating trade conflict between the United States and China could have negative consequences for the Chinese economy.
While China is a large and growing market for U. Since opening up to foreign trade and investment and implementing free-market reforms in , China has been among the world's fastest-growing economies, with real annual gross domestic product GDP growth averaging 9. China has become the world's largest economy on a purchasing power parity basis , manufacturer, merchandise trader, and holder of foreign exchange reserves.
As China's economy has matured, its real GDP growth has slowed significantly, from The Chinese government has embraced slower economic growth, referring to it as the "new normal" and acknowledging the need for China to embrace a new growth model that relies less on fixed investment and exporting, and more on private consumption, services, and innovation to drive economic growth.
Such reforms are needed in order for China to avoid hitting the "middle-income trap," when countries achieve a certain economic level but begin to experience sharply diminishing economic growth rates because they are unable to adopt new sources of economic growth, such as innovation.
The Chinese government has made innovation a top priority in its economic planning through a number of high-profile initiatives, such as "Made in China ," a plan announced in to upgrade and modernize China's manufacturing in 10 key sectors through extensive government assistance in order to make China a major global player in these sectors.
However, such measures have increasingly raised concerns that China intends to use industrial policies to decrease the country's reliance on foreign technology including by locking out foreign firms in China and eventually dominate global markets. In , the Trump Administration launched a Section investigation of China's innovation and intellectual property policies deemed harmful to U. China's growing global economic influence and the economic and trade policies it maintains have significant implications for the United States and hence are of major interest to Congress.
This report provides background on China's economic rise; describes its current economic structure; identifies the challenges China faces to maintain economic growth; and discusses the challenges, opportunities, and implications of China's economic rise for the United States.
C hina's rise from a poor developing country to a major economic power in about four decades has been spectacular. For example, it ranks first in terms of economic size on a purchasing power parity PPP basis, value-added manufacturing, merchandise trade, and holder of foreign exchange reserves.
China's rapid economic growth has led to a substantial increase in bilateral commercial ties with the United States. According to U. China is currently the United States' largest merchandise trading partner, its third-largest export market, and its largest source of imports. Many U. China's large-scale purchases of U. However, the emergence of China as a major economic power has raised concern among many U.
Some claim that China uses unfair trade practices such as an undervalued currency and subsidies given to domestic producers to flood U. Others contend that China's growing use of industrial policies to promote and protect certain domestic Chinese industries or firms favored by the government, and its failure to take effective action against widespread infringement and theft of U. IP-intensive industries. In addition, while China has become a large and growing market for U.
The Chinese government views a growing economy as vital to maintaining social stability. However, China faces a number of major economic challenges that could dampen future growth, including distortive economic policies that have resulted in overreliance on fixed investment and exports for economic growth rather than on consumer demand , government support for state-owned firms, a weak banking system, widening income gaps, growing pollution, and the relative lack of the rule of law in China.
The Chinese government has acknowledged these problems and has pledged to address them by implementing policies to increase the role of the market in the economy, boost innovation, make consumer spending the driving force of the economy, expand social safety net coverage, encourage the development of less-polluting industries such as services , and crack down on official government corruption. The ability of the Chinese government to implement such reforms will likely determine whether China can continue to maintain relatively rapid economic growth rates, or will instead begin to experience significantly lower growth rates.
China's growing economic power has led it to become increasingly involved in global economic policies and projects, especially infrastructure development.
If successful, China's economic initiatives could significantly expand export and investment markets for China and increase its "soft power" globally.
Prior to , China, under the leadership of Chairman Mao Zedong, maintained a centrally planned, or command, economy. A large share of the country's economic output was directed and controlled by the state, which set production goals, controlled prices, and allocated resources throughout most of the economy. During the s, all of China's individual household farms were collectivized into large communes. To support rapid industrialization, the central government undertook large-scale investments in physical and human capital during the s and s.
As a result, by nearly three-fourths of industrial production was produced by centrally controlled, state-owned enterprises SOEs , according to centrally planned output targets. Private enterprises and foreign-invested firms were generally barred.
A central goal of the Chinese government was to make China's economy relatively self-sufficient. Foreign trade was generally limited to obtaining those goods that could not be made or obtained in China. Such policies created distortions in the economy. Since most aspects of the economy were managed and run by the central government, there were no market mechanisms to efficiently allocate resources, and thus there were few incentives for firms, workers, and farmers to become more productive or be concerned with the quality of what they produced since they were mainly focused on production goals set by the government.
From to , China's per capita GDP on a purchasing power parity PPP basis, 7 a common measurement of a country's living standards, doubled. However, from to , Chinese living standards fell by In addition, the growth in Chinese living standards paled in comparison to those in the West, such as Japan, as indicated in Figure 2. Figure 1. Figure 2. In , shortly after the death of Chairman Mao in , the Chinese government decided to break with its Soviet-style economic policies by gradually reforming the economy according to free market principles and opening up trade and investment with the West, in the hope that this would significantly increase economic growth and raise living standards.
