China economy

Asia-Pacific Institute of Management
Academic Year
2014-2016
Project Report
On
Chinese Economy
Submiitttted To:: Submiitttted By::
Prroff.. Kewall Rajj Ashiima Pattwall 2K14G021
Devesh Siingh 2K14G033
Madhurr Goyall 2K14G049
Piiyush Pahujja 2K14G066
Prratthiik Kumarr 2K14G067
Riittiika Sharrma 2K14G077

INTRODUCTION
Since 20 years the Chinese economy has a very important role in the international scene,
and also continues to be subject of contrasting reviews.
The surface of China is 9,671,018 km square, making it the largest state in East Asia and
the population is approximately 20% of the world: China is the most populous country in
the world.
The importance of China in the XXI century is reflected in its role as second largest
economy to GDP after United States.
• China is also member of the many important institutions:
• United Nations, who has as one of his goals the achievement of international
cooperation in economic development.
• WTO, which aim to oversee a number of trade agreements between member
states, they representing approximately 97% of world trade in goods and services.
• APEC (Asia-Pacific Economic Cooperation): which aims to foster cooperation,
economic growth, free trade and investment in the Asia-Pacific
• ASEAN(Association of South-East Asian Nations):which the main purpose is to
promote cooperation and mutual assistance between member states to accelerate
economic progress and increased stability in the region of South-East Asia
• G20: that enclosing the most industrialized countries to encourage international
economic development by promoting new strategies and sustainable development.
With the introduction of economic reform based on capitalism, in 1978 China became
the country with the fastest economic development in the world. Also it is the second
largest exporter and third largest importer of goods.
There was a slow process of transformation in the Chinese economy, its institutions,
structure and regulations relating to the Financial sector. There were reforms in industry
and agriculture Also there were important and decisive initiatives to encourage foreign
investment: opening up to foreign countries and the introduction of the free market is so
central to the reform.

The reforms implemented have led to a "socialist market economy", a new economic
structure which combined socialism, which held the administrative and institutional
structure, an economic system which provided for the free market and free trade.
Over the last 20 years China has got an extremely high savings rate, averaging
around 40 %, Chinese economy has enjoyed one of the highest growth rates in the
world.
At the beginning of the nineties there was an incredible increase in GDP, from 4% in
1990 to 12.7% in 1994.In the ranking of GDP, in 2007 China surpassed Germany and in
2010 Japan. Of course the gap with the United State is still very large. In 2010, China is
expected to score a gross domestic product amounted to 5000 billion dollars, while the
U.S. is at an altitude of 15 thousand.In the last years the country has been able to rapidly
build up its capital stock and shift a massive pool of underutilized labour from the
subsistence-agriculture sector into higher-productivity activities that use capital.

THE HISTORY OF CHINA’S ECONOMIC DEVELOPMENT
China’s Economic Growth and Reforms: Prior to 1979
Prior to 1979, China, under the leadership of Chairman Mao Zedong, maintained a
centrally planned, or command, economy. A lar ge 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 1950s, 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 1960s and 1970s. As a result, by 1978 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 only those goods that could not be made or obtained in China.
Government policies kept the Chinese economy relatively stagnant and inefficient,
mainly because most aspects of the economy were managed and run by the central
government (and thus there were few profit incentives for firms, workers, and farmers),
competition was virtually nonexistent, foreign trade and investment flows were mainly
limited to Soviet bloc countries, and price and production controls caused widespread
distortions in the economy. Chinese living standards were substantially lower than those
of many other developing countries. The Chinese government in 1978 (shortly after the
death of Chairman Mao in 1976) 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.
China’s Economic Growth and Reforms: 1979-the Present
Beginning in 1979, 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 incenti ves to attract
foreign investment. In addition, state price controls on a wide range of products were
gradually eliminate d. Tr ade liber alization was also a major key to China’s economic
success. Removing trade barriers encouraged greater competition and at tracted foreign
direct investment (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.
Since the introduction of economic reforms, China’s economy has grown substantially
faster than during the pre-reform period. According to the Chinese government, from
1953 to 1978, real annual GDP growth was estimated at 6.7%, although many analysts
claim that Chinese economic data during this period are highly questionable because
government officials often exaggerated production levels for a variety of political
reasons. Economist Angus Madison estimated China’s average annual real GDP during
this period at 4.4%.
China has been able to double the size of its economy in real terms every eight years. The
global economic slowdown, which began in 2008, impacted the Chinese economy
(especially the export sector). China’s real GDP growth fell from 14.2% in 2007 to 9.6%
in 2008, and slowed to 9.2% in 2009. In response, the Chinese government implemented
a large economic stimulus package and an expansive monetary policy. These measures
boosted domestic investment and consumption and helped prevent a sharp economic
slowdown in China. From 2009 to 2011, China’s re al GDP growth averaged 9.6%.
China’s economy has slowe d in recent years—real GDP grew by 7.7 in 2012 and 2013.
The international Monetary Fund (IMF) has projected that China’s real GDP growth will
grow by 7.4% in 2014 and 7.1% in 2015.
China’s Achievements since the Reform and Opening in 1979:
China started its reform and opening in 1979 and achieved an annual growth rate of 9
percent between 1979 and 1990. At the end of that period and even up to early 2000s,
many scholars still believed that China could not continue that growth rate much longer
due to the lack of fundamental reforms.1 However, China’s annual growth rate during the
period 1990–2010 increased to 10.4 percent.
On the global economic scene, China’s growth since the reform and o pening started has
been unprecedented. This was a dramatic contrast with the depressing performance of
other transitional economies in Eastern Europe and the former Soviet Union.
As a result of the extraordinary performance, there has been a dramatic change in China’s
status in the global economy. When China embarked on its economic reform program in
1979, the world’s most populous country barely registered on the global economic scale,
commanding a mere 1.8 percent of global gross domestic product (GDP) (measured in
current U.S. dollars). Today, it is the world’s second-largest economy and produces 9.3

