Chinese Economy 4

China’s Economic Rise: History, Trends,
Challenges, and Implications for the

United States
Updated February 5, 2018
Congressional Research Service

https://crsreports.congress.gov
RL33534
China’s Economic Rise: History, Trends, Challenges, Implications for the United States
Summary
Prior to the initiation of economic reforms and trade liberalization nearly 40 years ago, China
maintained policies that kept the economy very poor, stagnant, centrally controlled, vastly
inefficient, and relatively isolated from the global economy. Since opening up to foreign trade and
investment and implementing free-market reforms in 1979, China has been among the world’s
fastest-growing economies, with real annual gross domestic product (GDP) growth averaging
9.5% through 2017, a pace described by the World Bank as “the fastest sustained expansion by a
major economy in history.” Such growth has enabled China, on average, to double its GDP every
eight years and helped raise an estimated 800 million people out of poverty. China has become
the world’s largest economy (on a purchasing power parity basis), manufacturer, merchandise
trader, and holder of foreign exchange reserves. This in turn has made China a major commercial
partner of the United States. China is the largest U.S. merchandise trading partner, biggest source
of imports, and third-largest U.S. export market. China is also the largest foreign holder of U.S.
Treasury securities, which help fund the federal debt and keep U.S. interest rates low.
As China’s economy has matured, its real GDP growth has slowed significantly, from 14.2% in
2007 to 6.9% in 2017, and that growth is projected by the International Monetary Fund (IMF) to
fall to 5.8% by 2022. 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 2025,” a plan announced in 2015 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. U.S. Trade Representative Robert Lighthizer has described
the Made in China 2025 initiative as “a very, very serious challenge, not just to us, but to Europe,
Japan and the global trading system.”
China’s efforts to expand its economic influence globally are another area of concern to U.S.
policymakers, including China’s Belt and Road initiative (BRI) to finance and help build
infrastructure projects in Asia, Africa, Europe, and elsewhere. Many analysts contend that China
could use the initiative to boost its industries facing overcapacity (such as steel), gain new
overseas markets, influence other countries to adopt China’s economic model, and expand
China’s “soft power” in the numerous countries that may participate in the initiative.
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. While
China is a large and growing market for U.S. firms, its incomplete transition to a free-market
economy has resulted in economic policies deemed harmful to U.S. economic interests, such as
industrial policies and theft of U.S. intellectual property. 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.

Contents
The History of China’s Economic Development ............................................................................ 2
China’s Economy Prior to Reforms .......................................................................................... 2
The Introduction of Economic Reforms.................................................................................... 4
China’s Economic Growth and Reforms: 1979-the Present ..................................................... 5
Causes of China’s Economic Growth ....................................................................................... 6
Measuring the Size of China’s Economy ........................................................................................ 8
China as the World’s Largest Manufacturer ............................................................................ 10
Changes in China’s Wage and Labor Cost Advantages .......................................................... 12
Foreign Direct Investment (FDI) in China .................................................................................... 13
Factors Driving China’s Growing FDI Outflows .......................................................................... 17
China’s Merchandise Trade Patterns ............................................................................................. 19
China’s Major Trading Partners .............................................................................................. 22
Major Chinese Trade Commodities......................................................................................... 23
China’s Regional and Bilateral Free Trade Agreements ......................................................... 25
Major Long-Term Challenges Facing the Chinese Economy........................................................ 27
China’s Incomplete Transition to a Market Economy............................................................. 28
Industrial Policies and SOEs ............................................................................................. 28
A State-Dominated Banking Sector, Excess Credit, and Growing Debt........................... 30
Large Internal Imbalances of Savings, Fixed Investment, and Consumption ................... 33
Environmental Challenges ................................................................................................ 39
Corruption and the Relative Lack of the Rule of Law ...................................................... 41
Demographic Challenges .................................................................................................. 42
Economic Goals of the 19th Party Congress of the Communist Party ..................................... 44
China’s Belt and Road Initiative ............................................................................................. 44
Made in China 2025 ................................................................................................................ 46
Challenges to U.S. Policy of China’s Economic Rise ................................................................... 47
Figures
Figure 1. Chinese Per Capita GDP: 1950-1978............................................................................... 3
Figure 2. Comparison of Chinese and Japanese Per Capita GDP: 1950-1978 ................................ 4
Figure 3. Chinese Real GDP Growth: 1979-2017 ........................................................................... 6
Figure 4. China’s Real GDP Growth 2007-2017 and Projections through 2022............................. 6
Figure 5. U.S. and Chinese Real GDP Growth Rates in 2010-2017 and
Projections through 2050 ............................................................................................................. 8
Figure 6. Chinese and U.S. GDP (PPP Basis) as a Percentage of Global Total: 1980-2016
and Projections through 2020 ..................................................................................................... 10
Figure 7. Gross Value Added Manufacturing in China, the United States, and Japan: 2006
and 2015 ......................................................................................................................................11
Figure 8. Average Monthly Wages for China and other Selected Countries: 1990-2016 .............. 12
Figure 9. Labor Cost Index for China and Selected Countries Relative to the United
States:1990-2016 ........................................................................................................................ 13

Figure 10. Industrial Output by Foreign-Invested Firms in China as a Share of National

Output Total: 1990-2011 ............................................................................................................ 14
Figure 11. Share of Chinese Merchandise Exports and Imports
by Foreign-Invested Enterprises in China: 1990-2017 ............................................................... 14
Figure 12. UNCTAD’s Estimates of China’s Annual FDI Flows: 1990-2016 .............................. 15
Figure 13. Chinese Data on Annual U.S. FDI Inflows into China: 1985-2016 ............................. 17
Figure 14. AEI/ Heritage Foundation Data on Chinese Cumulative Outward Nonbond
Investment by Major Destination: 2005-2017............................................................................ 19
Figure 15. China’s Merchandise Trade: 2000-2017 ...................................................................... 21
Figure 16. Annual Change in China’s Merchandise Exports and Imports: 2000-2017 ................. 21
Figure 17. China’s Share of Global Merchandise Exports: 1990-2017......................................... 22
Figure 18. Annual Change in the Stock of China’s Domestic Credit 2001-2016.......................... 31
Figure 19. Core Debt of Nonfinancial Sectors in 2016* as a Percentage of GDP for
Selected Economies.................................................................................................................... 32
Figure 20. U.S. and Chinese Corporate Debt: 2006-2016* ........................................................... 32
Figure 21. Chinese Gross Savings, Gross Fixed Investment, and Private Consumption as
a Percentage of GDP: 1990-2016 ............................................................................................... 34
Figure 22. Comparison of Gross Savings Rates for Major Global Economies in 2016 ................ 35
Figure 23. Comparison of Gross Fixed Investment for Major Global Economies in 2016 ........... 35
Figure 24. Comparison of Private Consumption of Major Global Economies in 2016 ................ 36
Figure 25. Sources of Chinese GDP Growth: 2010-2016: Percentage Points ............................... 37
Figure 26. Summary of Chinese Economic Rebalancing: 2010 Versus 2016 ............................... 38
Figure 27. Chinese Exports of Goods and Services: 1990-2016 ................................................... 38
Figure 28. Current Account Balances as a Percentage of GDP for China
and the United States: 2000-2016 .............................................................................................. 39
Figure 29. Average Annual Growth in Private Consumption: 2007-2016 ..................................... 39
Tables
Table 1. Comparisons of Chinese, Japanese, and U.S. GDP and Per Capita GDP
in Nominal U.S. Dollars and a Purchasing Power Parity Basis: 2017 ......................................... 9
Table 2. Chinese Data on Top Ten Sources of FDI Flows to China: 1979-2016 ........................... 16
Table 3. Major Destinations of Chinese Nonfinancial FDI Outflows in 2015: Flows and
Stock ........................................................................................................................................... 18
Table 4. China’s Global Merchandise Trade: 1979-2017 .............................................................. 20
Table 5. China’s Major Merchandise Trading Partners in 2017 .................................................... 23
Table 6. Major Chinese Merchandise Imports in 2017 ................................................................. 24
Table 7. Major Chinese Merchandise Exports in 2017 ................................................................. 24
Table 8. Economic Data on China’s FTA Partners: 2017 .............................................................. 25
Contacts
Author Information........................................................................................................................ 48


C
hina’s rise from a poor developing country to a major economic power in about four
decades has been spectacular. From 1979 (when economic reforms began) to 2017,
China’s real gross domestic product (GDP) grew at an average annual rate of nearly 10%.1
According to the World Bank, China has “experienced the fastest sustained expansion by a major
economy in history—and has lifted more than 800 million people out of poverty.”2 China has
emerged as a major global economic power. 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.S. trade data, total trade between the two countries grew from
$5 billion in 1980 to an estimated $634 billion in 2017. China is currently the United States’
largest merchandise trading partner, its third-largest export market, and its largest source of
imports. Many U.S. companies have extensive operations in China in order to sell their products
in the booming Chinese market and to take advantage of lower-cost labor for export-oriented
manufacturing.3 These operations have helped some U.S. firms to remain internationally
competitive and have supplied U.S. consumers with a variety of low-cost goods. China’s large-
scale purchases of U.S. Treasury securities (which totaled $1.2 trillion as of November 2017)
have enabled the federal government to fund its budget deficits, which help keep U.S. interest
rates relatively low.4
However, the emergence of China as a major economic power has raised concern among many
U.S. policymakers. Some claim that China uses unfair trade practices (such as an undervalued
currency and subsidies given to domestic producers) to flood U.S. markets with low-cost goods,
and that such practices threaten American jobs, wages, and living standards. 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.S. intellectual property rights (IPR) in China, threaten to
undermine the competitiveness of U.S. IP-intensive industries. In addition, while China has
become a large and growing market for U.S. exports, critics contend that numerous trade and
investment barriers limit opportunities for U.S. firms to sell in China, or force them to set up
production facilities in China as the price of doing business there.
The Chinese government views a growing economy as vital to maintaining social stability.
However, China faces a number of major economic challenges which 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
1 China’s economic reform process began in December 1978 when the Third Plenum of the Eleventh Central
Committee of the Communist Party adopted Deng Xiaoping’s economic proposals. Implementation of the reforms
began in 1979.
2 World Bank, China Overview, March 28, 2017, available at http://www.worldbank.org/en/country/china/overview.
3 Some companies use China as part of their global supply chain for manufactured parts, which are then exported and
assembled elsewhere. Other firms have shifted the production of finished products from other countries (mainly in
Asia) to China; they import parts and materials into China for final assembly.
4 See CRS Report RL33536, China-U.S. Trade Issues, by Wayne M. Morrison.
Congressional Research Service RL33534 · VERSION 96 · UPDATED 1

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 in regard to infrastructure development. China’s Belt and Road
initiative (BRI) represents a grand strategy by China to finance infrastructure throughout Asia,
Europe, Africa, and beyond. If successful, China’s economic initiatives could significantly
expand export and investment markets for China and increase its “soft power” globally.
China’s growing global economic influence has raised a number of questions, and in some cases,
concerns, as to how China’s rise will affect U.S. economic interests and influence on global
economic policies. China’s economic rise has become a factor in congressional debate over
various aspects of U.S. trade policy (even those that are not directly related to China), such as the
renewal of trade promotion authority (TPA), which was reauthorized through legislation in June
2015, and the Trans-Pacific Partnership (TPP), which was signed by the United States and 11
other countries in February 2016. In January 2017, President Trump announced that the United
States would withdraw from TPP,5 which, many contend, may diminish U.S. economic influence
in Asia while expanding China’s.
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.
The History of China’s Economic Development

China’s Economy Prior to Reforms
Prior to 1979, 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 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 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).
5For additional information on TPA and TPP, see CRS In Focus IF10038, Trade Promotion Authority (TPA), by Ian F.
Fergusson, and CRS In Focus IF10000, TPP: Overview and Current Status, by Brock R. Williams and Ian F.
Fergusson.

According to Chinese government statistics, China’s real GDP grew at an average annual rate of
6.7% from 1953 to 1978, although the accuracy of these data has been questioned by many
analysts, some of whom contend that during this period, Chinese government officials (especially
at the subnational levels) often exaggerated production levels for a variety of political reasons.
Economist Angus Maddison puts China’s actual average annual real GDP growth during this
period at about 4.4%.6 In addition, China’s economy suffered significant economic downturns
during the leadership of Chairman Mao Zedong, including during the Great Leap Forward from
1958 to 1962 (which led to a massive famine and reportedly the deaths of up to 45 million
people)7 and the Cultural Revolution from 1966 to 1976 (which caused widespread political
chaos and greatly disrupted the economy). From 1950 to 1978, China’s per capita GDP on a
purchasing power parity (PPP) basis,8 a common measurement of a country’s living standards,
doubled. However, from 1958 to 1962, Chinese living standards fell by 20.3%, and from 1966 to
1968, they dropped by 9.6% (see Figure 1). 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. Chinese Per Capita GDP: 1950-1978

($ billions, PPP basis)
1,200
1,000
800
600
400
200
0
195019521954195619581960196219641966196819701972197419761978
Source: Angus Maddison, Historical, Statistics of the World Economy: 1-2008 AD.
6 The Organization for Economic Cooperation and Development, Chinese Economic Performance in the Long Run,
960-2030, by Angus Maddison, 2007.
7 New York Times, Editorial, Mao’s Great Leap to Famine, December 15, 2010.
8 Purchasing power parities are a method used to measure and compare the economic data of other countries expressed
in U.S. dollars. That method adjusts the data to reflect differences in prices across countries. This method is discussed
in more detail later in the report.

