Economic Overview
The Chinese economy experienced astonishing growth in the last few decades that catapulted the country to become the world's second largest economy. In 1978—when China started the program of economic reforms—the country ranked ninth in nominal gross domestic product (GDP) with USD 214 billion; 35 years later it jumped up to second place with a nominal GDP of USD 9.2 trillion.
Since the introduction of the economic reforms in 1978, China has become the world’s manufacturing hub, where the secondary sector (comprising industry and construction) represented the largest share of GDP. However, in recent years, China’s modernization propelled the tertiary sector and, in 2013, it became the largest category of GDP with a share of 46.1%, while the secondary sector still accounted for a sizeable 45.0% of the country’s total output. Meanwhile, the primary sector’s weight in GDP has shrunk dramatically since the country opened to the world.
China weathered the global economic crisis better than most other countries. In November 2008, the State Council unveiled a CNY 4.0 trillion (USD 585 billion) stimulus package in an attempt to shield the country from the worst effects of the financial crisis. The massive stimulus program fuelled economic growth mostly through massive investment projects, which triggered concerns that the country could have been building up asset bubbles, overinvestment and excess capacity in some industries. Given the solid fiscal position of the government, the stimulus measures did not derail China’s public finances. The global downturn and the subsequent slowdown in demand did, however, severely affect the external sector and the current account surplus has continuously diminished since the financial crisis.
Apparently, China exited the financial crisis in good shape, with GDP growing above 9%, low inflation and a sound fiscal position. However, the policies implemented during the crisis to foster economic growth exacerbated the country’s macroeconomic imbalances. Particularly, the stimulus program bolstered investment, while households’ consumption remained repressed. In order to tackle these imbalances, the new administration of President Xi Jinping and Premier Li Keqiang started to unveil economic measures aimed at promoting a more balanced economic model at the expense of the once-sacred rapid economic growth.
Economic History
After Mao Zedong’s death in 1976, Deng Xiaoping—who was the core of the second generation of Chinese leadership—became China’s paramount leader and pushed ahead bold reforms that reshaped the country’s economy. At the Third Plenum of the 11th Central Committee of the Communist Party of China, held in December 1978, Deng announced the official launch of the Four Modernizations—agriculture, defense, industry and science and technology—which marked the beginning of the reform and opening-up policies. Economic reforms under Deng’s era increased the role of market mechanisms and reduced government control over the economy. The measures included, among others, breaking down the collective farms, opening up China to foreign investment, encouraging business entrepreneurship, establishing Special Economic Zones and introducing market incentives in the state-owned companies. Moreover, China started to participate in the global economy and the country joined the International Monetary Fund (IMF) and the World Bank in 1980.
In early 1990s, Jiang Zemin—the third generation of Chinese leadership—became the new paramount leader of the country and his administration implemented substantial economic reforms. Under his mandate, most of the state-owned companies, except large monopolies, were privatized or liquidated, thus expanding the role of the private sector in the economy at the cost of leaving millions unemployed. During the same period, President Jiang and Premier Zhu Rongji reduced trade barriers; ended state planning; introduced competition, deregulation and new taxes; reformed and bailed out the banking system; and drove the military stratum out of the economy. In addition, Jiang guided China to join the World Trade Organization in December 2011, which buttressed the country’s trade.
In 2002, Jiang Zemin stepped down as General Secretary of the Communist Party, thereby initialing the transition to the fourth generation of leadership, led by President Hu Jintao and Premier Wen Jiabao. The Hu-Wen administration tried to reduce the income gap between the coastal cities and the countryside, as China’s skyrocketing growth mostly benefited just one part of the population. They increased subsidies, scrapped agricultural taxes, slowed privatization of state assets and promoted social welfare. Despite the government’s efforts to prevent the country from overheating, by the mid-2000s the economy experienced an unprecedented economic growth mainly due to booming exports, resilient private consumption, soaring manufacturing and massive investment. However, the 2008 global financial crisis forced the Chinese authorities to launch an aggressive stimulus package and adopt a loose monetary policy.