percent of global GDP China’s exports grew by 16 percent per ye ar from 1979 to 2009.
At the start of that period, China’s exports represented a mere 0.8 percent of global
exports of goods and nonfactor services. Now China is the largest exporter of goods in
the world, with 9.6 percent of the global share and an 8.4 percent share of goods and
nonfactor services.
In 1980, China was still a low-income country; in fact, its income per capita (measured in
purchasing power parity or PPP) was only 30 percent of the level of the average sub
Saharan African country.2 Today, its income per capita of $7,500 (in terms of PPP;
$4,400 in current dollars) is over three times the level of sub-Saharan Africa, and China
is well-established as a middle-income country Behind this growth, there has been a
dramatic structural transformation—in particular, rapid urbanization and
industrialization. At the start of economic reforms in the 1980s, China was primarily an
agrarian economy. Even in 1990, 73.6 percent of its population still lived in rural areas,
and primary products composed 27.1 percent of GDP. These shares declined to 27.1
percent for the rural population and 11.3 percent for primary products composition of
GDP in 2009. A similar change occurred in the composition of China’s exports. In 1984,
primary products and chemicals composed an important share of merchandise exports
(about 55 percent). Now, almost all of China’s e xports are manuf actures Accompanying
the change in the composition of China’s exports is the accumulation of foreign reserves.
In 1990, China’s foreign reserves were $11.1 billion USD, barely enough to cover 2.5
months of imports, and its reserves today exceed $3 trillion USD—the largest in the
world.

CAUSES OF CHINA’S ECONOMIC GROWTH
Economists generally attribute muc h of China’s r apid 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. When reforms were initiated in
1979, domestic savings as a percentage of GDP stood at 32%. 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 savings has enabled
China to substantially boost domestic investment. In f act, China’s gross domestic savings
levels far exceed its domestic investment levels, which have made China a large net
global lender.
Measuring the Size of China’s Economy
The rapid growth of the Chinese economy has led many analysts to speculate if and when
China will overtake the United States as the “world’s lar gest economic power.” The
“actual” size of China’s economy has been a subject of extensive de bate amo ng
economists. Measured in U.S. dollars using nominal e xchange r ates, China’s GDP in
2013 was $9.5 trillion, about 56% the size of the U.S. economy, according to the
IMF.The per capita GDP (a common meas urement of a countr y’s living standards) of
China was $6,959, which was 13% the size of U.S. levels.
Many economists contend that using nominal exchange rates to convert Chinese data (or
that of other countries) into U.S. dollars fails to reflect the true size of China’s economy
and living standards relative to the United States. Nominal exchange rates simply reflect
the prices of foreign currencies vis-à-vis the U.S. dollar and such measurements exclude
differences in the prices for goods and services across countries. To illustrate, one U.S.
dollar exchanged for local currency in China would buy more goods and services there
than it would in the United States. This is because prices for goods and services in China
are generally lower than they are in the United States. Conversely, prices for goods and
services in Japan are generally higher than they are in the United States (and China).
Thus, one dollar exchanged for local Japanese currency would buy fewer goods and
services there than it would in the United States. Economists attempt to develop estimates
of exchange rates based on their actual purchasing power relative to the dollar in order to

make more accurate comparisons of economic data across countries, usually referred to
as purchasing power parity (PPP).
The PPP exchange r ate increases the (estimated) meas urement of China’s economy and
its per capita GDP. According to the IMF which periodically does international price
surveys, prices for goods and services in China are about 56% the level they are in the
United States. Adjusting for this price differential raises the value of China’s 2013 GDP
from $9.5 trillion (nominal dollars) to $16.1 trillion (on a PPP basis).This would indicate
that China’s economy is 96% the size of the U.S. economy. China’s share of global GDP
on a PPP basis rose from 2.3% in 1980 to 15.8% in 2013 (the U.S. share of global GDP
on a PPP basis was 24.3% in 1980, but by 2013, had fallen to 16.5%).
The IMF October 2014 Economic Outlook report predicts that China will overtake the
United States to become the world’s largest economy in 2014 on a PPP basis, and that by
2019, China’s economy will be 21.3% lar ger than the U.S. economy. This would not be
the first time in history that China was the world’s largest economy.
The PPP me asureme nt also raises China’s 2013 nominal per capita GDP (from $6,959) to
$11,869, which was 22.4% of the U.S. level. The EIU projects that, even by the year
2030, U.S. living standards will be close to three times greater than those in China. Thus,
although China could become the world’s largest economy in a few years on a PPP basis,
it will likely take many years for its living standards to approach U.S. levels.
Source: CIA Factbook

China as the World’s Largest Manufacturer
China has emer ged as the world’s largest manuf acturer according to the United Nations.
In 2012, the value of China’s manuf acturing o n a gross value added basis was 28.2%
higher than that in the United States. Manufacturing plays a considerabl y more important
role in the Chinese economy than it does for the United States and Japan. In 2011,
China’s gross valued added manufacturing was equal to 30.5% of GDP, compare d to
12.3% for the United States and 18.7% for Japan. In its 2013 Global Manufacturing
Competitiveness Index, Deloitte (an international consulting firm) ranked China first in
manufacturing in 2013 and projected it would remain so in five years (the United States
ranked third in 2013 and was projected to rank fifth in 2018). The report stated that
“China’s competitive ness is bolstered by conducive policy enviro nment either
encouraging or directly funding investments in science and technology, employee
education and infrastructure de velopme nt,” and further stated that “the landscape for
competitive manufacturing is in the midst of a massive power shift, in which twentieth-century
manufacturing stalwarts like the United States, Germany and Japan will be
challenged to maintain their competitive edge to emerging nations, including China.”