Figure 2. Comparison of Chinese and Japanese Per Capita GDP: 1950-1978

($ billions, PPP basis)
14,000
12,000
10,000
8,000
China
6,000
Japan
4,000
2,000
1972
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1974
1976
1978
Source: Angus Maddison, Historical, Statistics of the World Economy: 1-2008 AD.
In 1978, (shortly after the death of Chairman Mao in 1976), 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?”9
The Introduction of Economic Reforms

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 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
9This reference appears to have meant that it did not matter whether an economic policy was considered to be
“capitalist” or “socialist,” what really mattered was whether that policy would boost the economy and living standards.

country, a process Deng Xiaoping reportedly referred to as “crossing the river by touching the
stones.”10
China’s Economic Growth and Reforms: 1979-the Present

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.11
From 1979 to 2016, China’s annual real GDP averaged 9.6% (see Figure 3). This has meant that
on average China has been able to more than double the size of its economy in real terms every
eight years. The global economic slowdown, which began in 2008, had a significant impact on
the Chinese economy. China’s media reported in early 2009 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 2008 had fallen to 6.8% year-on-year. The Chinese government responded
by implementing a $586 billion economic stimulus package (approved in November 2008), aimed
largely at funding infrastructure and loosening monetary policies to increase bank lending.12 Such
policies enabled China to effectively weather the effects of the sharp global fall in demand for
Chinese products. From 2008 to 2010, China’s real GDP growth averaged 9.7%. However, the
rate of GDP growth slowed for the next six consecutive years, declining from 10.6% in 2010 to
6.7% in 2016 (although it rose to 6.8% in 2017). The IMF’s October 2017 World Economic
Outlook projected that China’s real GDP would slow further in the years ahead, hitting 5.7% in
2022 (Figure 4).13
10 Many analysts contend that Deng’s push to implement economic reforms was largely motivated by a belief that the
resulting economic growth would ensure that the Communist Party stayed in power.
11 China’s economic growth slowed significantly followed the aftermath of the Tiananmen massacre that occurred in
June 1989. Several countries, including the United States, imposed trade sanctions against China. In addition, Chinese
economic reforms were essentially put on hold. China’s real GDP growth rate fell from 11.3% in 1988 to 4.1% in 1989,
and declined to 3.8% in 1990. In 1991, Chinese economic reforms were resumed, and several economic sanctions were
lifted. As a result, China’s rapid economic growth rates resumed.
12 Xinhuanet, “20 million jobless migrant workers return home,” February 2, 2009.
13 IMF, World Economic Outlook, October 2016.

Figure 3. Chinese Real GDP Growth: 1979-2017

(percent)
Source: IMF, and Chinese National Bureau of Statistics.
Figure 4. China’s Real GDP Growth 2007-2017 and Projections through 2022
(percent)
Source: IMF, WEO.
Causes of China’s Economic Growth

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. 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 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.e., increases in efficiency) have
been another major factor in China’s rapid economic growth. 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 nonstate 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.e., through its adoption of foreign technology), its level of productivity gains, and
thus, real GDP growth, could slow significantly from its historic levels unless China becomes a
major center for new technology and innovation and/or implements new comprehensive
economic reforms. Several developing economies (notably several in Asia and Latin America)
experienced rapid economic development and growth during the 1960s and 1970s 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 period of time,
a phenomenon described by economists as the “middle-income trap.”14 This means that several
developing (low-income) economies were able to transition to a middle-income economy, but
because they were unable to sustain high levels of productivity gains (in part because they could
not address structural inefficiencies in the economy), they were unable to transition to a high-
income economy.15 China may be at a similar crossroads now.16 The Economist Intelligence Unit
(EIU) projects that China’s real GDP growth will slow considerably in the years ahead,
eventually converging on U.S. growth rates by the year 2036 (U.S. and Chinese real GDP growth
14 Japan was able to become a high-income economy, but since the mid-1980s, its economic growth has been relatively
stagnant.
15 These designations are based on World Bank per capita GDP measurements.
16 For a discussion of this issue, see the World Bank, China 2030, 2013, p. 12, at http://www-wds.worldbank.org/
external/default/WDSContentServer/WDSP/IB/2013/03/27/000350881_20130327163105/Rendered/PDF/
762990PUB0china0Box374372B00PUBLIC0.pdf.

are both projected at 1.6%); for some years thereafter, U.S. GDP growth is projected to be greater
than China’s (Figure 5).
Figure 5. U.S. and Chinese Real GDP Growth Rates in 2010-2017 and
Projections through 2050
(percent)
Source: Economist Intelligence Unit Database (accessed on January 26, 2018).

Notes: Long-range economic projections should be viewed with caution. EIU’s projections differ from those of
the IMF in Figure 4.
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. (These
issues are discussed in more detail later in the report.)
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 largest economic power.” The “actual” size of
China’s economy has been a subject of extensive debate among economists. Measured in U.S.
dollars using nominal exchange rates, China’s GDP in 2017 in nominal U.S. dollars was $11.9
trillion, about 62% of the size of the U.S. economy, according to estimates made by the IMF.
China’s 2017 per capita GDP in nominal dollars was $8,583, which was 14.4% of the U.S. level.
Many economists contend that using nominal exchange rates to convert Chinese data (or those 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 rate increases the (estimated) measurement of China’s economy and its per
capita GDP. According to the IMF (which uses price surveys conducted by the World Bank),
prices for goods and services in China are about half the level they are in the United States.
Adjusting for this price differential raises the value of China’s 2017 GDP from $11.9 trillion
(nominal dollars) to $23.1 trillion (on a PPP basis) (see Table 1).17 IMF data indicate that China
overtook the United States as the world’s largest economy in 2014 on a PPP basis.18
China’s share of global GDP on a PPP basis rose from 2.3% in 1980 to an estimated 18.3% in
2017, while the U.S. share of global GDP on a PPP basis fell from 24.3% to an estimated
15.3%.19 This would not be the first time in history that China was the world’s largest economy
(see text box). China’s economic ascendency has been impressive, especially considering that in
1980, China’s GDP on a PPP basis was only one-tenth that of the United States (see Figure 6).
The IMF predicts that by 2022, China’s economy will be 46.6% larger than the U.S. economy on
a PPP basis.
Table 1. Comparisons of Chinese, Japanese, and U.S. GDP and Per Capita GDP
in Nominal U.S. Dollars and a Purchasing Power Parity Basis: 2017
China United States
Nominal GDP ($ billions) 11,938 19,362

GDP in PPP ($ billions) 23,122 19,362
Nominal Per Capita GDP ($) 8,583 59,495
Per Capita GDP in PPP ($) 16,624 59,495
Source: IMF, World Economic Forum.
17 PPP data reflect what the value of China’s goods and services would be if they were sold in the United States.
18 The United States remains the world’s largest economy when using nominal U.S. dollars.
19 IMF, World Economic Outlook, October 2017, projections

The Decline and Rise of China’s Economy

According to a study by economist Angus Maddison, China was the world’s largest economy in 1820, accounting
for an estimated 32.9% of global GDP. However, foreign and civil wars, internal strife, weak and ineffective
governments, natural disasters (some of which were man-made), and distortive economic policies caused China’s
share of global GDP on a PPP basis to shrink significantly. By 1952, China’s share of global GDP had fallen to 5.2%,
and by 1978, it slid to 4.9%.20 The adoption of economic reforms by China in the late 1970s led to a surge in
China’s economic growth and has helped restore China as a major global economic power.
Source: The Organization for Economic Cooperation and Development, Chinese Economic Performance in the Long
Run, 960-2030, by Angus Maddison, 2007.
Figure 6. Chinese and U.S. GDP (PPP Basis) as a Percentage of Global Total: 1980-
2016 and Projections through 2020
(percent)
Source: IMF, World Economic Outlook, October 2017.
The PPP measurement also raises China’s 2016 nominal per capita GDP (from $8,583) to
$16,624, which was 27.9% of the U.S. level. Even with continued rapid economic growth, it
would likely take many years for Chinese living standards to approach U.S. levels. For example,
the EIU projects that, even by the year 2050, Chinese living standards would be half of U.S.
levels.21
China as the World’s Largest Manufacturer

China has emerged as the world’s largest manufacturer according to the United Nations. Figure 7
lists estimates of the gross value added of manufacturing in China, the United States, and Japan
expressed in U.S. dollars from 2005 to 2014. Gross value added data reflect the actual value of
manufacturing that occurred in the country (i.e., they subtract the value of intermediate inputs and
raw materials used in production). These data indicate that China overtook Japan as the world’s
20 In comparison, the U.S. share of global GDP was estimated to have risen from 1.8% in 1820 to 27.5% in 1952, but
declined to 21.6% by 1978.
21 EIU database, surveyed in January 2018.

second-largest manufacturer on a gross value added basis in 2006 and the United States in 2010.
In 2014, the value of China’s manufacturing on a gross value added basis was 39.6% higher than
the U.S. level. Manufacturing plays a considerably more important role in the Chinese economy
than it does for the United States. In 2014, China’s gross valued added manufacturing was equal
to 27.7% of its GDP, compared to 12.1% for the United States.22
Figure 7. Gross Value Added Manufacturing in China, the United States, and Japan:
2006 and 2015
($ billions)
Source: United Nations, UNdata.
In its 2016 Global Manufacturing Competitiveness Index, Deloitte (an international consulting
firm) ranked China as the world’s most competitive manufacturer (out of 40 countries), based on
a survey of global manufacturing executives, while the United States ranked second (it ranked
fourth in 2010). The index found that global executives predicted that the United States would
overtake China by 2020 to become the world’s most competitive economy, largely because of its
heavy investment in talent and technology (e.g., high levels of R&D spending and activities, the
presence of top-notch universities, and large amounts of venture capital being invested in
advanced technologies). On the other hand, while China was expected to remain a major
manufacturing power because of its large R&D spending levels, movement toward higher-valued,
advanced manufacturing, government policies to promote innovation, and a large pool of
graduates in science, technology, engineering and mathematics, it was viewed as facing several
challenges, including a slowing economy, a decline in value-added manufacturing and
overcapacity in several industries, rising labor costs, and a rapidly aging population. As a result,
China was projected to fall to the second-most competitive manufacturer by 2020.23
22 United Nations, UNdata, available at http://data.un.org/Data.aspx?d=SNAAMA&f=

grID%3a201%3bcurrID%3aUSD%3bpcFlag%3a0.
23 Deloitte, 2016 Global Manufacturing Competitiveness Index, 2016, available at https://www2.deloitte.com/content/
dam/Deloitte/us/Documents/manufacturing/us-gmci.pdf.

More broadly, the World Economic Forum produces an annual Global Competitive Report, which
assesses and ranks (based on an index) the global competitiveness of a country’s entire economy,
based on factors that determine the level of productivity of an economy, which in turn sets the
level of prosperity that the country can achieve. The World Economic Forum’s 2016-2017 Global
Competitive Index ranked China as the world’s 28th-most competitive economy (out of 138
countries), while the United States ranked third.24
Changes in China’s Wage and Labor Cost Advantages

China’s huge population and relatively low wage rates gave it a significant competitive advantage
when economic reforms and trade liberalization were first begun by the government in the late
1970s. However, this advantage appears to be eroding as wages in China have risen in recent
years. As indicated in Figure 8, China’s average monthly wages (converted into U.S. dollars) in
1990 were $37, compared with $54 for Vietnam and $505 for Mexico.25 However, in 2016,
China’s average monthly wages (at $854) were 306.7% higher than Vietnam’s wages ($210) and
122.3% higher than Mexico’s ($384). From 2007 to 2016, China’s average monthly wages rose
by 213%. The American Chamber of Commerce in China (AmCham China) 2017 Business
Climate survey listed rising labor costs as the second-biggest challenge facing U.S. firms in China
(it was the largest concern in the 2015 AmCham China survey).26 Figure 9 shows a comparison
of labor costs per unit of production for the countries listed in the previous figure, indexed
relative to U.S levels. In 1990, China’s unit labor production costs were 47% of U.S. levels and
by 2016 they were 75% of U.S. levels.
Figure 8. Average Monthly Wages for China and other Selected Countries: 1990-2016
(nominal U.S. dollars)
Source: Economist Intelligence Unit.
24 World Economic Forum, The Global Competitiveness Report, 2016–2017, September 2016.
25 The Economist Intelligence Unit, Data Tool, accessed in December 2016.
26 AmCham China, 2017 Business Climate Survey Report, January 2017, available at http://www.amchamchina.org/.

