L1-China&39;s Economic Conditions(4)

MOST RECENT DEVELOPMENTS

On January 9, 2005, the Chinese National Bureau of Statistics made major revisions toits estimates of China’s GDP from 1993-2004. The new revisions indicate that China’seconomy grew significantly faster than previously recorded.

On November 21, 2005, the International Monetary Fund urged China to adopt greaterflexibility in its currency policy in order to obtain balanced growth and development and tohelp reduce global trade imbalances.

On July 21, 2005, the Chinese government announced major reforms to its currencypolicy. It stated that China’s currency (the renminbi or yuan) would no longer be pegged tothe dollar but instead would be a managed float regime with reference to a basket ofcurrencies (including the dollar), and that the exchange rate of the U.S. dollar against theyuan would be adjusted from 8.28 to 8.11 yuan per U.S. dollar, an appreciation of 2.1%.On June 22, 2005, CNOOC, a Chinese company, made a $18.5 billion bid to purchaseUnocal, a U.S. energy company. News of the bid raised concern among several Members,many of who contended that the deal threatened U.S. national security. On August 2, 2005,CNOOC withdrew its bid, citing strong political opposition in the United States. On January10, 2006, CNOOC announced it had reached $2.3 billion deal to purchase a 45% stake in ablock of offshore Nigerian oil fields.

BACKGROUND AND ANALYSIS

An Overview of China’s Economic Development

China’s Economy Prior to Reforms

Prior to 1979, China maintained a centrally planned, or command, economy. A largeshare of the country’s economic output was directed and controlled by the state, which setproduction goals, controlled prices, and allocated resources throughout most of the economy.During the 1950s, all of China’s individual household farms were collectivized into largecommunes. To support rapid industrialization, the central government undertook large-scaleinvestments in physical and human capital during the 1960s and 1970s. As a result, by 1978nearly three-fourths of industrial production was produced by centrally controlled state-owned enterprises according to centrally planned output targets. Private enterprises andforeign-invested firms were nearly nonexistent. A central goal of the Chinese governmentwas to make China’s economy relatively self-sufficient. Foreign trade was generally limitedto obtaining only those goods that could not be made or obtained in China.

Government policies kept the Chinese economy relatively stagnant and inefficient,mainly because there were few profit incentives for firms and farmers; competition wasvirtually nonexistent, and price and production controls caused widespread distortions in theeconomy. Chinese living standards were substantially lower than those of many other