China as Global Player
Thirty years ago China launched economic reforms that would transform the country and
its place in the world. At a speed no one could have predicted even a decade ago, the
nation has re-emerged as a global player on multiple fronts.
Consider China's progress in technology. As the Annual Meeting of the New Champions
2008 was getting underway in Tianjin, a Chinese astronaut was making the nation's first -
ever space walk. On the diplomatic front, Beijing's hosting of the 29th Olympic Games in
August was regarded as a major success, despite some critical overseas coverage at the
outset. But it is in the arena of economics that China's gains are most apparent.
Prior to travelling to Tianjin to deliver the opening address at the Annual Meeting of the
New Champions, Premier Wen Jiabao spoke before the UN General Assembly in New
York of China's ongoing efforts to fulfill the Millennium Development Goals. "China has
brought down the number of people in absolute poverty from 250 million to 15 million in
less than 30 years," he said. With its economic achievements well certified, China now
stands as a haven of economic stability at a time when the US and other developed
economies are engulfed in financial turmoil and entering what could be a prolonged
recession.
More important, its longer term economic outlook appears strong, underpinned by an
expanding middle class and growing investments in technology. China's export -led
economy is certainly not immune to a global slowdown that originates from the US credit
crunch and liquidity crisis.
Liu Mingkang, Chairman of the China Banking Regulatory Commission, predicted GDP
growth could slide from 11% to 9%. However, even if exports fall, Chinese firms can
expect to profit from the country's growing consumer market.
One of Beijing's top priorities in recent years has been to wean the economy off its
reliance on exports and encourage the growth of the domestic market. As Alibaba
Chairman and Chief Executive Officer Jack Ma Yun said, "the future of China is
domestic demand and consumption."

The government is also seeking to transform China from a country best known for its
low-cost manufacturing to one respected for its innovative capacity. "The most important
thing for China is human intellectual capital," said Guo Shuqing, Chairman of China
Construction Bank.
"In the coming 10 to 20 years, we will have to transform to an innovation-driven growth
model." China has already emerged as a preferred destination for R&D investment, both
foreign and domestic. Beijing has set a goal to increase national spending on R&D from
1.4% of GDP in 2005 to 2.5% by 2020. Domestic technology leaders predict that in the
next decade, China will for the first time create globally relevant technology standards.
China's sturdy economic fundamentals and high ambitions are all the more striking
against the current backdrop of financial turbulence in the West.
In light of the nation's nearly US$ 2 trillion in foreign reserves and its US$ 200 billion
sovereign wealth fund, it is no surprise that some foreigners perceive China as a potential
economic savior amid deepening global troubles. Indeed, one near-term challenge for
China will be managing international expectations about just how much help it will be
able to provide to the rest of the world.
Its own leaders view China still as a developing country that needs time to mature – a
nation hardly prepared to assume the mantle of global leader. They are also wary of the
political blowback that can come with any attention grabbing moves. But those who point
to China's rapid ascent up the global economic rankings are less patient as they see the
country as possessing characteristics of both an industrialized and developing economy.
There is perhaps no better indicator of China's growing clout than the recent calls for it to
become more active in global governance institutions. "I think with this flat world in
which we live, China has a bigger role to play in line with its current position as one of
the leading countries of the world," said Publicis Group Chairman and Chief Executive
Officer Maurice Lévy. Some have gone so far as to argue that China risks becoming a
"free rider" on the international stage, reaping the benefits of its growing international
influence without playing as active a role in shaping the global financial and geopolitical
agenda as it should.

That said, the Group of Seven economies has yet to expand its roster to include on a
permanent basis major emerging economies such as Russia, Brazil, India and China in its
regular deliberations on global economic governance.
Yet there also remains a strong consensus among Chinese elites that the nation is not yet
ready to take up the responsibilities of the developed world. In their view, maintaining
stability at home remains top priority. Presiding over the next stage of reforms in this
highly complex and diverse country is task enough for now. "What China can do is
maintaining the momentum of sustained growth and avoid ups and downs," said Premier
Wen Jiabao. "That would be our most important contribution to global stability.

CHINA & MULTIPOLAR GROWTH WORLD
It is important to place this moment in history in a broader historical context. After the
Industrial Revolution, the world was polarized. Growth in industrialized countries
accelerated. Later in the 20th century, a few developing economies in East Asia were able
to accelerate growth, and they caught up with the industrialized countries. Most other
developing countries failed to have sustained and accelerated growth. As a result, there is
a great divergence between the developed and developing countries.
Given this history, the global economy was dominated by the G-7 economies consistently
throughout the latter half of the 20th century. At market exchange rates, the G-7
represented about two-thirds of the global economy. Even accounting for purchasing
power parity, half of global income was concentrated in the G-7.
With the rapid growth in the past 20 years, China has become a major driving force for
the emergence of a multipolar growth world. In the 1980s and the 1990s, except for
China, the other top five contributors to the growth of global GDP were all members of
the G-7 industrialized countries, and China’s contributions were respectively 13.4 percent
and 26.7 percent of the contributions of the United States in those two decades. However,
in the decade beginning in 2000, China became the top contributor to the growth of
global GDP. Among the G-7 countries only the United States and Japan remained in the
top-five list, and China’s contribution exceeded that of the United States by 4 percentage
points. A multipolar growth world emerged in the 21st century, with many of the new
growth poles in emerging market economies.
In addition, the Chinese government and Chinese firms will also provide funds for natural
resource and infrastructure investment in emerging markets and low-income countries.
This is already happening, and it is likely to continue into the future. In particular, there is
a growing role for Chinese finance in the African region—the developing region with the
most constrained access to finance.