Notes: Because data are listed in U.S. dollars rather than local currency, changes to wages may also partially
reflect changes to exchange rates with the U.S. dollar. However, such data may reflect average labor costs in
dollars that U.S.-invested firms might face in their overseas operations.
Figure 9. Labor Cost Index for China and Selected Countries Relative to the United
States:1990-2016
(U.S. level =100)

Notes: The labor cost of producing one unit of output, indexed to U.S. levels.
Foreign Direct Investment (FDI) in China

China’s trade and investment reforms and incentives led to a surge in FDI beginning in the early
1990s. Such 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 urban workforce.27 As indicated
in Figure 10, 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% in 2011.28 In addition, FIEs are
responsible for a significant level of China’s foreign trade. At their peak, FIEs accounted for
58.3% of Chinese exports in 2005 and 59.7% of imports, but these levels have subsequently
fallen, reaching 43.2% and 46.8%, respectively, in 2017 (see Figure 11).
27China 2012 Statistical Yearbook.

28Industrial output is defined by the Chinese government as the total volume of final industrial products produced and
industrial services provided during a given period. Source: China 2012 Statistical Yearbook.

Figure 10. Industrial Output by Foreign-Invested Firms in China as a Share

of National Output Total: 1990-2011
(percent)
40
35
30
25
20
15
10
Source: Invest in China (http://www.fdi.gov.cn) and China’s 2012 Statistical Yearbook.
Figure 11. Share of Chinese Merchandise Exports and Imports

by Foreign-Invested Enterprises in China: 1990-2017
(percent)
Source: Invest in China (http://www.fdi.gov.cn).
The United Nations Conference on Trade and Development (UNCTAD) reports that China has
become a both a major recipient of global FDI as well as a major provider of FDI outflows (see

Figure 12).29 China’s FDI inflows in 2016 were estimated at $134 billion, making it the world’s
third-largest recipient of FDI (after the United States and the United Kingdom).30 China’s FDI
outflows in 2016 were $183 billion, making it the world’s second-largest source of FDI outflows
(after the United States). China’s FDI outflows exceeded inflows for the first time in 2016.
Figure 12. UNCTAD’s Estimates of China’s Annual FDI Flows: 1990-2016

($ billions)
Source: UNCTAD Data Center.

Notes: UNCTAD FDI data differ from that reported by China. Data exclude Hong Kong which is treated
separately.
The sharp increase in China’s global FDI outflows in recent years appears to be largely driven by
a number of factors, including Chinese government policies and initiatives to encourage firms to
“go global.” The government wants to use FDI to gain access to IPR, technology, know-how,
famous brands, etc., in order to move Chinese firms up the value-added chain in manufacturing
and services, boost domestic innovation and development of Chinese brands, and help Chinese
firms (especially SOEs) to become major global competitors.31 China’s slowing economy and
rising labor costs have also encouraged greater Chinese overseas FDI in order to help firms
diversify risk and expand business opportunities beyond the China market, and, in some cases, to
relocate less competitive firms from China to low-cost countries. China’s Ministry of Foreign
Trade (MOFCOM) reports that in 2016, Chinese nonfinancial FDI in BRI countries totaled $14.5
billion, and that new contracts totaling $126 billion (or 52% of total new contracted Chinese
29 U.N.FDI data differ from Chinese data, in part because Chinese data are limited to nonfinancial FDI and UN data
includes financial-related FDI. UNCTAD reports Hong Kong FDI data separately.
30 UNCTAD estimates that China’s FDI inflows in 2017 rose to $144 billion, making it the world’s second-largest FDI
recipient after the United States.

31 The composition of Chinese FDI sectors has changed over the past few years. For example, according to
AEI/Heritage Foundation, in 2010, 67% of Chinese FDI outflows were in energy and metals sectors, but by 2015, this
level dropped to 29%, caused in part by large levels of Chinese FDI in transportation, finance, real estate, and
technology sectors.

overseas FDI in 2016) were signed with such countries.32 Additionally, increased FDI outflows
may be the result of the Chinese government attempting to diversify its foreign exchange reserve
holdings (which totaled $3.1 trillion as of December 2017—by far the world’s largest holder).
Until recently, it appears that a large share of China’s reserves have gone to portfolio investments,
especially U.S. Treasury securities, which are relatively safe and liquid, but earn relatively small
returns.
According to Chinese government data on nonfinancial FDI inflows, the largest sources of
cumulative FDI in China for 1979-2016 were Hong Kong and Macau (by far the largest at 52.6%
of total),33 the British Virgin Islands (BVI), Japan, Singapore, and the United States (see Table 2).
The largest sources of nonfinancial FDI inflows into China in 2016 were Hong Kong/Macau
(65.3% of total), BVI, Singapore, South Korea, the United States, and Taiwan. According to
Chinese data, annual U.S. nonfinancial FDI flows to China peaked at $5.4 billion in 2002 (10.2%
of total FDI in China). In 2016, they were $2.4 billion or 1.9% of total FDI flows to China (see
Figure 13).34 China estimates the stock of U.S. nonfinancial FDI in China at $80 billion through
2016.35
Table 2. Chinese Data on Top Ten Sources of FDI Flows to China: 1979-2016
($ billions and percentage of total)
Estimated Cumulative Utilized
FDI: 1979-2016 Utilized FDI in 2016
Country Amount % of Total Amount % of Total

Total 1,765.5 100 126.0 100
Hong Kong and Macau 928.2 52.6 82.3 65.3
British Virgin Islands 155.9 8.8 6.7 5.3
Japan 104.9 5.9 3.1 2.5
Singapore 85.3 4.8 6.1 4.8
United States 80.0 4.5 2.4 1.9
S. Korea 68.7 3.9 4.8 3.8
Taiwan 64.7 3.7 2.0 1.6
Cayman Islands 35.3 2.0 5.2 4.1
Germany 28.2 1.6 2.7 2.1
32 MOFCOM, Official of the Department of Outward Investment and Economic Cooperation of the Ministry of
Commerce Comments on China’s Outward Investment and Economic Cooperation in 2017, January 18, 2017, available
at http://english.mofcom.gov.cn/article/newsrelease/policyreleasing/201701/20170102503092.shtml.
33 Much of the FDI originating from Hong Kong may originate from other foreign investors, such as Taiwan. In
addition, some Chinese investors might be using these locations to shift funds overseas in order to re-invest in China to
take advantage of preferential investment policies (this practice is often referred to as “round-tipping”). Thus, the actual
level of FDI in China may be overstated.
34 U.S. data on bilateral FDI flows with China differ significantly with Chinese data. For additional info on bilateral
FDI flows based on U.S. data, see CRS Report RL33536, China-U.S. Trade Issues, by Wayne M. Morrison.
35Many analysts argue that official U.S. and Chinese FDI data on bilateral investment flows are significantly
understated. The Rhodium Group, for example, estimates U.S. FDI flows to China in 2016 at $13.8 billion and U.S.
FDI stock in China through 2016 at $240 billion. See, Rhodium Group, Two-Way Street: 2017 Update US-China
Direct Investment Trends, May 2017, p.14, available at http://rhg.com/wp-content/uploads/2017/05/RHG_Two-Way-
Street_2017-Update_Final_9May2017.pdf.

Estimated Cumulative Utilized

FDI: 1979-2016 Utilized FDI in 2016
Country Amount % of Total Amount % of Total

United Kingdom 15.7 0.9 1.4 1.1
Source: Cumulative data are from the IMF Coordinated Direct Investment Survey. Annual data are from the
Chinese Ministry of Commerce.
Figure 13. Chinese Data on Annual U.S. FDI Inflows into China: 1985-2016
($ billions)
Source: Chinese Ministry of Commerce and the National Bureau of Statistics of China.
Note: Chinese and U.S. data on bilateral FDI flows differ sharply because of different methodologies used.
Factors Driving China’s Growing FDI Outflows

A key aspect of China’s economic modernization and growth strategy during the 1980s and 1990s
was to attract FDI into China to help boost the development of domestic firms. Investment by
Chinese firms abroad was sharply restricted. However, in 2000, China’s leaders initiated a new
“go global” strategy, which sought to encourage Chinese firms (primarily SOEs) to invest
overseas. One key factor driving this investment is China’s massive accumulation of foreign
exchange reserves. Traditionally, a significant level of those reserves has been invested in
relatively safe but low-yielding assets, such as U.S. Treasury securities. On September 29, 2007,
the Chinese government officially launched the China Investment Corporation (CIC) in an effort
to seek more profitable returns on its foreign exchange reserves and diversify away from its U.S.
dollar holdings.36 The CIC was originally funded at $200 billion, making it one of the world’s
largest sovereign wealth funds.37 Another factor behind the government’s drive to encourage
more outward FDI flows has been to obtain natural resources, such as oil and minerals, deemed
36 See CRS Report RL34337, China’s Sovereign Wealth Fund, by Michael F. Martin.
37 At the end of 2015, CIC’s assets totaled $810 billion.

by the government as necessary to sustain China’s rapid economic growth.38 Finally, the Chinese
government has indicated its goal of developing globally competitive Chinese firms with their
own brands. Investing in foreign firms, or acquiring them, is viewed as a method for Chinese
firms to obtain technology, management skills, and often, internationally recognized brands,
needed to help Chinese firms become more globally competitive. For example, in April 2005,
Lenovo Group Limited, a Chinese computer company, purchased IBM Corporation’s personal
computer division for $1.75 billion.39 Similarly, overseas FDI in new plants and businesses is
viewed as developing multinational Chinese firms with production facilities and R&D operations
around the world.
China’s FDI outflows by destination for 2015 (as reported by the Chinese government) are listed
in Table 3.40 The largest destinations of cumulative Chinese FDI through 2015 were Hong Kong
(59.8% of total), the Cayman Islands (5.7%), the BVI (4.7%), and the United States (3.7%). In
terms of annual Chinese FDI outflows, the largest recipients of FDI flows in 2015 were Hong
Kong (61.6%), Singapore (7.2%), the Cayman Islands (7.0%), and the United States (5.5%).
A significant level of Chinese FDI that goes to Hong Kong, the BVI, and the Cayman Islands
likely is redirected elsewhere. The American Enterprise Institute (AEI) and the Heritage
Foundation jointly maintain the China Global Investment Tracker (CGIT), a database that has
been developed to track the actual flows (from the parent company to the final destination) of
Chinese investment globally. The CGIT database tracks FDI valued at $100 million or more
(which it refers to as “China’s outward nonbond investment”).41 These data differ significantly
from official Chinese FDI outflow data. The CGIT data on the top destinations of total Chinese
outward nonbond outward investment from 2005 to 2017 included the United States ($172.7
billion), Australia ($103.7 billion), the United Kingdom ($75 billion), Brazil ($61.2 billion), and
Russia ($53.8) (see Figure 14). The CGIT also puts Chinese FDI in the United States in 2017 at
$24.5 billion (compared to $54.6 billion in 2016), making the United States the largest destination
of Chinese outward FDI. China’s largest U.S. acquisition in 2017 was HNA’s purchase of CIT
Group’s aircraft leasing business for $10.4 billion.
Table 3. Major Destinations of Chinese Nonfinancial FDI Outflows in 2015: Flows and
Stock
($ billions and percentage)
Stock of FDI through Share of FDI Stock
Destination FDI Flows in 2015 2015 through 2015 (%)
Total 145.7 1,098.0 —

Hong Kong 89.8 656.9 59.8
Cayman Islands 10.2 62.4 5.7
British Virgin Islands 1.8 51.7 4.7
United States 8.0 40.8 3.7
Singapore 10.5 32.0 2.9
Australia 3.4 28.4 2.6
38 Chinese oil and mineral companies are dominated by SOEs.

39 The Chinese government is believed to be Lenovo’s largest shareholder.
40 At the time of this writing, Chinese 2016 data on its overseas FDI by country were not available.
41 AEI/Heritage Foundation’s methodology do not use the standard measurement of FDI, which generally includes
foreign ownership or control of at least 10% share or control of an entity.

Stock of FDI through Share of FDI Stock

Destination FDI Flows in 2015 2015 through 2015 (%)
United Kingdom 1.8 16.6 1.5
Source: Chinese Ministry of Commerce.

Note: Ranked according to the top seven destinations of the stock of Chinese FDI outflows through 2015.
Figure 14. AEI/ Heritage Foundation Data on Chinese Cumulative Outward

Nonbond Investment by Major Destination: 2005-2017
($ billions)
Source: AEI/Heritage Foundation, China Global Investment Tracker.