As Chinese leader Deng Xiaoping, the architect of China's economic reforms, put it: "Black cat, white cat, what does it matter what color the cat is as long as it catches mice?
Beginning in , China launched several economic reforms. The central government initiated price and ownership incentives for farmers, which enabled them to sell a portion of their crops on the free market. In addition, the government established four special economic zones along the coast for the purpose of attracting foreign investment, boosting exports, and importing high technology products into China.
Additional reforms, which followed in stages, sought to decentralize economic policymaking in several sectors, especially trade. Economic control of various enterprises was given to provincial and local governments, which were generally allowed to operate and compete on free market principles, rather than under the direction and guidance of state planning.
In addition, citizens were encouraged to start their own businesses. Additional coastal regions and cities were designated as open cities and development zones, which allowed them to experiment with free-market reforms and to offer tax and trade incentives to attract foreign investment. In addition, state price controls on a wide range of products were gradually eliminated.
Trade liberalization was also a major key to China's economic success. Removing trade barriers encouraged greater competition and attracted FDI inflows. China's gradual implementation of economic reforms sought to identify which policies produced favorable economic outcomes and which did not so that they could be implemented in other parts of the country, a process Deng Xiaoping reportedly referred to as "crossing the river by touching the stones.
Since the introduction of economic reforms, China's economy has grown substantially faster than during the pre-reform period, and, for the most part, has avoided major economic disruptions. This has meant that on average China has been able to double the size of its economy in real terms every eight years.
The global economic slowdown, which began in , had a significant impact on the Chinese economy. China's media reported in early that 20 million migrant workers had returned home after losing their jobs because of the financial crisis and that real GDP growth in the fourth quarter of had fallen to 6. From to , China's real GDP growth averaged 9. However, the rate of GDP growth declined slowed for the next six consecutive years, falling from Real GDP ticked up to 6.
Figure 3. Figure 4. Economists generally attribute much of China's rapid economic growth to two main factors: large-scale capital investment financed by large domestic savings and foreign investment and rapid productivity growth.
These two factors appear to have gone together hand in hand. Economic reforms led to higher efficiency in the economy, which boosted output and increased resources for additional investment in the economy. China has historically maintained a high rate of savings. However, most Chinese savings during this period were generated by the profits of SOEs, which were used by the central government for domestic investment.
Economic reforms, which included the decentralization of economic production, led to substantial growth in Chinese household savings as well as corporate savings.
As a result, China's gross savings as a percentage of GDP is the highest among major economies. The large level of domestic savings has enabled China to support a high level of investment. In fact, China's gross domestic savings levels far exceed its domestic investment levels, which have made China a large net global lender. Several economists have concluded that productivity gains i. The improvements to productivity were caused largely by a reallocation of resources to more productive uses, especially in sectors that were formerly heavily controlled by the central government, such as agriculture, trade, and services.
For example, agricultural reforms boosted production, freeing workers to pursue employment in the more productive manufacturing sector. China's decentralization of the economy led to the rise of non-state enterprises such as private firms , which tended to pursue more productive activities than the centrally controlled SOEs and were more market-oriented and more efficient.
Additionally, a greater share of the economy mainly the export sector was exposed to competitive forces. Local and provincial governments were allowed to establish and operate various enterprises without interference from the government. In addition, FDI in China brought with it new technology and processes that boosted efficiency. However, as China's technological development begins to converge with major developed countries i.
Several developing economies notably several in Asia and Latin America experienced rapid economic development and growth during the s and s by implementing some of the same policies that China has utilized to date to develop its economy, such as measures to boost exports and to promote and protect certain industries.
However, at some point in their development, some of these countries began to experience economic stagnation or much slower growth compared to previous levels over a sustained time, a phenomenon described by economists as the "middle-income trap. The World Bank classifies development levels of economies using a per capita gross national income GNI methodology. The Chinese government projects that China can cross the high-income threshold by It hopes to achieve this largely by making innovation a major source of future economic growth.
Skeptics contend that innovation growth in China will be hard to achieve, especially if it is mainly state-driven and imposes new restrictions on foreign firms,.
Figure 5. Notes: Bar in red indicates the level China would need to reach to become a high-income economy. For some years thereafter, EIU projects U. GDP growth to be greater than China's Figure 6. Figure 6. The Chinese government has indicated its desire to move away from its current economic model of fast growth at any cost to more "smart" economic growth, which seeks to reduce reliance on energy-intensive and high-polluting industries and rely more on high technology, green energy, and services.
China also has indicated it wants to obtain more balanced economic growth.
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