FOREIGN DIRECT INVESTMENT (FDI) IN CHINA
China’s trade and investment reforms and incentives led to a s urge in FDI be ginning in
the early 1990s. Suc h flows have been a major source of China’s productivity gains and
rapid economic and trade growth. There were reportedly 445,244 foreign-invested
enterprises (FIEs) registered in China in 2010, employing 55.2 million workers or 15.9%
of the ur ban workforce.FIEs account for a significant share of China’s industrial output.
That level rose from 2.3% in 1990 to a high of 35.9% in 2003, but fell to 25.9% as of
2011.In addition, FIEs are responsible for a significant le vel of China’s foreign tr ade. In
2013, FIEs in China accounted for 47.3% of China’s exports and 44.8% of its imports,
although this le vel was down from its peak in 2006 when FIEs ’ share of Chinese exports
and imports was 58.2% and 59.7%, respectively.FIEs in China dominate China’s high
technology exports. From 2002 to 2010, the s hare of China’s high tech exports by FIEs
rose from 79% to 82%. During the same period, the s hare of China’s high tech exports by
wholly owned foreign firms (which excludes foreign joint ventures with Chinese firms)
rose from 55% to 67%.
According to the United Nations, annual FDI flows to China grew from $2 billion in
1985 to an estimated $121 billion in 2013 and may have reached $127 billion in 2013.
The U.N. further estimates the stock of FDI in China through 2012 at $832.9 billion.
China was the world’s second-largest destination for FDI flows in 2013 (after the United
States).According to Chinese government data o n non-financial FDI inflows, the largest
sources of cumulative FDI in China for 1979-2013 were Hong Kong (47.0%),the British
Virgin Islands(BVI), Japan, the United States, and Taiwan. The largest sources of non-financial
FDI inflows into China in 2013 were Hong Kong (67% of total), Singapore,
Japan, Taiwan, and The United States. According to Chinese data, annual U.S. non-financial
FDI flows to China peaked at $5.4 billion in 2002 (10.2% of total FDI in
China). In 2013, they were $3.4 billion or 2.9% of total FDI flows to China. The stock of
U.S. non-financial FDI in China (based on Chinese data) was $74.6 billion through 2013.

IMPORT-EXPORT WITH OUTSIDE WORLD
The vast majority of China's imports consists of industrial supplies and capital goods,
notably machinery and high-technology equipment, the majority of which comes from
the developed countries, primarily Japan and the United States.
Regionally, almost half of China's imports come from East and Southeast Asia, and about
one-fourth of China's exports go to the same destinations. About 80 percent of China's
exports consist of manufactured goods, most of which are textiles and electronic
equipment, with agricultural products and chemicals constituting the remainder. Out of
the five busiest ports in the world, three are in China.
Exports of goods and services represent the value of all goods and other market services
provided to the rest of the world. They include the value of merchandise, freight ,
insurance, transport, travel, royalties, license fees, and other services, such as
communication, construction, financial, information, business, personal, and government
services. They exclude compensation of employees and investment income (formerly
called factor services) and transfer payments.
Imports of goods and services represent the value of all goods and other market services
received from the rest of the world. They include the value of merchandise, freight,
insurance, transport, travel, royalties, license fees, and other services, such as
communication, construction, financial, information, business, personal, and government
services. They exclude compensation of employees and investment income (formerly
called factor services) and transfer payments.

CHINA’S MERCHANDISE TRADE PATTERNS
Economic reforms and trade and investment liberalization have helped transform China
into a major trading power. Chinese merchandise exports rose from $14 billion in 1979 to
$2.2 trillion in 2013, while merchandise imports grew from $18 billion to $1.9 trillion.
From 1990 to 2013, the annual growth of China’s exports and imports averaged 18.5%
and 17.3%, respectively. China’s exports and imports in 2013 grew by 7.8% and 7.3%,
respectively. During the first half of 2014, China’s exports and imports grew by 0.9% and
1.7% o ver s ame period in 2013. China’s merchandise trade sur plus grew shar ply from
2004 to 2008, rising from $32 billion to $297 billion. That surplus fell each year from
2009 to 2011, dropping to $158 billion. Howe ver, in 2012, China’s trade sur plus rose to
$233 billion, and in 2013 it increased to $261 billion.
In 2009, China o vertook Germany to become both the world’s lar gest merchandise
exporter and the second-largest merchandise importer (after the United States). In 2012,
China o vertook the United States as the world’s lar gest merchandise trading economy.
China’s share of global merchandise exports more than tripled from 2000 to 2013, rising
from 3.8% to 12.1%; the World Bank projects this figure could increase to 20% by
2030.Merchandise trade surpluses, large-scale foreign investment, and large purchases of
foreign currencies to maintain its exchange rate with the dollar and other currencies have
enabled China to become by far the world’s largest holder of foreign exc hange reserves at
nearly $3.9 trillion as of March 2014.