Notes: Data includes outward FDI and valued at $100 million or more. These data differ significantly from
official Chinese data.
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 $2.3 trillion
in 2017, while merchandise imports grew from $18 billion to $1.8 trillion (see Table 4 and
Figure 15). China’s rapidly growing trade flows have made it an increasingly important (and
often the largest) trading partner for many countries. According to China, it was the largest
trading partner for 130 countries in 2013.42 From 2000 to 2008, the annual growth of China’s
merchandise exports and imports averaged 25.1% and 24.2%, respectively. However, China’s
exports and imports fell by 15.9% and 11.2%, respectively, due to the impact of the global
financial crisis. China’s trade recovered in 2010 and 2011, with export growth averaging 25.8%
and import growth averaging 31.9%. However, since that time, China’s trade flows have slowed
sharply. From 2012 to 2014, China’s exports and imports grew at an average annual rate of 7.2%
and 4.1%, respectively. From 2015 to 2016 exports and imports fell by an average rate of 4.7%
and 11.6%, respectively (see Figure 16), reflecting a sluggish global economy and a decline in
42China.org.cn, “Promoting China-Japan relations through Culture,” June 18, 2014, at http://www.china.org.cn/
opinion/2014-06/18/content_32690843.htm.

commodity prices (such as oil and ores). However, in 2017, China’s exports and imports rose by
6.7% and 17.4%, respectively. China’s merchandise trade surplus grew sharply from 2004 to
2008, rising from $32 billion to $297 billion. That surplus fell each year over the next three years,
dropping to $158 billion in 2011. However, it rose in each of the next four years, reaching a
record $679 billion in 2015 before falling to $611 billion in 2016 and to $489 billion in 2017.
In 2009, China overtook Germany to become both the world’s largest merchandise exporter and
the second-largest merchandise importer (after the United States). In 2012, China overtook the
United States as the world’s largest merchandise trading economy (exports plus imports).43 As
indicated in Figure 17, China’s share of global merchandise exports grew from 2.0% in 1990 to
14.1% in 2015, but fell to 13.4% in 2016 and to 13.2% in 2017.44
Table 4. China’s Global Merchandise Trade: 1979-2017

($ billions)
Year Exports Imports Trade Balance
1979 13.7 15.7 -2.0

1980 18.1 19.5 -1.4
1985 27.3 42.5 -15.3
1990 62.9 53.9 9.0
1995 148.8 132.1 16.7
2000 249.2 225.1 24.1
2001 266.2 243.6 22.6
2002 325.6 295.2 30.4
2003 438.4 412.8 25.6
2004 593.4 561.4 32.0
2005 762.0 660.1 101.9
2006 969.1 791.5 177.6
2007 1,218.0 955.8 262.2
2008 1,428.9 1,131.5 297.4
2009 1,202.0 1,003.9 198.2
2010 1,578.4 1,393.9 184.5
2011 1,899.3 1,741.4 157.9
2012 2,050.1 1,817.3 232.8
2013 2,210.7 1,949.3 261.4
2014 2,343.2 1,963.1 380.1
2015 2,280.5 1,601.8 678.8
2016 2,135.3 1,524.7 610.6
2017 2,279.2 1,790.0 489.2
Source: Global Trade Atlas and China’s Customs Administration.
43 In 2013, China became the largest trading economy for total goods and services.
44 Economist Intelligence Unit, Data Tools, accessed in June 2017.

Figure 15. China’s Merchandise Trade: 2000-2017

($ billions)
Source: World Trade Atlas and China’s Customs Administration.

Note: Data are in U.S. dollars which may be impacted by changes in exchange rates.
Figure 16. Annual Change in China’s Merchandise Exports and Imports: 2000-2017
(percent)
Source: Global Trade Atlas and China’s Customs Administration.

Note: Data are in U.S. dollars which may be impacted by changes in exchange rates as well as commodity prices.

Figure 17. China’s Share of Global Merchandise Exports: 1990-2017

(percent)

Notes: Data for 2017 are estimated.
China’s Major Trading Partners

Table 5 lists official Chinese trade data on its seven largest trading partners in 2017 (based on
total trade). These include the 28 countries that make up the European Union (EU28), the United
States, the 10 nations that constitute the Association of Southeast Asian Nations (ASEAN), Japan,
Hong Kong, South Korea, and Taiwan.45 China’s top three export markets were the United States,
the EU28, and Hong Kong,46 while its top sources for imports were the EU28, ASEAN, and
South Korea. According to Chinese data, it maintained large trade surpluses with the United
States ($282 billion), Hong Kong ($274 billion) and the EU28 ($129 billion), and reported large
trade imbalances with Taiwan ($112 billion) and South Korea ($74 billion). China’s trade data
differ significantly from those of many of its trading partners. These differences appear to be
largely caused by how China’s trade via Hong Kong is counted in official Chinese trade data.
China treats a large share of its exports through Hong Kong as Chinese exports to Hong Kong for
statistical purposes, while many countries that import Chinese products through Hong Kong
generally attribute their origin to China for statistical purposes, including the United States.47
45 ASEAN members include Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the Philippines,
Singapore, Thailand, and Vietnam.
46 Much of Chinese exports to Hong Kong are later re-shipped elsewhere.
47 See CRS Report RS22640, What’s the Difference?—Comparing U.S. and Chinese Trade Data, by Michael F.
Martin.

Table 5. China’s Major Merchandise Trading Partners in 2017

($ billions)
Chinese Chinese China’s Trade
Country Total Trade Exports Imports Balance
European Union 618.1 373.7 244.4 129.3

United States 581.5 431.8 149.7 282.1
ASEAN 501.3 281.3 220.0 61.3
Japan 302.1 137.1 165.0 -27.9
Hong Kong 287.8 281.0 6.9 274.1
South Korea 280.2 102.9 177.3 -74.4
Taiwan 198.8 43.6 155.2 -111.6
Source: China’s Customs Administration.

Notes: Rankings according to China’s total trade in 2017. China’s bilateral trade data often differ from that of its
trading partners.
Major Chinese Trade Commodities

China’s abundance of low-cost labor has made it internationally competitive in many low-cost,
labor-intensive manufactures. As a result, manufactured products constitute a significant share of
China’s trade. A substantial amount of China’s imports is comprised of parts and components that
are assembled into finished products, such as consumer electronic products and computers, and
then exported. Often, the value-added to such products in China by Chinese workers is relatively
small compared to the total value of the product when it is shipped abroad.
China’s top 10 imports and exports in 2017 are listed in Table 6 and Table 7, respectively, using
the harmonized tariff system (HTS) on a two-digit level. Major imports included electrical
machinery and equipment;48 mineral fuels; nuclear reactors, boilers, and machinery (such as
automatic data process machines and machines to make semiconductors); ores; and optical,
photographic, medical, or surgical instruments. China’s biggest exports were electrical machinery
and equipment; nuclear reactors, boilers, and machinery; furniture and bedding; woven apparel;
and knit apparel.
48This includes electrical machinery and equipment and parts thereof; sound recorders and reproducers, television
image and sound recorders and reproducers, and parts and accessories of such articles.

Table 6. Major Chinese Merchandise Imports in 2017

Percentage of 2017/2016
HS Code Description $ Billions Total Exports % Change
Total Commodities 1,790 100.0 17.4

85 Electrical machinery and equipment 457 25.5 9.8
27 Mineral fuel, oil etc. 246 11.5 40.7
84 Nuclear reactors, boilers, and machinery 170 9.5 15.0
26 Ores, slag, and ash 125 7.0 34.7
90 Optical, photographic, cinematographic, measuring 97 5.5 4.8
checking, precision, medical or surgical instruments
and apparatus; parts and accessories thereof
87 Vehicles, except railway, and parts 79 4.4 10.9
trucks, and bicycles)
39 Plastics and articles thereof 69 3.9 13.0
29 Organic chemicals 56 3.1 27.2
12 Oil seeds, misc. grain, fruit, plant, etc. 45 2.5 16.4
74 Copper and articles thereof 41 2.3 23.7
Source: World Trade Atlas, using official Chinese statistics.

Note: Top 10 imports in 2016, two-digit level, harmonized tariff system.
Table 7. Major Chinese Merchandise Exports in 2017

Percentage of 2017/2016
HS Code Description $ Billions Total Exports % Change
Total Commodities 2,279 100.0 6.7

85 Electrical machinery 600 26.3 7.2
84 Nuclear reactors, boilers, and machinery 383 16.8 10.8
94 Furniture and bedding 91 4.0 -0.2
62 Apparel articles and accessories, woven 74 3.2 0.3
61 Apparel articles and accessories, knit or crochet 72 3.2 -4.8
39 Plastics and articles thereof 71 3.1 9.7
90 Optical, photographic, cinematographic, measuring 71 3.1 3.5
checking, precision, medical or surgical instruments
and apparatus; parts and accessories thereof
87 Vehicles, except railway, and parts 67 3.0 11.1
73 Articles of iron or steel 58 2.5 6.7
95 Toys and sports equipment 56 2.4 23.2
Source: World Trade Atlas, using official Chinese statistics.

Note: Top 10 exports in 2017, two-digit level, harmonized tariff system.

China’s Regional and Bilateral Free Trade Agreements

China has undertaken several initiatives to develop trade and investment ties around the world,
especially with Asian countries. To that end, China has entered into several regional and bilateral
trade agreements, or is in the process of doing so. In 2017, China had free trade agreements
(FTAs) with 22 partners, including with the 10 countries that make up the Association of
Southeast Asian Nations (ASEAN), Australia, Chile, Costa Rica, Hong Kong, Macau, Iceland,
New Zealand, Pakistan, Peru, Switzerland, Australia, and South Korea. China also has an
“economic cooperation framework agreement” with Taiwan, which is the equivalent to an FTA.
The combined GDP (on a PPP basis) and population of these countries in 2017 was $15.6 trillion
and 1.0 billion, respectively; and China’s total merchandise trade (exports plus imports) with
these countries was $1.5 trillion (see Table 8). In comparison, the United States had FTAs in
effect with 20 countries through 2017, which had combined GDP (PPP basis) of $10.9 trillion and
population of 465 million. Total U.S. trade with these countries was $1.5 trillion.
Table 8. Economic Data on China’s FTA Partners: 2017

Country GDP in PPP ($billions) Population China’s Total Trade
(millions) ($billions)
Australia 1,209.0 24.5 127.7
Brunei 33.4 0.4 1.0
Cambodia 64.3 16.0 5.8
Chile 442.9 18.1 35.3
Costa Rica 84.1 4.9 2.3
Hong Kong 455.0 7.4 287.9
Iceland 18.3 0.3 0.2
Indonesia 3,246.0 260.6 63.4
Laos 45.4 6.9 2.6
Macau 70.7 0.6 3.3
Malaysia 931.3 31.6 96.5
Myanmar 335.6 53.4 12.4
New Zealand 187.7 4.8 14.5
Pakistan 1,073.0 197.0 20.2
Peru 386.5 31.9 20.1
Philippines 875.7 104.9 51.4
Singapore 519.7 5.6 75.6
South Korea 1,967.0 51.0 280.2
Switzerland 550.2 8.4 12.8
Taiwan 1,177.0 23.5 198.8
Thailand 1,231.0 69.0 80.7
Vietnam 646.8 95.5 112.1
Total 15,550.62 1,016.3 1,504.8
Source: EIU and Global Trade Atlas.

Notes: Data are for countries China had an FTA with in 2017. Data for GDP are estimates.

China signed FTA’s with Georgia and Maldives in 2017 (which went into effect in 2018). China
is currently in the process of negotiating FTAs with the Cooperation Council for the Arab States
of the Gulf (which includes Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, and Bahrain),
Sri Lanka, Israel, Norway, Moldova, and Mauritius, and a trilateral agreement with Japan and
South Korea. China says it is also considering FTA negotiations with Canada, Colombia,
Mongolia, Fiji, Nepal, Papua New Guinea, Palestine, and Panama. China has also negotiated (or
is negotiating) several upgrades of existing FTAs.
In December 2012, China joined with the 10 members of ASEAN, Japan, South Korea, Australia,
India, and New Zealand to begin negotiations toward a Regional Comprehensive Economic
Partnership (RCEP), which, if concluded, could constitute the world’s largest free trade bloc (in
terms of combined population and GDP).49 The 20th round of RCEP negotiations was held in
October 2017. In November 2014, during the Asia-Pacific Economic Cooperation (APEC)
summit in Beijing, Chinese President Xi called for renewed efforts to achieve a Free Trade Area
of the Asia-Pacific (FTAAP) agreement, an idea that was first proposed by the United States over
a decade ago.
China’s economic rise and its growing impact on global trade have made it a key factor in debates
among U.S. policymakers over various U.S. trade policy issues. U.S. commercial relations with
China were an integral part of the congressional debate over the renewal of Trade Promotion
Authority (TPA) and the Trans-Pacific Partnership (TPP), an FTA that was signed by the United
States and 11 other Pacific Rim nations. Although China did not participate in TPP, its trade
policies underpinned some U.S. motivation for the agreement. While some supporters of TPP
viewed it as a vehicle to counteract China’s growing economic and political power in the Asia-
Pacific region,50 others saw it as a strategy to move China toward a more liberalized economy
because, it was argued, not being part of the TPP could be costly to the Chinese economy, and
thus TPP would give an upper hand to economic reformers in China. It has been further argued
that getting China into the TPP would have helped address a number of long-standing economic
differences between the United States and China, such as China’s SOE preferences, lack of IPR
protection and cyber-theft of U.S. trade secrets, and digital trade barriers, among others. Finally,
many argued that because the TPP is a “high standard” agreement, it would become the blueprint
or model for broader FTAs in the future.
The Trump Administration’s decision to terminate U.S. participation in the current TPP and
instead pursue bilateral FTAs51 has raised questions over how this will impact the ability of the
United States to continue to play a leading economic and political role in the Asia-Pacific region
(and globally as well). Many analysts contend that pulling out of the TPP has damaged U.S.
credibility with its major trading partners and has weakened the ability of the United States to
pressure China to further liberalize its economy. For example, in January 2017, then USTR
Michael Froman stated
We heard a lot about the importance of being tough on China during this recent campaign.
I agree. It’s important to be tough with China on trade.... But here, I have to admit to being
a little perplexed. There simply is no way to reconcile a get-tough-on-China policy with
withdrawing from TPP. That would be the biggest gift any U.S. President could give China,
49 In 2017, the RCEP countries had a combined population of 3.6 billion people, total GDP on a PPP basis at $49.7
trillion, and combined total merchandise trade of $10.3 trillion. Source: Economist Intelligence Unit.
50 For example, at a May 2015 speech, President Obama stated that “if we don’t write the rules for trade around the
world—guess what—China will. And they’ll write those rules in a way that gives Chinese workers and Chinese
businesses the upper hand, and locks American-made goods out.”
51 See, CRS Insight IN10646, The United States Withdraws from the TPP, by Brock R. Williams and Ian F. Fergusson.

