L1-China&39;s Economic Conditions(3)

IB9801401-12-06

China’s Economic Conditions

SUMMARY

Since the initiation of economic reformsin 1979, China has become one of the world’sfastest-growing economies. From 1979 to2005 China’s real GDP grew at an averageannual rate of 9.6%. Many economists spec-ulate that China could become the world’slargest economy at some point in the nearfuture, provided that the government is able tocontinue and deepen economic reforms, par-ticularly in regard to its inefficient state-owned enterprises (SOEs) and the state bank-ing system. In addition, China faces severalother difficult challenges, such as pollutionand growing income inequality that threatensocial stability.

Trade continues to play a major role inChina’s booming economy. In 2005, exportsrose by 28.4% to $762 billion, while importsgrew by 17.6% to $660 billion, producing a$102 billion trade surplus. China is now theworld’s third-largest trading economy after theUnited States and Germany. China’s tradeboom is largely the result of large inflows offoreign direct investment (FDI) into China,which totaled $61 billion in 2004 and anestimated $58 billion in 2005. Over half ofChina’s trade is accounted for by foreign-invested firms in China.

China experienced some inflationarypressures in 2004, fueled in part by specula-tion in real estate, over-investment in certainindustries, and rising costs for energy and rawmaterials. The government responded byraising interest rates and using administrativecontrols to slow investment in certain sectors.

Many economists contend that China’s policyof pegging its currency (the yuan), whichforces the government to trade yuan for dol-lars (to keep the peg at about 8.3 yuan to thedollar), could boost the level of inflation inChina at some point in the future. They alsocontend that the sharp increase in the mone-tary supply (due to the peg) may induce Chi-nese banks to make bad loan decisions andthus increase the level of non-performingloans. Secretary of Treasury John Snow statedthat China’s currency peg posed a risk to itseconomy and that of its trading partners. OnJuly 21, 2005, China announced that it wouldappreciate its currency to the dollar from 8.28to 8.11 and replace its dollar peg with “amanaged float exchange rate regime” withreference to a basket of currencies.

China’s economy continues to be a con-cern to U.S. policymakers. On the one hand,China’s economic growth presents hugeopportunities for U.S. exporters. On the otherhand, the surge in Chinese exports to theUnited States has put competitive pressures onmany U.S. industries. Many U.S. policy-makers have argued that greater efforts shouldbe made to pressure China to fully implementits WTO commitments and change variouseconomic policies deemed harmful to U.S.economic interests, such as its currency policyand its use of subsidies to support its state-owned firms. In addition, recent bids by Chi-nese state-owned firms to purchase variousU.S. firms have raised concerns among Mem-bers over the impact such acquisitions couldhave on U.S. national and economic security.