FUTURE PROSPECTS IN COMING 20 YEARS
Looking forward, China can still rely on the advantage of backwardness, and it has the
potential to maintain dynamic growth for another 20 years or more because of the
following reasons:
1. In 2008, China’s per capita income was 21 percent of U.S. per c apita income
measured in PPP.5 The income gap between China and the United States indicates
that there is still a large technological gap between China and industrialized
countries. China can continue to enjoy the advantage of backwardness before
closing up the gap.
2. Maddison’s (2010) estimation shows that China’s current relative status to the
United States is similar to that of Japan’s in 1951, Korea’s in 1977, and Taiwan’s
in 1975. The annual growth rate of GDP grew 9.2 percent in Japan between 1951
and 1971, 7.6 percent in Korea between 1977 and 1997, and 8.3 percent in Taiwan
between 1975 and 1995. China’s de velopment strategy after the reform in 1979 is
similar to that of Japan, Korea, and Taiwan. China has the potential to achieve
another 20 years of 8 percent growth. By that time, China’s per capita income
measured in PPP may reach about 50 percent of U.S. per capita income. (Note that
Japan’s per capita meas ured in PPP was 65.6 percent of that of the United States in
1971, Korea’s was 50.2 percent in 1997, and Taiwan’s was 54.2 percent in 1995.)
Measured by PPP, China’s economic size may the n be twice as lar ge as that of the
United States; and measured by market exchange rates, China may be at least the
same size as the United States.

MAJOR LONG-TERM CHALLENGES
FACING THE CHINESE ECONOMY
Over the last three years, the global economy has witnessed its most tumultuous times
since the Great Depression. The impressive coordinated policy response of the G-20
nations has helped the world avoid the worst possible scenario. Economic activity started
to recover around the world in 2009. Global GDP performance improved from a
contraction of 2 percent in 2009 to a growth of 4.2 percent in 2010, and a projected
growth of 2.7 percent in 2011.
However, we are observing a two-speed recovery. On the one hand, high income
countries’ growth rates in 2010 and 2011 are estimated 3.1 percent and only 1.6 percent,
respectively—far below the historical average following other crises. On the other hand,
developing countries have been growing at 7.6 percent in 2010 and are likely to be at 6.0
percent in 2011, much faster than advanced countries and returning to their pre-crisis
rates. Developing countries, especially China and India, but others too, have increasingly
become engines of the world economy growth.
China’s economy has shown remar kable growth o ver the past se ve ral years, and many
economists project that it will enjoy fairly healthy growth in the near future. However,
economists caution that these projections are likely to occur only if China continues to
make major reforms to its economy. Failure to implement such reforms could endanger
future growth. The y note that China’s current economic model has resulted in a number
of negative economic (and social) outcomes, such as over-reliance on fixed investment
and exporting for its economic growth, extensive inefficiencies that exist in many sectors
(due largely to government industrial policies), wide-spread pollution, and growing
income inequality, to name a few. Many of China’s economic problems and challenges
stem from its incomplete transition to a free market economy and from imbalances that
have resulted from the government’s goal of economic growth at all costs.
1. China’s Incomplete Transition to a Market Economy
Despite China’s three-decade history of widespread economic reforms, Chinese officials
contend that China is a “socialist-mar ket economy.” This appears to indicate that the
government accepts and allows the use of free market forces in a number of areas to help
grow the economy, but the go ver nment still plays a major role in the country’s economic
development.
2. Industrial Policies and SOEs

According to the World Bank, “China has become one of the world’s most active users of
industrial policies and administrations.”According to one estimate, China’s SOEs may
account for up of 50% of non-agriculture GDP.In addition, although the number of SOEs
has declined sharply, they continue to dominate a number of sectors (such as petroleum
and mining, telecommunications, utilities, transportation, and various industrial sectors);
are shielded from competition; are the main sectors encouraged to invest overseas; and
dominate the listings on China’s stock indexes. One study found that SOEs constituted
50% of the 500 largest manufacturing companies in China and 61% of the top 500
service sector enterprises. It is estimated that there were 154,000 SOEs as of 2008, and
while these accounted for only 3.1% of all enterprises in China, they held 30% of the
value of corporate assets in the manufacturing and services sectors.
3. The Banking System
China’s banking s ystem is largely controlled by the central go ver nme nt, which attempts
to ensure that capital (credit) flows to industries deemed by the government to be
essential to China’s economic de velo pme nt. SOEs are belie ved to receive preferential
credit treatment by government banks, while private firms must often pay higher interest
rates or obtain credit elsewhere.
According to one estimate, SOEs accounted for 85% ($1.4 trillion) of all bank loans in
2009.In addition; the government sets interest rates for depositors at very low rates, often
below the rate of inflation, which keeps the price of capital relatively low for firms.
4. An Undervalued Currency
China does not allow its currency to float and therefore must make large-scale purchases
of dollars to keep the exchange rate within certain target levels. Although the renminbi
(RMB) has appreciated against the dollar in real terms by about 40% since reforms were
introduced in July 2005, some analysts contend that it remains highly undervalued.
China’s undervalued currency makes its exports less expensive, and its imports more
expensive, than would occur under a floating exchange rate system. In order to maintain
its exchange rate target, the government must purchase foreign currency (such as the
dollar) by expanding the money supply. This makes it much more difficult for the
government to use monetary policy to combat inflation.
5. Overdependence on Exporting and Fixed Investment
2009 IMF report estimated that fixed investment related to tradable goods plus net
exports together accounted for o ver 60% of China’s GDP growth from 2001 to 2008 (up
from 40% from 1990 to 2000), which was significantly higher than in the G-7 countries
(16%), the euro area (30%), and the rest of Asia (35%).

6. Growing Pollution
China’s economic growth model has emphasized the growth of heavy industry in China,
much of which is energy-intensive and high polluting. The level of pollution in China
continues to worsen, posing serious health risks to the population. The Chinese
government often disregards its own environmental laws in order to promote rapid
economic growth.
7. Corruption and the Relative Lack of the Rule of Law
The relative lack of the rule of law in China has led to widespread government
corruption, financial speculation, and misallocation of investment funds. In many cases,
government “connections,” not market forces, are the main determinant of successful
firms in China. Many U.S. firms find it difficult to do business in China because rules
and regulations are generally not consistent or transparent, contracts are not easily
enforced, and intellectual property rights are not protected (due to the lack of an
independent judicial system).