one with broad and deep consequences, economic and strategic. It would be huge for
China... From our friends and allies in the region to our own military commanders, we have
heard clearly that failure by the U.S. to move forward would be a debilitating blow to U.S.
leadership and credibility in the region, one that would create a void that China is all too
happy to fill, and one that would leave our closest military allies and partners no choice but
to line up behind China.52
Some analysts contend that China has already begun to assert itself as a major advocate of the
current global trading system and free trade (despite the fact that many of China’s economic and
trade policies are protectionist in nature). They note, for example, that Chinese President Xi
Jinping attended the annual World Economic Forum in Davos, Switzerland, in January 2017, the
first Chinese head of state to do so. In a keynote speech delivered to the forum, Xi stated
We must remain committed to developing global free trade and investment, promote trade
and investment liberalization and facilitation through opening-up and say no to
protectionism ... We will advance the building of the Free Trade Area of the Asia Pacific
and negotiations of the Regional Comprehensive Economic Partnership to form a global
network of free trade arrangements. China stands for concluding open, transparent and win-
win regional free trade arrangements and opposes forming exclusive groups that are
fragmented in nature.53
The remaining 11 TPP members concluded an agreement on January 23, 2018, that excludes the
United States, called the Comprehensive and Progressive Agreement for Trans-Pacific
Partnership (CPTPP). However, at the World Economic Forum on January 26, 2018, President
Trump stated that the United States was prepared to negotiate mutually beneficial, bilateral trade
agreements with all countries, including the countries within TPP, and would consider negotiating
with them “as a group if it is in the interests of all.”54
Major Long-Term Challenges Facing the

Chinese Economy
China is currently undergoing a major restructuring of its economic model. Policies that were
employed in the past to essentially produce rapid economic growth at any cost were very
successful. However, such policies have entailed a number of costs (such as heavy pollution,
widening income inequality, overcapacity in many industries, an inefficient financial system,
rising corporate debt, and numerous imbalances in the economy) and therefore the old growth
model is viewed by many economists as no longer sustainable. China has sought to develop a
new growth model (“the new normal”) that promotes more sustainable (and less costly) economic
growth that puts greater emphasis on private consumption and innovation as the new drivers of
the Chinese economy. Implementing a new growth model that sustains healthy economic growth
could prove challenging unless China is able to effectively implement new economic reforms.
Many analysts warn that without such reforms, China could face a period of stagnant economic
52 USTR, Remarks by Ambassador Michael Froman at the Washington International Trade Association, January 10,
2017, available at https://ustr.gov/about-us/policy-offices/press-office/speechestranscripts/2017/january/Remarks-
Ambassador-Froman-WITA.
53 World Economic Forum, President Xi’s Speech to Davos in Full, January 17, 2017, available at
https://www.weforum.org/agenda/2017/01/full-text-of-xi-jinping-keynote-at-the-world-economic-forum.
54 Politico, “Full text: Trump Davos speech transcript,” January 26, 2018, at
https://www.politico.com/story/2018/01/26/full-text-trump-davos-speech-transcript-370861.

growth and living standards, a condition referred to by economists as the “middle-income trap”
(see text box). Several of these challenges are discussed below.
Avoiding the Middle-Income Trap

Several developing economies (notably some in Asia and Latin America) experienced rapid economic development
and growth during the 1960s and 1970s by implementing some of the same policies that China has utilized to date
to develop their economies, such as measures to boost exports and to promote and protect certain industries.
However, at some point in their development, several of these countries began to experience economic
stagnation (or much slower growth compared to previous levels) over a sustained period of time, a phenomenon
economists described as the “middle-income trap.” While several developing economies transitioned to a middle-
income economy, defined by the World Bank as per capita gross national income (GNI) in 2016 of $1,006-$12,235
(using average exchange rates, adjusted for inflation), only a handful of economies (such as Japan, Taiwan, and
South Korea) have maintained rapid economic growth long enough to become “high-income” countries (per capita
GNI of $12,236 or more). Most other countries that reached middle-income levels and saw their GDP growth
rates begin to decline were unable to address structural inefficiencies in their economies or could not sustain
productivity growth. China, which is currently a “high middle-income country,” with a per capita GNI of $8,250,
may be at a similar crossroads.55 For example, China may be losing its advantage in low-cost labor. Its working
population has reportedly fallen for four straight years (according to the Chinese government, it fell by 4.97
million people in 2015 and 3.53 million people in 2016). A continued decline in China’s workforce could drive up
wages faster than productivity gains, thus potentially slowing the growth rate of real GDP. China already has
experienced a slowdown in total factor productivity (TFP) growth in recent years. TFP grew at an average annual
rate of 3.4% from 2012 to 2016, compared with 6.0% average growth over the previous five years. If China is
unable to boost TFP in the future, it may begin to experience a sharp decline in economic growth and hence be
caught in the middle-income trap. In January 2017 the IMF warned that for China, “a sharp or disruptive slowdown
in the future remains a risk given continuing rapid credit expansion, impaired corporate debts, and persistent
government support for inefficient state-owned firms.”56
The Chinese government’s 19th Party Congress outlined a number of initiatives to boost productivity and to make
China a “country of innovators.” As a result, the government projects that China can cross the high-income
threshold by 2025. However, many economists are skeptical of what appears to be a government top-down
approach to boosting innovation and high living standards.
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-market 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
government still plays a major role in the country’s economic development.
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.”57 China’s State Council has said that there are currently
150,000 SOEs at the central and local government level.58 China’s SOEs may account for up of
50% of nonagriculture GDP.59 In addition, although the number of SOEs has declined sharply,
55 For a listing of country classifications, see World Bank at http://databank.worldbank.org/data/download/GNIPC.pdf.

56 IMF, Transcript of a Press Briefing on Update of the World Economic Outlook, January 16, 2017, available at
https://www.imf.org/en/News/Articles/2017/01/16/tr01162017-Press-Briefing-On-Update-Of-The-World-Economic-
Outlook.
57 The World Bank, China: 2030, February 27, 2012, p. 114.
58 The State Council of the People’s Republic of China, “Why is China reforming State-owned enterprises?,” February
16, 2017, available at http://english.gov.cn/news/video/2017/02/16/content_281475569025065.htm.

59 U.S.-China Economic and Security Review Commission, An Analysis of State-owned Enterprises and State

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.60 One study found that SOEs constituted 50% of the 500 largest
manufacturing companies in China and 61% of the top 500 service sector enterprises.61 Not only
are SOEs dominant players in China’s economy, many are quite large by global standards.
Fortune’s 2016 list of the world’s 500 largest companies includes 103 Chinese firms (compared
to 29 listed firms in 2007).62 Of the 103 Chinese firms listed, Fortune identified 75 companies
(73% of total) where the government owned 50% or more of the company. Together, these 75
firms in 2016 generated $7.2 trillion in revenues, had assets valued at $20.7 trillion, and
employed 16.2 million workers. Of the 28 other Chinese firms on the Fortune 500 list, several
appear to have financial links to the Chinese government.
China and Global Steel Overcapacity

China has become a major global producer of steel. From 2001 to 2016, China’s production of raw steel rose
from 152 million metric tons to 805 million metric tons, an increase of 459.9%. During this period, China’s share
of global production rose from 17.9% to 50.3% and China accounted for 87.1% of the increase in global steel
production.63 While much of China’s increased steel capacity has been in response to domestic demand (resulting
from China’s large-scale fixed investment), it is also a major exporter. In 2015, China was the second-largest
exporter of semifinished and steel products (after the EU) at 111.6 million metric tons, or 24.1% of global total.
Concerns have been raised over the past few years over the effects of increased global steel production despite
falling global steel demand. Following an EU Symposium on Excess Capacity and Structural Adjustment in the Steel
Sector in April 2016, then-U.S. Secretary of Commerce Penny Pritzker and then-USTR Michael Froman issued a
joint statement that said that the “U.S. steel industry is in a crisis driven in large part by global excess capacity....
led by unsustainable expansion in steelmaking capacity by China,” and noted that global steel overcapacity had
impacted the U.S. industry through price declines, decreased profitability, and over 13,000 jobs lost.64
Many analysts contend that China’s steel industry is heavily supported by government entities at the central and
local government level through low-cost credit and subsidies. These enable many Chinese steel firms to operate,
even when they are unprofitable and heavily in debt—these are termed by some as “zombies.” The government is
reluctant to allow such firms to go bankrupt due to concerns over effects layoffs could have on social stability.
One study by Renmin University estimated that half of Chinese steel firms were “zombie enterprises.”65 In April
2016, the USTR released a list of 86 government subsidies from 2011 to 2014 given to Hebei Iron & Steel
Company, one of the largest steel companies in China, which was obtained from the company’s annual reports.66
Capitalism in China, by Andrew Szamosszegi and Cole Kyle, October 26, 2011, p. 1.
60 The nature of China’s SOEs has become increasing complex. Many SOEs appear to be run like private companies.
For example, and a number of SOEs have made initial public offerings in China’s stock markets and those in other
countries (including the United States), although the Chinese government is usually the largest shareholder. It is not
clear to what extent the Chinese government attempts to influence decisions made by the SOE’s which have become
shareholding companies.
61 Xiao Geng, Xiuke Yang, and Anna Janus, State-owned Enterprises in China, Reform Dynamics and Impacts, 2009,
p. 155.
62 The listing can be found at http://beta.fortune.com/global500/.
63 Data from World Steel Association, at https://www.worldsteel.org/steel-by-topic/statistics/Steel-Statistical-
Yearbook-.html.
64 USTR, Press Release, April 16, 2016, available at https://ustr.gov/about-us/policy-offices/press-office/press-releases/
2016/april/statement-secretary-pritzker-and-ustr#.
65 The Wall Street Journal, China Steels Its Resolve, But ‘Zombies’ Abound, July 29, 2016, available at
http://blogs.wsj.com/chinarealtime/2016/07/29/csteel0729/.
66 Inside U.S. Trade, China Trade Extra, U.S. Lays Out Subsidies To Chinese Steel Firm In ‘Room Document’
Circulated At WTO Meeting, April 29, 2016.

In February 2016, the Chinese government announced plans to shut 100 million to 150 million metric tons of
crude steel capacity over the next five years and cut 500,000 jobs.67 The USTR’s 2016 report on China’s WTO
compliance stated that China had committed to “ensure that no central government plans, policies, directives,
guidelines, lending or subsidization targets the net expansion of steel capacity,” and to take steps to reduce
existing capacity, including “actively and appropriately dispose of ‘zombie enterprises’ through bankruptcies and
other means.”68
A State-Dominated Banking Sector, Excess Credit, and Growing Debt

China’s banking system is largely dominated by state-owned or state-controlled banks. According
to one analyst, the mangers of China’s state banks are drawn from the ranks of the Chinese
Communist Party cadre system, which “enables the party and government leaderships to exert
influence over bank lending.”69 In 2015, the top five largest banks in China in terms of assets
were state-owned entities.70 The percentage share of assets held by state-owned commercial
banks (including the five large state-owned banks), the three government policy banks,71 and
joint-stock commercial banks (where government entities are a major stock holder), together
accounted for 68.5% of total bank assets in China.72 Foreign participation in China’s banking
system is relatively small, accounting for 1.6% of total bank assets.73 SOEs are believed 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 2009.74 It is believed that oftentimes SOEs do not repay
their loans, which may have saddled the banks with an ever-increasing amount of nonperforming
loans.75 Many analysts contend that one of the biggest weaknesses of the banking system is that it
lacks the ability to ration and allocate credit according to market principles, such as risk
assessment.
The Chinese central government uses the banking system to boost credit in order to help meet its
GDP growth objectives and to, when needed, offset the impact of global economic downturns,
such as after the 9/11 terrorist attacks and the global financial crisis. From 2007 to 2016, China’s
domestic credit increased in dollar terms by 218% (see Figure 18), and as a share of GDP, the
level rose from 125% to 212%. As indicated in Figure 19, China’s combined household,
corporate, and government debt levels as a percentage of GDP as of mid-2016 are comparable to
those of the United States and South Korea and lower than those of Japan and the European
67 Bloomberg News, China Expects 1.8 Million Coal, Steel Layoffs on Capacity Cuts, February 29, 2016, available at
https://www.bloomberg.com/news/articles/2016-02-29/china-expects-1-8-million-coal-steel-layoffs-on-capacity-cuts.
68 USTR, 2016 Report to Congress On China’s WTO Compliance, January 2017, p. 6.
69 Mercator Institute for China Studies, China’s Political System, 2017, p. 213.
70 These were the Industrial & Commercial Bank of China, China Construction Bank, Agricultural Bank of China,
Bank of China, and Bank of Communications.