PLANS ANNOUNCED BY THE CHINESE GOVT. TO
REFORM AND RESTRUCTURE THE ECONOMY
1. The Central Government Five-Year Plans
China’s last two five-year plans (FYP), the 11th FYP (2006-2010) and the 12th FYP (2011-
2015), have placed strong emphasis on promoting consumer demand, addressing income
disparities (such as by boosting spending on social safety net programs), boosting energy
efficiency, reducing pollution, improving the rule of law, and deepening economic
reforms. Those plans have also identified a number of industries and technologies that the
government has targeted for
Development.
2. The Drive for “Indigenous Innovation”
Many of the industrial policies that China has implemented or formulated since 2006
appear to stem largely from a comprehensive document issued by China’s State Council
(the highest executive organ of state power) in 1996 titled
The National Medium-and Long-Term Program for Science and Technology
Development (2006-2020), often referred to as the MLP. The MLP appears to represent
an ambitious plan to modernize the structure of China’s economy by
Transforming it from a global center of low-tech manufacturing to a major center of
innovation (by the year 2020) and a global innovation leader by 2050. As some observers
describe it, China wants to go from a model of “made in China” to “innovate in China.” It
also seeks to sharply reduce the country’s dependence on foreign technology.

COMPARISON BETWEEN
CHINA AND INDIA ECONOMY
This is a comparative study of China and India, two of the most populous
Countries of the world, and which combine to constitute nearly one-third of the world’s
population. Both India and China have undertaken fairly extensive economic reform
policies during the past two decades.
Since the adoption of economic reform policies in 1978, China’s economic growth
performance has been truly dramatic. Similarly, in terms of social progress, welfare and
poverty reduction, Chinese performance has been quite remarkable in the last two
decades. On the other hand, in India, the second most populous country and largest
democracy in the world, growth performance since the initiation of economic reform
policies in 1991 has been relatively modest, falling behind on many fronts relative to the
Chinese performance indicators. Figure 1 shows trends o ver the past dec ade of China’s
GDP per capita vis-à-vis India’s , where the impro vement has been much less fast.3 It is
evident that until the 1990s, GDP per capita (PPP international dollars) in China and
India was at very similar levels, but since then China accelerated phenomenally leaving
India far behind in the race.
However, development indicators such as adult literacy rates and life expectancy show
that India is still behind China in absolute levels. For example, the adult literacy rate in
China rose from 67% in 1980 to 93% in 2007. In India, the adult literacy rate increased
from 41% in 1980 to 64% in 2007. This clearly shows that India’s recent figure for adult
literacy rate is still below China’s literacy rate of 1980. A similar trend c an be obser ved
in life expectancy figures. Chinese life expectancy grew from 66 years in 1980 to about
72 years in 2007, while India’s life expectanc y grew from 54 years in 1980 to abo ut 65
years in 2007. So, India’s life expectancy is still below China’s 1980 level.
Hence, the essential inspiration behind this paper is to compare and understand China and
India’s differential le vel of de velo pment performance. I intend to discuss the results at the
national and regional level performance so as to see how far the policy changes can
contribute to the difference in development dividend in China and India
Since the late 1970s China has moved from a closed, centrally planned system to a more
market-oriented one that plays a major global role - in 2010 China became the world's
largest exporter. Reforms began with the phasing out of collectivized agriculture, and
expanded to include the gradual liberalization of prices, fiscal decentralization, increased
autonomy for state enterprises, growth of the private sector, development of stock
markets and a modern banking system, and opening to foreign trade and investment.
China has implemented reforms in a gradualist fashion. In recent years, China has

renewed its support for state-owned enterprises in sectors considered important to
"economic security," explicitly looking to foster globally competitive industries. Af ter
keeping its currency tightly linked to the US dollar for years, in July 2005 China moved
to an exchange rate system that references a basket of currencies. From mid 2005 to late
2008 cumulative appreciation of the renminbi against the US dollar was more than 20%,
but the exchange rate remained virtually pegged to the dollar from the onset of the global
financial crisis until June 2010, when Beijing allowed resumption of a gradual
appreciation and expanded the daily trading band within which the RMB is permitted to
fluctuate. The restructuring of the economy and resulting efficiency gains have
contributed to a more than tenfold increase in GDP since 1978. Measured on a
purchasing power parity (PPP) basis that adjusts for price differences, China in 2013
stood as the second-largest economy in the world after the US, having surpassed Japan in
2001. The dollar values of China's agricultural and industrial output each exceed those of
the US; China is second to the US in the value of services it produces. Still , per capita
income is below the world average. The Chinese government faces numerous economic
challenges, including: (a) reducing its high domestic savings rate and correspondingly
low domestic consumption; (b) facilitating higher-wage job opportunities for the aspiring
middle class, including rural migrants and increasing numbers of college graduates; (c)
reducing corruption and other economic crimes; and (d) containing environmental
damage and social strife related to the economy's rapid transformation. Economic
development has progressed further in coastal provinces than in the interior, and by 2011
more than 250 million migrant workers and their dependents had relocated to urban areas
to find work. One consequence of population control policy is that China is now one of
the most rapidly aging countries in the world. Deterioration in the environment - notably
air pollution, soil erosion, and the steady fall of the water table, especially in the North -
is another long-term problem. China continues to lose arable land because of erosion and
economic development. The Chinese government is seeking to add energy production
capacity from sources other than coal and oil, focusing on nuclear and alternative energy
development. Several factors are converging to slow China's growth, including debt
overhang from its credit-fueled stimulus program, industrial overcapacity, inefficient
allocation of capital by state-owned banks, and the slow recovery of China's trading
partners. The government's 12th Five-Year Plan, adopted in March 2011 and reiterated at
the Communist Party's "Third Plenum" meeting in November 2013, emphasizes
continued economic reforms and the need to increase domestic consumption in order to
make the economy less dependent in the future on fixed investments, exports, and heavy
industry. However, China has made only marginal progress toward these rebalancing
goals. The new government of President XI Jinping has signaled a greater willingness to
undertake reforms that focus on China's long-term economic health, including giving the
market a more decisive role in allocating resources.
India is developing into an open-market economy, yet traces of its past autarkic policies
remain. Economic liberalization measures, including industrial deregulation, privatization
of state-owned enterprises, and reduced controls on foreign trade and investment, began