71 These include Export Import Bank of China, Agricultural Development Bank of China, and China Development
Bank.
72 Bejkovsky, Ing. Jan, State Capitalism in China: The Case of the Banking Sector, August 2016, available at
http://globalbizresearch.org/IAR16_Vietnam_Conference_2016_Aug/docs/doc/PDF/VS611.pdf.
73 Ibid.
74 The Economist, State Capitalism’s Global Reach, New Masters of the Universe, How State Enterprise is Spreading,
January 21, 2012.

75 According to Chinese officials, the ratio of nonperforming in China of commercial banks at the end of 2016 was
1.7% ($220 billion), although some analysts contend that this figure could be much higher. See, Reuters, “Chinese
commercial banks’ NPL ratio at 1.74 pct –regulator,” January 25, 2017, available at http://www.reuters.com/article/
china-banks-npl-idUSB9N1FA01A.

Union. However, China’s debt levels (in both dollars and as a percentage of GDP) have risen
sharply within a relatively short time, which, some have speculated, could spark an economic
crisis in China in the future. From 2006 year-end to mid-2016, China’s total nonfinancial sector
debt as a percentage of GDP increased from 143% to 254% (up 111 percentage points). Much of
the rise in that debt came from the corporate sector, which, as a percentage of GDP, rose from
107% in 2006 to 171% in mid-2016 (up 64 percentage points). In dollar terms, China’s corporate
debt rose from $3 trillion to $17.8 trillion (up $14.8 trillion) and currently greatly exceeds U.S.
corporate debt levels (see Figure 20). Several observers have warned that China’s credit growth
may be too extensive and could undermine future growth by sharply boosting debt levels, causing
overcapacity in many industrials (especially extending credit to firms that are unprofitable to keep
them operating), contributing to bubbles (such as in real estate), and reducing productivity by
proving preferential treatment to SOEs and other government-supported entities.
Figure 18. Annual Change in the Stock of China’s Domestic Credit 2001-2016
($ billions)

Figure 19. Core Debt of Nonfinancial Sectors in 2016* as a Percentage of GDP

for Selected Economies
(percent)
Source: Bank for International Settlements.

Note: * As of second quarter 2016.
Figure 20. U.S. and Chinese Corporate Debt: 2006-2016*

($ billions)
Source: Bank for International Settlements.

Notes: *As of second quarter 2016.
Local government debt is viewed as a big problem in China, largely because of the potential
impact it could have on the Chinese banking system. During the beginning of the global financial
slowdown, many Chinese subnational government entities borrowed extensively to help stimulate

local economies, especially by supporting infrastructure projects. In December 2013, the Chinese
National Audit Office reported that from the end of 2010 to mid-year 2013, local government
debt had increased by 67% to nearly $3 trillion.76 The Chinese government reported that local
government debt rose to $4.3 trillion as of 2015. Efforts have been made over the past few years
by the central government to restructure local government debt and restrict local government
borrowing, with mixed success, according to some press reports, because of pressures on local
governments to maintain rapid economic growth.77
Many economists blame China’s closed capital account for much of China’s debt problems. The
Chinese government has maintained restrictions on capital inflows and outflows for many years,
in part to control the exchange of its currency, the renminbi (RMB), against the dollar and other
currencies in order to boost exports. Many argue the Chinese government’s restrictions on capital
flows have greatly distorted financial markets in China, preventing the most efficient use of
capital, such as overinvestment in some sectors (such as real estate) and underinvestment in
others (such as services).
Large Internal Imbalances of Savings, Fixed Investment, and Consumption

Many economists assert that China’s economic model has produced large internal imbalances,
characterized by high savings and fixed investment and relatively low private consumption,
which may no longer be sustainable. As indicated in Figure 21, from 1990 to 2014, Chinese gross
savings as a percentage of GDP and gross fixed investment as a percentage of GDP both
increased significantly, while private consumption as a percentage of GDP declined sharply.78
China’s gross savings as a percentage of GDP and gross fixed investment as a percentage of GDP
are the highest among any of the world’s largest economies (see Figures Figure 22 and Figure
23), while China’s private consumption as a share of GDP is among the lowest. These data would
imply that Chinese households have not benefited as much from China’s economic growth as
other sectors of the economy.
Many economists contend that the relatively small share of private consumption and disposable
income relative to GDP is largely caused by two factors: China’s banking policies and the lack of
an adequate social safety net. The Chinese government places restrictions on the export of capital.
As a result, Chinese households put a large share of their savings in domestic banks. The Chinese
government sets the interest rate on deposits. Often this rate is below the rate of inflation, which
lowers household income. Some economists consider this policy to constitute a transfer of wealth
from Chinese households to Chinese firms, which benefit from low interest rates. This “tax” on
household income negatively affects household consumption. Secondly, China’s lack of an
adequate social safety net (such as pensions, health care, unemployment insurance, and
education) induces households to save a large portion of their income. According to one estimate,
between 1982 and 2012, the average urban household saving rate rose from 12% to 32%.79
Corporations are also a major contributor to the high savings rate in China. Many Chinese firms,
especially SOEs, do not pay out dividends and thus are able to retain most of their earnings.
76 The Wall Street Journal, Xi Faces Test over China’s Local Debt; Risks From Debt are Still Controllable, Audit
Office Says, December 30, 2013.
77 See for example, the Financial Times, “China local governments revive off-budget fiscal stimulus,” September 21,
2016, available athttps://www.ft.com/content/b303f280-7f14-11e6-8e50-8ec15fb462f4.

78 In addition, personal disposable income in China as a share of GDP was significantly lower in 2014 (at 44.0%) than
it was in 1990 (at 91.5%).

79 London School of Economic, The One-Child Policy and Household Savings, LSE working papers, September 18,
2014, p. 1. The authors contend that China’s one child policy is largely the cause of the rise in household savings,

Many economists contend that requiring the SOEs to pay dividends could boost private
consumption in China if the money were then used to help fund social welfare programs. Chinese
economic policies have resulted in gross fixed investment being the main engine of the country’s
economic growth for every year from 2000 to 2014. (In 2011 gross fixed investment and private
consumption each accounted for 3.0 percentage points; see Figure 21.)80
A 2009 IMF report estimated that fixed investment related to tradable goods plus net exports
together accounted for over 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%).81 The global financial crisis led to a sharp fall in demand for
Chinese exports, which helped sharply reduce China’s trade surpluses. The Chinese government
responded in part by sharply increasing spending on fixed investment. As a result, fixed
investment as a share of GDP rose from 40.5% in 2008 to 45.9% in 2013.
Figure 21. Chinese Gross Savings, Gross Fixed Investment, and

Private Consumption as a Percentage of GDP: 1990-2016
(percent)
80 The last time private consumption was the largest contributor to GDP was 1999.
81 Guo, Kai and Papa N’Diaye, Is China’s Export-Oriented Growth Sustainable, IMF Working Paper, August 2009.

Figure 22. Comparison of Gross Savings Rates for Major Global Economies in 2016
(percentage of GDP)
Figure 23. Comparison of Gross Fixed Investment for Major Global Economies
in 2016
(percentage of GDP)

Figure 24. Comparison of Private Consumption of Major Global Economies in 2016

(percentage of GDP)
Some Indicators of Rebalancing

Some rebalancing of China’s economy may have occurred in recent years. For the past several
years, gross fixed investment (some of which is linked to tradable sectors) has generally been the
largest contributor to China’s real GDP growth. For example, from 2000 to 2014, fixed
investment was the largest source of China’s GDP growth 11 out of 14 years. However, in both
2015 and 2016, private consumption was the largest contributor to GDP growth (see Figure 25).
In addition, from 2010 to 2016, China’s gross savings as a percentage of GDP rate fell from
51.8% to 45.8%, private consumption82 as a share of GDP increased from 35.6% to 38.7%, and
gross fixed investment as a percentage of GDP dropped from 45.2% to 42.4%. Another useful
indicator is the broad sector composition of China’s GDP (i.e., agriculture, industry, and
services), referred to as gross value added at factor cost. The output of industry has surpassed that
of services for many years.83 In 2012, services output overtook industrial output for the first time
and has grown in importance through 2016. From 2010 to 2016, the output of services as a
percentage of GDP grew from 44.1% to 51.6%, while the output of industry dropped from 46.4%
to 39.8% (see Figure 26).
In terms of trade, China has become much less reliant on exports than in the past. Its exports of
goods and services as a percentage of GDP dropped from a peak of 38.3% in 2006 to 20.5% in
2016 (see Figure 27). In addition, China’s trade surpluses as a percentage of GDP have fallen
sharply in recent years. China has run current account (CA) surpluses every year since 1994.
From 2001 to 2007, China’s CA surpluses as a percentage of GDP rose from 1.3% to a historical
high of 9.9%. Since then, China’s CA surplus as a percentage of GDP has fallen sharply, reaching
82 The rise in Chinese private consumption may have largely been a function of increased personal disposal income. In
1990, personal disposable income was equal to 54.4%, but that level decline over time, dropping to 40.8% in 2010.
However, this level increased to 44.9% in 2016.
83 For example, output by industry as a percentage of GDP in 2005 was for 46.9% compared to services at 41.4% and
11.7% for agriculture.

an estimated 2.4% in 2016 (see Figure 28). Much of that decline was likely caused by the effects
of the global economic slowdown that began in 2008, which sharply reduced foreign demand for
Chinese exports. However, some of the decline may also have been the result of increased
Chinese private consumption. As indicated in Figure 29, the growth of Chinese private
consumption over the past 10 years was among the fastest of any major economy, averaging 8.9%
annually compared with 1.6% for the United States.
Figure 25. Sources of Chinese GDP Growth: 2010-2016: Percentage Points

Figure 26. Summary of Chinese Economic Rebalancing: 2010 Versus 2016

(percentage of GDP)
Figure 27. Chinese Exports of Goods and Services: 1990-2016

Percentage of GDP

Figure 28. Current Account Balances as a Percentage of GDP for China

and the United States: 2000-2016
(percent)
Source: International Monetary Fund, World Economic Outlook Database, October 2016.
Note: Data for 2016 are IMF estimates.
Figure 29. Average Annual Growth in Private Consumption: 2007-2016

(percent)
Environmental Challenges
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. China’s environmental
challenges are illustrated by the following incidents and reports.
 A 2018 report by ExxonMobil estimated that China contributed about 60% of the
growth in global CO2 emissions from 2000 to 2016, and that its emissions would
surpass the combined CO2 levels of the United States and EU by 2025.84
 A 2017 OECD report estimated the health costs of China’s air pollution in 2015
at $1.4 trillion, equivalent to 7.8% of its GDP.85
 A 2015 study by the Rand Corporation estimated that the costs (in terms of health
impact and lost productivity) from China’s air pollution were equal to 6.5% of
GDP each year from 2000 to 2010. It further estimated the costs as a percentage
of GDP of water pollution and soil degradation at an additional 2.1% and 1.1%,
respectively.86
 On August 12, 2015, a series of large explosions in several warehouses
containing chemicals occurred in the Chinese port city of Tianjin, claiming the
lives of at least 163 people. Some press reports have blamed poor government
enforcement of environmental regulations for the disaster. For example, some in
China have questioned why dangerous chemicals were warehoused so close to
residential areas and have raised concerns over the extent of chemical
contamination in the area that may have resulted from the explosions.
 The U.S. Embassy in Beijing, which monitors and reports air quality in China
based on an air quality index of particulate matter (developed by the U.S.
Environmental Protection Agency) considered to pose a health concern, reported
that the air quality in Beijing for a majority of the days in January 2013 ranged
from “unhealthy” to “hazardous” (based on 24-hour exposure) and, on a few
days, it recorded high readings that were “beyond index.”87 The level of poor air
quality in Beijing was termed by some in China as “Airpocalypse,” and
reportedly forced the government to shut down some factories and reduce the
level of official cars on the road.88 On December 9, 2013, China’s media reported
that half of China was blanketed by smog.89 The U.S. Consulate General in
Shanghai reported that were a number of days in December 2013 where its
measurement of the air quality in Shanghai was hazardous or very unhealthy, and
during some time periods on December 5, 2013, its readings were “beyond
84 ExxonMobil, 2018 Outlook for Energy, A View to 2040, 2018, p. 60, available at
http://cdn.exxonmobil.com/~/media/global/files/outlook-for-energy/2018/2018-outlook-for-energy.pdf.
85 OECD, The Rising Cost of Ambient Air Pollution thus far in the 21st Century, Results from the BRIICS and the
OECD Countries, July 2017, p. 22, available at http://www.oecd-ilibrary.org/docserver/download/d1b2b844-

en.pdf?expires=1517681542&id=id&accname=guest&checksum=9B43144FCF78931DCE50EBEC9B8F84E8.
86 The Rand Corporation, Cost of Selected Policies to Address Air Pollution in China, 2015, p. 3, available at
http://www.rand.org/content/dam/rand/pubs/research_reports/RR800/RR861/RAND_RR861.pdf.
87 Hazardous is the worst category for air quality used by the U.S. embassy, based on a numerical value of its index
ranging from 301 to 500. A measurement of below 50 is considered good. On several occasions, the air quality index in
Beijing has surpassed 500, and on January 12, 2013, it reportedly hit 755.
88 National Public Radio, “Beijing’s ‘Airpocalypse’ Spurs Pollution Controls, Public Pressure,” January 14, 2013.
89 Xinhua, December 9, 2013.