in the early 1990s and served to accelerate the country's growth, which averaged under
7% per year from 1997 to 2011. India's diverse economy encompasses tradi tional village
farming, modern agriculture, handicrafts, a wide range of modern industries, and a
multitude of services. Slightly less than half of the work force is in agriculture, but,
services are the major source of economic growth, accounting for near ly two-thirds of
India's output with less than one-third of its labor force. India has capitalized on its large
educated English-speaking population to become a major exporter of information
technology services, business outsourcing services, and software workers. India's
economic growth began slowing in 2011 because of a decline in investment, caused by
high interest rates, rising inflation, and investor pessimism about the government's
commitment to further economic reforms and about the global situation. In late 2012, the
Indian Government announced additional reforms and deficit reduction measures,
including allowing higher levels of foreign participation in direct investment in the
economy. The outlook for India's long-term growth is moderately positive due to a young
population and corresponding low dependency ratio, healthy savings and investment
rates, and increasing integration into the global economy. However, India has many
challenges that it has yet to fully address, including poverty, corruption, violence and
discrimination against women and girls, an inefficient power generation and distribution
system, ineffective enforcement of intellectual property rights, decades-long civil
litigation dockets, inadequate transport and agricultural infrastruct ure, limited non-agricultural
employment opportunities, high spending and poorly-targeted subsidies,
inadequate availability of quality basic and higher education, and accommodating rural -
to-urban migration. Growth in 2013 fell to a decade low, as India's economic leaders
struggled to improve the country's wide fiscal and current account deficits. Rising
macroeconomic imbalances in India and improving economic conditions in Western
countries, led investors to shift capital away from India, prompting a sharp depreciation
of the rupee. However, investors' perceptions of India improved in early 2014, due to a
reduction of the current account deficit and expectations of post -election economic
reform, resulting in a surge of inbound capital flows and stabilization of the rupee.
China India
GDP
(purchasing
power parity)
$13.39 trillion (2013 est.)
note: data are in 2013 US
dollars
dollars
GDP - real
growth rate
7.7% (2013 est.)
7.7% (2012 est.)
3.2% (2013 est.)
5.1% (2012 est.)

China India
9.3% (2011 est.) 7.5% (2011 est.)
GDP - per capita
(PPP)
$9,800 (2013 est.)
$9,100 (2012 est.)
$8,300 (2011 est.)
dollars
$4,000 (2013 est.)
$3,900 (2012 est.)
$3,800 (2011 est.)
dollars
GDP -
composition by
sector
agriculture: 10%
industry: 43.9%
services: 46.1%
(2013 est.)
agriculture: 17.4%
industry: 25.8%
services: 56.9% (2013 est.)
Population
below poverty
line
6.1%
note: in 2011, China set a new
poverty line at RMB 2300
(approximately US $3,630)
(2013)
29.8% (2010 est.)
Household
income or
consumption by
percentage share
lowest 10%: 1.7%
highest 10%: 30%
note: data are for urban
households only (2009)
lowest 10%: 3.6%
highest 10%: 31.1% (2005)
Inflation rate
(consumer
prices)
2.6% (2013 est.)
2.6% (2012 est.)
9.6% (2013 est.)
9.7% (2012 est.)
Labor force 797.6 million
note: by the end of 2012,
China's population at working
age (15-64 years) was 1.0040
billion (2013 est.)
487.3 million (2013 est.)
Labor force - by
occupation
agriculture: 33.6%
industry: 30.3%
services: 36.1%
(2012 est.)
agriculture: 49%
industry: 20%
services: 31% (2012 est.)

China India
Unemployment
rate
4.1% (2013 est.)
4.1% (2012 est.)
note: data are for registered
urban unemployment, which
excludes private enterprises and
migrants
8.8% (2013 est.)
8.5% (2012 est.)
Distribution of
family income -
Gini index
47.3 (2013)
47.4 (2012)
36.8 (2004)
37.8 (1997)
Budget revenues: $2.118 trillion
expenditures: $2.292 trillion
(2013 est.)
revenues: $181.3 billion
expenditures: $281.6 billion
(2013 est.)
Industries world leader in gross value of
industrial output; mining and ore
processing, iron, steel,
aluminum, and other metals,
coal; machine building;
armaments; textiles and apparel;
petroleum; cement; chemicals;
fertilizers; consumer products
(including footwear, toys, and
electronics); food processing;
transportation equipment,
including automobiles, rail cars
and locomotives, ships, aircraft;
telecommunications equipment,
commercial space launch
vehicles, satellites
textiles, chemicals, food
processing, steel, transportation
equipment, cement, mining,
petroleum, machinery, software,
pharmaceuticals
Industrial
production
growth rate
7.6% (2013 est.) 0.9% (2013 est.)
Agriculture -
products
world leader in gross value of
agricultural output; rice, wheat,
potatoes, corn, peanuts, tea,
millet, barley, apples, cotton,
rice, wheat, oilseed, cotton, jute,
tea, sugarcane, lentils, onions,
potatoes; dairy products, sheep,
goats, poultry; fish