index.” According to the U.S. Embassy in Beijing, from 2008 to 2015, nearly
two-thirds of the days in Beijing had air pollution considered to be unhealthy.90
 In February 2013, China’s Geological Survey reportedly estimated that 90% of
all Chinese cities had polluted groundwater, with two-thirds having “severely
polluted” water.91
 According to a 2012 report by the Asian Development Bank, less than 1% of the
500 largest cities in China meet the air quality standards recommended by the
World Health Organization, and 7 of these are ranked among the 10 most
polluted cities in the world.92
The Chinese government has indicated that it is taking steps to reduce energy consumption, boost
enforcement of environmental laws and regulations, reduce coal usage by expanding the use of
cleaner fuels (such as natural gas) to general power, and relocate high-polluting factories away
from large urban areas, although such efforts have had mixed results on the overall level of
pollution in China.93 In addition, China has become a major global producer and user of clean and
renewable energy technology. In January 2017, the Chinese government said it would spend $361
billion on renewable energy power generation by 2020.94
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). The relative lack of the rule of law
and widespread government corruption in China limit competition and undermine the efficient
allocation of goods and services in the economy. A New York Times article reported that (former)
Chinese Premier Wen Jiabao’s family controlled assets worth at least $2.7 billion.95 One study
estimates that between 2001 and 2010, China was the world’s largest source of illicit capital
outflows at $3.8 trillion.96 A 2012 survey by the Pew Research Center’s Global Attitudes Project
reported that 50% of respondents said that corrupt officials are a very big problem (up from 39%
in 2008).97 Chinese officials often identify government corruption as the greatest threat to the
Chinese Communist Party and the state. The Chinese government’s anticorruption watchdog
90 The BBC, “China pollution: First ever red alert in effect in Beijing,” December 8, 2015, available at
http://www.bbc.com/news/world-asia-china-35026363.
91 New York Times, “Concerns Grow About ‘Severely Polluted’ Water in China’s Cities,” February 20, 2013.
92 The Asian Development Bank, Toward an Environmentally Sustainable Future, Country Environmental Analysis of
the People’s Republic of China, 2012, p. xviii.

93 Bloomberg, “China Is Winning Its War on Air Pollution, at Least in Beijing,” January 11, 2018, available at
https://www.bloomberg.com/news/articles/2018-01-11/china-is-winning-its-war-on-air-pollution-at-least-in-beijing.
94 Reuters, “China to plow $361 billion into renewable fuel by 2020,” January 4, 2017, at
https://www.reuters.com/article/us-china-energy-renewables/china-to-plow-361-billion-into-renewable-fuel-by-2020-
idUSKBN14P06P.
95 New York Times, “Billions in Hidden Riches for Family of Chinese Leader,” October 25, 2012.
96 Global Financial Integrity, Chinese Economy Lost $3.79 Trillion in Illicit Financial Outflows Since 2000, Reveals
New GFI Report, October 25, 2012. It is not known how much of the illicit financial outflows in China are directly
linked to government corruption.
97 Pew Research Global Attitudes Project, Growing Concerns in China about Inequality, Corruption, October 16, 2012.

reported that 106,000 officials were found guilty of corruption in 2009.98 Since assuming power
in 2012, Chinese Xi Jinping has carried out an extensive anticorruption drive. China has
reportedly sought cooperation with the United States to obtain extradition of 150 alleged corrupt
officials who have fled to the United States.99 However, many analysts contend that government
anticorruption campaigns are mainly used to settle political scores with out-of-favor officials.
Some analysts contend that President’s Xi anticorruption drive is more about consolidating his
own political than instituting reforms.100 In addition, there are some indicators that the current
anticorruption campaign may be having a negative impact on the Chinese economy, due to
hesitancy by some local officials to pursue projects they feel will lead to scrutiny from the central
government.101 Many observers argue that meaningful progress against government corruption
cannot occur without greater government transparency, a system of checks and balances, a free
press, Internet freedom, and an independent judiciary.102 In October 2014, China held its fourth
Plenum of the 18th Party Conference. The meeting focused on the need to enhance the rule of law
in China, but emphasized the leading role of the Communist Party in the legal system.103
China maintains a weak and relatively decentralized government structure to regulate economic
activity in China. Laws and regulations often go unenforced or are ignored by local government
officials. As a result, many firms cut corners in order to maximize profits. This has led to a
proliferation of unsafe food and consumer products being sold in China or exported abroad. Lack
of government enforcement of food safety laws led to a massive recall of melamine-tainted infant
milk formula that reportedly killed at least four children and sickened 53,000 others in 2008.
Transparency International’s Corruption Perception Index for 2016 ranked China 79th out of 176
countries and territories, up from 72nd in 2007.104
Demographic Challenges
Many economists contend that China’s demographic policies, particularly its one-child policy
(first implemented in 1979), are beginning to have a significant impact on the Chinese economy.
For example, according to a McKinsey Global Institute study, China’s fertility rate fell from
about 5.8 births per woman in 1964 to 1.6 in 2012.105 This is now affecting the size of the Chinese
workforce.
The existence of a large and underemployed labor force was a significant factor in China’s rapid
economic growth when economic reforms were first introduced. Such a large labor force meant
98 BBC News, “Corruption Up Among China Government Officials,” January 8, 2010.

99 The Atlantic Monthly, How to Discipline 90 Million People, April 2015, available at http://www.theatlantic.com/
international/archive/2015/04/xi-jinping-china-corruption-political-culture/389787/.
100 The Washington Post, China’s Leader, Xi Jinping, Consolidates Power with Crackdowns on Corruption, Internet,
October 3, 2013.
101 A study reportedly issue by Bank of America Merrill Lynch estimated that China’s current antigraft campaign
would cost the Chinese economy more than $100 billion. See, BBC, China Blog, the Real Costs of China’s Anti-
Corruption Crackdown, April 2, 2014, available at http://www.bbc.com/news/blogs-china-blog-26864134.
102 New York Times, “Chinese Officials Find Misbehavior Now Carries Cost,” December 25, 2012.
103 The Diplomat, “4 Things We Learned from China’s 4th Plenum,” October 23, 2014, available at
http://thediplomat.com/2014/10/4-things-we-learned-from-chinas-4th-plenum/.
104 Transparency International, Corruption Perceptions Index 2016, January 2017, available at
https://www.transparency.org/news/feature/corruption_perceptions_index_2016.
105 McKinsey Global Institute, Can Long-Term Global Growth be Saved?, January 2015, available at
http://www.mckinsey.com/~/media/McKinsey/dotcom/Insights/Growth/Can%20long-
term%20global%20growth%20be%20saved/MGI_Global_growth_Full_report_February_2015pdf.ashx.

that firms in China had access to a nearly endless supply of low-cost labor, which helped enable
many firms to become more profitable, which in turn led them to boost investment and
production. Some economists contend that China is beginning to lose this labor advantage.
China’s working population has reportedly fallen for three straight years (in 2014, it reportedly
dropped by 3.7 million people).106 McKinsey Global Institute predicts that over the next 50 years,
China’s labor force could shrink by one-fifth. Some economists contend such factors will lead to
much smaller rates of future economic growth. As the labor force shrinks, Chinese wages could
begin to rise faster than productivity and profits growth, which could make Chinese firms less
competitive, and result in a shift of labor-intensive manufacturing overseas.107
The one-child policy has also resulted in a rapidly aging society in China.108 According to the
Brookings Institute, China already has 180 million people aged over 60, and this could reach 240
million by 2020 and 360 million by 2030. The population share of people aged over 60 could
reach 20% by 2020, and 27% by 2030.109 With a declining working population and a rising
elderly population, the Chinese government will face challenges trying to boost worker
productivity (such as enhancing innovation and high-end technology development) and
expanding spending on health care and elderly services. China’s Hukou (household registration)
system also poses challenges to the government.
China’s Hukou System110

First introduced in 1951, the Chinese Hukou (household registration) system is a categorization of its citizens
based on both their place of residence and eligibility for certain socioeconomic benefits. Hukou is issued through a
111
registration process administered by local authorities and solidified into inheritable social identities. The
classification of the system is composed by two related parts: socioeconomic eligibility
(agriculture/nonagriculture); and residential location (living in urban/rural areas). The Chinese government
imposed the system with the purpose of regulating population distribution, especially in regard to cities. Since
economic reforms were begun in 1979, hundreds of millions of people have been allowed to leave their home
towns to work in urban areas, such as Shanghai. The number of rural laborers working in China’s cities was 274
million in 2014, over one-third (36%) of the total workforce.112 Although such workers are allowed to reside in
the cities where they work, they are generally denied access to social entitlements, such as pensions, medical
insurance, and basic education for children. This forces such workers to save a very high level of their income to
pay for these services. Due to China’s desire to increase the urbanization of its population, combat demographic
disparities, and boost domestic consumption, the Chinese government is currently considering implementing new
reforms to the Hukou system.
106 The Washington Post, One is enough: Chinese Families Lukewarm over Easing of One-Child Policy, January 27,
2015, available at http://www.washingtonpost.com/world/asia_pacific/one-is-enough-chinese-families-lukewarm-over-
easing-of-one-child-policy/2015/01/22/bdfeff1e-9d7e-11e4-86a3-1b56f64925f6_story.html.
107 International Monetary Fund, the End of Cheap Labor, June 2013, available at http://www.imf.org/external/pubs/ft/
fandd/2013/06/das.htm.
108 Some analysts contend that because of it demographics, China will grow old before it grows rich.
109 Brookings Institute, Racing Towards the Precipice, by: Feng Wang, June 2012, available at
http://www.brookings.edu/research/articles/2012/06/china-demographics-wang.
110 Prepared by Candy Meza, Research Associate, Foreign Affairs, Defense, and Trade Division.
111 Congressional-Executive Commission on China, Special Topic Paper: China’s Household Registration System:
Sustained Reforms Needed to Protect China’s Rural Migrant.

112 Annual survey of migrant workers conducted by the National Bureau of Statistics, 2014. http://www.stats.gov.cn/
tjsj/ndsj/2014/indexeh.htm.

Economic Goals of the 19th Party Congress of the Communist Party

President Xi’s report to the 19th Party Congress in November 2017 stated that socialism with
Chinese characteristics had entered a new era. He stated that China would work to become a
“moderately prosperous society in all respects” by 2050. Major goals include boosting living
standards for poor and rural people, addressing income disparities (e.g., rich-poor and urban-
rural), making private consumption the driver of the economy, boosting services, reducing
pollution, promoting innovation and economic modernization, and improving overall living
standards.113 For example, the report states the following:
We will work faster to build China into a manufacturer of quality and develop advanced
manufacturing, promote further integration of the internet, big data, and artificial
intelligence with the real economy, and foster new growth areas and drivers of growth in
medium-high end consumption, innovation-driven development, the green and low-carbon
economy, the sharing economy, modern supply chains, and human capital services. We
will support traditional industries in upgrading themselves and accelerate development of
modern service industries to elevate them to international standards. We will move Chinese
industries up to the medium-high end of the global value chain, and foster a number of
world-class advanced manufacturing clusters.
The report indicated that China would continue to pursue trade and investment reforms, noting
the following:
We will adopt policies to promote high-standard liberalization and facilitation of trade and
investment; we will implement the system of pre-establishment national treatment plus a
negative list across the board, significantly ease market access, further open the service
sector, and protect the legitimate rights and interests of foreign investors. All businesses
registered in China will be treated equally.
However, the report emphasized the continued importance of the state sector and the
government’s continued role in various economic sectors:
We will improve the systems for managing different types of state assets, and reform the
system of authorized operation of state capital. In the state-owned sector, we will step up
improved distribution, structural adjustment, and strategic reorganization. We will work to
see that state assets maintain and increase their value; we will support state capital in
becoming stronger, doing better, and growing bigger, and take effective measures to
prevent the loss of state assets. We will further reform of state-owned enterprises, develop
mixed-ownership economic entities, and turn Chinese enterprises into world-class,
globally competitive firms.114
China’s Belt and Road Initiative

China’s Belt and Road initiative (BRI), also called “One Belt, One Road” (OBOR), was launched
in 2013 to boost economic integration and connectivity (such as infrastructure, trade, and
113 China’s goals are to achieve average annual GDP growth of 4.8% from 2020 to 2035 and 3.4% from 2030 to 2050.
It seeks to achieve per capita GDP of $20,000 by 2025 (making China a high income country), $45,000 by 2035 (35%
of U.S. levels), and $120,000 by 2050 (half of U.S. levels).
114 Xinhua, “Full text of Xi Jinping's report at 19th CPC National Congress,” November 3, 2017, available at
http://news.xinhuanet.com/english/special/2017-11/03/c_136725942.htm.

investment) with its neighbors and various trading partners in Asia, Africa, Europe, and
beyond.115 At the APEC summit in November 2017, President Xi said the following:
The Belt and Road Initiative calls for joint contribution and it has a clear focus, which is
to promote infrastructure construction and connectivity, strengthen coordination on
economic policies, enhance complementarity of development strategies and boost
interconnected development to achieve common prosperity. This initiative is from China,
but it belongs to the world. It is rooted in history, but it is oriented toward the future. It
focuses on the Asian, European and African continents, but it is open to all partners. I am
confident that the launch of the Belt and Road Initiative will create a broader and more
dynamic platform for Asia-Pacific cooperation.116
Many U.S. analysts view the BRI differently than how Chinese leaders describe it. For example,
Nadège Rolland, senior fellow with the National Bureau of Asian Research states the following:
The Belt and Road Initiative (BRI) is generally understood as China’s plan to finance and
build infrastructure projects across Eurasia. Infrastructure development is in fact only one
of BRI’s five components which include strengthened regional political cooperation,
unimpeded trade, financial integration and people-to-people exchanges. Taken together,
BRI’s different components serve Beijing’s vision for regional integration under its helm.
It is a top-level design for which the central government has mobilized the country’s
political, diplomatic, intellectual, economic and financial resources. It is mainly conceived
as a response to the most pressing internal and external economic and strategic challenges
faced by China, and as an instrument at the service of the PRC’s vision for itself as the
uncontested leading power in the region in the coming decades. As such, it is a grand
strategy.117
Many aspects of the BRI initiative remain unclear, including which (and how many) countries
will participate, how much China will spend to finance the initiative, and what projects will fall
under the BRI. For example, the government’s China Belt and Road Portal currently lists profiles
of 70 countries on its website.118 However, China’s official media in December 2017 stated that
86 countries and international organizations had signed 100 cooperation agreements with China
under the BRI.119 Nadège Rolland said that China pledged it would spend $1 trillion to $1.3
trillion, The Economist reports that China put the figure at $4 trillion,120 and the World Economic
Forum estimates that China could ultimately spend $8 trillion on BRI.121
The initiative could provide a big boost to China’s economy and soft power image. China hopes
to gain a better return on its foreign exchange reserves, create new overseas business
opportunities for Chinese firms, create new markets for industries currently experiencing
115 It comprises the Silk Road Economic Belt and the 21st Century Maritime Silk Road.
116 Xinhuanet, “Full text of Chinese President Xi's address at APEC CEO Summit,” November 11, 2017, available at
http://www.xinhuanet.com/english/2017-11/11/c_136743492.htm.
117 Testimony of Nadège Rolland, Senior Fellow, The National Bureau of Asian Research, before the U.S.-China
Economic and Security Review Commission Hearing on: “China’s Belt and Road Initiative: Five Years Later, January
25, 2018, available at https://www.uscc.gov/sites/default/files/Rolland_USCC%20Testimony_16Jan2018.pdf.
118 See https://eng.yidaiyilu.gov.cn/info/iList.jsp?cat_id=10076&cur_page=1.
119 Xinhuanet, “China signs cooperation agreements with 86 entities under Belt and Road,” available at
http://www.xinhuanet.com/english/2017-12/23/c_136846221.htm.
120 The Economist, “Our bulldozers, our rules, China’s foreign policy could reshape a good part of the world
economy,” July 2, 2016, available at https://www.economist.com/news/china/21701505-chinas-foreign-policy-could-

reshape-good-part-world-economy-our-bulldozers-our-rules.
121 World Economic Forum, “China’s $900 billion New Silk Road. What you need to know,” June 26, 2017, available
at https://www.weforum.org/agenda/2017/06/china-new-silk-road-explainer/.

overcapacity, and stimulate economic development in poorer regions of China.122 However, the
initiative could pose financial risks if borrowers do not repay loans or if recipient countries do not
view Belt and Road as benefiting them. U.S. Secretary of State Rex Tillerson criticized certain
aspects of Belt and Road initiative in remarks made in October 2017:
We have watched the activities and actions of others in the region, in particular China, and
the financing mechanisms it brings to many of these countries which result in saddling
them with enormous levels of debt. They don’t often create the jobs, which infrastructure
projects should be tremendous job creators in these economies, but too often, foreign
workers are brought in to execute these infrastructure projects. Financing is structured in a
way that makes it very difficult for them to obtain future financing, and oftentimes has very
subtle triggers in the financing that results in financing default and the conversion of debt
to equity.123
China has undertaken other major financial initiatives as well. In July 2014, China, along with
Brazil, Russia, India, and South Africa, announced the creation of a $100 billion “New
Development Bank,” which is headquartered in Shanghai, China. The new bank aims to fund
infrastructure projects in developing countries. In October 2014, China launched the creation of a
new $100 billion Asian Infrastructure Development Bank (AIIB), aimed at funding infrastructure
projects in Asia.124 Fifty-seven nations joined as founding members. The AIIB, headquartered in
Beijing, announced it was open for business in January 2016. To date, the United States has
chosen not to join the AIIB.
Made in China 2025

The “Made in China 2025” initiative, announced in 2015, is one of several recently announced
ambitious projects aimed at increasing the competitiveness of Chinese industries, fostering
Chinese brands, boosting innovation, and reducing China’s reliance on foreign technology by
making China a major or dominant global manufacturer of various technologies.125 According to
Chinese media, the initiative intends to “transform China from a manufacturing giant into a world
manufacturing power” by 2049.126 For example, the plan states a goal of achieving 40% of
domestically manufactured basic components and basic materials by 2020 and 70% by 2025. An
updated version of the plan released in January 2018 said China aimed to become the world's
leading manufacturer of telecommunication, railway, and electrical power equipment by 2025,
and that China’s robotics, high-end automation, and new energy vehicles industries would
globally rank second or third by 2025.127 The methods the Chinese government plans to use to
achieve its goals have raised concerns among U.S. firms and policymakers because they appear to
122 On October 24, 2017, the 19th Chinese Communist Party Congress passed a resolution to include the Belt and Road
Initiative into the Chinese Constitution.
123 U.S. Department of State, Remarks on “Defining Our Relationship with India for the Next Century,” October 18,
2017, available at https://www.state.gov/secretary/remarks/2017/10/274913.htm.

124 See CRS In Focus IF10154, Asian Infrastructure Investment Bank, by Martin A. Weiss.
125 The 2015 “Made in China 2025” document identified these 10 for support These ten key sectors are (1) next-
generation information technology, (2) high-end numerical control machinery and robotics, (3) aerospace and aviation
equipment, (4) maritime engineering equipment and high-tech maritime vessel manufacturing, (5) advanced rail
equipment, (6) energy-saving and new energy vehicles, (7) electrical equipment, (8) agricultural machinery and
equipment, (9) new materials, and (10) biopharmaceuticals and high-performance medical devices.
126 Xinhuanet, "Made in China 2025" Plan Unveiled, May 19, 2015, at http://www.xinhuanet.com/english/2015-
05/19/c_134251770.htm
127 China Daily, “Made in China 2025 roadmap updated,” January 27, 2018, at
http://www.chinadaily.com.cn/a/201801/27/WS5a6bb8b9a3106e7dcc137168.html.

involve large subsidies, protection of domestic industries, directed policies to purchase

technology and IPR from abroad, increased pressure on foreign firms to transfer technology in
order to do business in China, and what appears to be a goal of deliberately reducing foreign
participation in China’s markets.
In an interview on November 3, 2017, U.S. Trade Representative Robert Lighthizer stated that
China’s Made in China 2025 initiative was “a very, very serious challenge, not just to us, but to
Europe, Japan and the global trading system.”128 The USTR’s 2017 annual report on China’s
WTO compliance focused heavily on the initiative, stating that Made in China 2025 differed from
industry support by other WTO members in the level of ambition and scale of resources dedicated
to obtaining its goals, and the USTR report warned that “even if the Chinese government fails to
achieve the industrial policy goals set forth in Made in China 2025, it is still likely to create or
exacerbate market distortions and create severe excess capacity in many of the targeted
industries.”129
Challenges to U.S. Policy of China’s Economic Rise

China’s rapid economic growth and emergence as a major economic power have given China’s
leadership increased confidence in its economic model. Many believe the key challenges for the
United States are to convince China that (1) it has a stake in maintaining the international trading
system, which is largely responsible for its economic rise, and should take a more active
leadership role in maintaining that system; and (2) further economic and trade reforms are the
surest way for China to grow and modernize its economy. Lowering trade and investment barriers
would boost competition in China, lower costs for consumers, increase economic efficiency, and
spur innovation. However, many U.S. stakeholders are concerned that China’s efforts to boost the
development of indigenous innovation and technology could result in greater intervention by the
state (such as subsidies, trade and investment barriers, and discriminatory policies), which could
negatively affect U.S. IP-intensive firms.
Opinions differ as to the most effective way to deal with China on major economic issues. Some
support a policy of engagement with China using various forums, such as the newly created U.S.-
China Comprehensive Economic Dialogue. Others support a somewhat mixed policy of using
engagement when possible, coupled with a more aggressive use of the WTO dispute settlement
procedures to address China’s unfair trade policies.130 Still others, who see China as a growing
threat to the U.S. economy and the global trading system, advocate a policy of trying to contain
China’s economic power and using punitive measures (such as trade sanctions) to either counter
the negative impact of China’s industrial policies on U.S. firms or push China to modify
distortive and discriminatory policies (such as the Made in China 2025 initiative). Responding to
China’s BRI is viewed by some as a major challenge to U.S. global economic interests. While
China’s financial support of infrastructure projects in numerous countries could produce positive
economic results, U.S. policymakers have expressed concerns that China will use BRI to mainly
benefit its own firms, that the process of implementation of projects will not be transparent, that
BRI participation could saddle countries with large debts, and that China will use the BRI to
spread its economic system to other countries.
128 The interview is available at https://www.youtube.com/watch?v=L03Np5ZLvM8.

129 USTR, 2017 Report to Congress on China’s WTO Compliance, January 2018, p. 10, available at
https://ustr.gov/sites/default/files/files/Press/Reports/China%202017%20WTO%20Report.pdf.
130 At the time of this writing, the Trump Administration has not brought any WTO dispute settlement cases against
China to date.

Author Information
Wayne M. Morrison
Specialist in Asian Trade and Finance
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
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China’s Economic Rise: History, Trends,

Challenges, and Implications for the

Updated February 5, 2018

Congressional Research Service

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Figure 10. Industrial Output by Foreign-Invested Firms in China as a Share of National

Congressional Research Service

Congressional Research Service

Congressional Research Service RL33534 · VERSION 96 · UPDATED 1

The History of China’s Economic Development

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Figure 1. Chinese Per Capita GDP: 1950-1978

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Figure 2. Comparison of Chinese and Japanese Per Capita GDP: 1950-1978

The Introduction of Economic Reforms

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China’s Economic Growth and Reforms: 1979-the Present

13 IMF, World Economic Outlook, October 2016.

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Figure 3. Chinese Real GDP Growth: 1979-2017

Source: IMF, and Chinese National Bureau of Statistics.

Source: IMF, WEO.

Causes of China’s Economic Growth

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Source: Economist Intelligence Unit Database (accessed on January 26, 2018).

Measuring the Size of China’s Economy

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Nominal GDP ($ billions) 11,938 19,362

Source: IMF, World Economic Forum.

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The Decline and Rise of China’s Economy

Source: IMF, World Economic Outlook, October 2017.

China as the World’s Largest Manufacturer

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Source: United Nations, UNdata.

22 United Nations, UNdata, available at http://data.un.org/Data.aspx?d=SNAAMA&f=

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Changes in China’s Wage and Labor Cost Advantages

Source: Economist Intelligence Unit.

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Source: Economist Intelligence Unit.

Foreign Direct Investment (FDI) in China

27China 2012 Statistical Yearbook.

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Figure 10. Industrial Output by Foreign-Invested Firms in China as a Share

Source: Invest in China (http://www.fdi.gov.cn) and China’s 2012 Statistical Yearbook.

Figure 11. Share of Chinese Merchandise Exports and Imports

Source: Invest in China (http://www.fdi.gov.cn).

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Figure 12. UNCTAD’s Estimates of China’s Annual FDI Flows: 1990-2016

Source: UNCTAD Data Center.

recipient after the United States.

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Country Amount % of Total Amount % of Total

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Estimated Cumulative Utilized

Country Amount % of Total Amount % of Total