China India
oilseed; pork; fish
Exports $2.21 trillion (2013 est.)
$313.2 billion (2013 est.)
$296.8 billion (2012 est.)
Exports -
commodities
electrical and other machinery,
including data processing
equipment, apparel, radio
telephone handsets, textiles,
integrated circuits
petroleum products, precious
stones, machinery, iron and
steel, chemicals, vehicles,
apparel
Exports -
partners
Hong Kong 17.4%, US 16.7%,
Japan 6.8%, South Korea 4.1%
(2013 est.)
UAE 12.3%, US 12.2%, China
5%, Singapore 4.9%, Hong
Kong 4.1% (2012)
Imports $1.95 trillion (2013 est.)
$467.5 billion (2013 est.)
$488.9 billion (2012 est.)
Imports -
commodities
electrical and other machinery,
oil and mineral fuels; nuclear
reactor, boiler, and machinery
components; optical and
medical equipment, metal ores,
motor vehicles; soybeans
crude oil, precious stones,
machinery, fertilizer, iron and
steel, chemicals
Imports -
partners
South Korea 9.4%, Japan 8.3%,
Taiwan 8%, United States 7.8%,
Australia 5%, Germany 4.8%
(2013 est.)
China 10.7%, UAE 7.8%, Saudi
Arabia 6.8%, Switzerland 6.2%,
US 5.1% (2012)
Debt - external $863.2 billion (31 December
2013 est.)
$737 billion (31 December 2012
est.)
$412.2 billion (31 December
2013 est.)
2012 est.)
Exchange rates Renminbi yuan (RMB) per US
dollar -
Indian rupees (INR) per US
dollar -

China India
6.2 (2013 est.)
6.3123 (2012 est.)
6.7703 (2010 est.)
6.8314 (2009)
6.9385 (2008)
58.68 (2013 est.)
53.437 (2012 est.)
45.726 (2010 est.)
48.405 (2009)
43.319 (2008)
Fiscal year calendar year 1 April - 31 March
Public debt 22.4% of GDP (2013 est.)
26.1% of GDP (2012)
note: official data; data cover
both central government debt
and local government debt,
which China's National Audit
Office estimated at RMB 10.72
trillion (approximately US$1.66
trillion) in 2011; data exclude
policy bank bonds, Ministry of
Railway debt, China Asset
Management Company debt,
and non-performing loans
51.8% of GDP (2013 est.)
51.7% of GDP (2012 est.)
note: data cover central
government debt, and exclude
debt instruments issued (or
owned) by government entities
other than the treasury; the data
include treasury debt held by
foreign entities; the data exclude
debt issued by subnational
entities, as well as intra-governmental
debt; intra-governmental
debt consists of
treasury borrowings from
surpluses in the social funds,
such as for retirement, medical
care, and unemployment; debt
instruments for the social funds
are not sold at public auctions
Reserves of
foreign
exchange and
gold
$3.821 trillion (31 December
2013 est.)
2012 est.)
est.)
est.)
Current Account
Balance
$182.8 billion (2013 est.)
$215.4 billion (2012 est.)
-$74.79 billion (2013 est.)
-$91.47 billion (2012 est.)
GDP (official
exchange rate)
$9.33 trillion
note: because China's exchange
rate is determine by fiat, rather
than by market forces, the

China India
official exchange rate measure
of GDP is not an accurate
measure of China's output; GDP
at the official exchange rate
substantially understates the
actual level of China's output
vis-a-vis the rest of the world; in
China's situation, GDP at
purchasing power parity
provides the best measure for
comparing output across
countries (2013 est.)
Stock of direct
foreign
investment - at
home
2012 est.)
2011 est.)
$310 billion (30 November 2013
est.)
2012 est.)
Stock of direct
foreign
investment -
abroad
est.)
2012 est.)
2013 est.)
2012 est.)
Market value of
publicly traded
shares
2013 est.)
2012)
2011 est.)
2012 est.)
2011)
2010 est.)
Central bank
discount rate
2.25% (31 December 2013 est.)
2.25% (31 December 2012 est.)
7.75% (31 December 2013 est.)
8% (31 December 2010 est.)
note: this is the Indian central
bank's policy rate - the
repurchase rate
Commercial
bank prime
lending rate
5.73% (31 December 2013 est.)
6% (31 December 2012 est.)
10.6% (31 December 2013 est.)
10.63% (31 December 2012
est.)

China India
Stock of
domestic credit
2013 est.)
2012 est.)
2013 est.)
2012 est.)
Stock of narrow
money
2013 est.)
2012 est.)
2013 est.)
2012 est.)
Stock of broad
money
2013 est.)
2012 est.)
2013 est.)
2012 est.)
Taxes and other
revenues
19.4% of GDP (2013 est.) 10.3% of GDP (2013 est.)
Budget surplus
(+) or deficit (-)
-2.1% of GDP (2013 est.) -5.7% of GDP (2013 est.)
GDP -
composition, by
end use
household
consumption: 36.3%
government
consumption: 13.7%
investment in fixed
capital: 46%
investment in
inventories: 1.2%
exports of goods and
services: 25.1%
imports of goods and
services: -22.2%
(2013 est.)
household
consumption: 56.4%
government
consumption: 12.4%
investment in fixed
capital: 29.6%
investment in
inventories: 8.2%
exports of goods and
services: 25.2%
imports of goods and
services: -31.8%
(2013 est.)
Gross national
saving
50% of GDP (2013 est.)
51.2% of GDP (2012 est.)
33.7% of GDP (2013 est.)
28.8% of GDP (2012 est.)

China India
50.1% of GDP (2011 est.) 30.3% of GDP (2011 est.)

China economy

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