The fifth generation came to power in 2012, when President Xi Jinping and Premier Li Keqiang took the reins of the country. The new Xi-Li administration unveiled an ambitious reform agenda in an attempt to change the country’s economic fundamentals and ensure a sustainable growth model. In this regard, authorities expressed their willingness to tolerate lower growth rates as a necessary condition to push forward economic reforms. Xi coined the term “Chinese Dream” as his contribution to the guiding ideology of the Communist Party of China. Although vague, the “Chinese dream" emphasizes people’s happiness and the idea of a strong China.
China’s Balance of payments
China’s external position is extremely solid. The current account has recorded a surplus in every year since 1994. The capital account followed suit and only recorded two deficits in the last 20 years. This situation of surpluses in the both the current and the capital put pressure on the national currency and prompted the Central Bank to sterilize most of the foreign currency that entered the country. As a result, China’s foreign exchange reserves skyrocketed to almost USD 4.0 trillion in 2014. The current account surplus reached its peak in 2007, when it represented 10.1% of GDP. Since then, however, the surplus has narrowed and in 2013 it fell to only 2.0% of GDP.
China’s capital account has bold controls, which implies that the country lacks the freedom to convert local financial assets into foreign financial assets at a market-determined exchange rate and vice versa. The new Xi-Li administration and the People’s Bank of China vowed to accelerate interest rate liberalization and capital account convertibility. In this regard, Chinese authorities have started to implement some measures, such as removing a cap on foreign-currency deposit rates in Shanghai.
The capital account benefited from strong inflows of Foreign Direct Investment (FDI). FDI has performed strongly in the last decade, with record inflows of USD 118 billion in 2013, thereby becoming the second largest recipient of foreign investment. Among the countries that invest more in China are Hong Kong, Singapore, Japan, Taiwan, and the United States. In addition, China’s outward investment soared in recent years and, according to some analysts, the country could become a net exporter of capital in the coming years.
China’s Trade Structure
China has experienced interrupted merchandise trade surpluses since 1993. Total trade multiplied by nearly 100 to USD 4.2 trillion in only three decades and, in 2013, China surpassed the United States as the world’s biggest trading nation.
The opening of the country and the government’s massive investment programs have prompted the country to become a major manufacturing hub. This situation fostered trade growth in the last decades, particularly after China joined the World Trade Organization in 2001. As an economy highly integrated into the global trade system, the country benefited from a steady improvement in its terms of trade since 2000. However, the global economic downturn in 2008-2009 led the country to reduce manufacturing output, thus putting a drag on China’s trading sector.
Moreover, the country has engaged in several bilateral and multilateral trade agreements that have opened new markets for its products. In 2003, China signed the Closer Economic Partnership Arrangement with Hong Kong and Macau. A Free Trade Agreement (FTA) between China and the ASEAN nations came into effect on January 2010, which created the world’s third largest free trade area in terms of nominal GDP. China also established, among others, FTA with countries such as Chile, Costa Rica, Pakistan, Peru, New Zealand, Thailand and Singapore. Moreover, there are other FTA under negotiation with Australia, the Gulf Cooperation Council, Japan, Korea and Norway.
Exports from China
Electronics and machinery make up around 55% of total exports, garments account for 13% and construction material and equipment represent 7%. Sales to Asia represent over 40% of total shipments, while North America and Europe have an export share of 24% and 23%, respectively. Although exports to Africa and South America expanded rapidly, they only account for 8% of total shipments.
Due to favorable global trade conditions and China’s accession to the World Trade Organization in December 2001, the country has experienced an astonishing growth of 26.9% annually in real goods and services exports during the 2002-2008 period.
While exports contracted sharply in 2009 due to the downturn in global demand, shipments in 2010 and 2011 rebounded strongly following the 2008 financial crisis. In 2012 and 2013, export growth averaged 7.8%.
In nominal terms, merchandise exports jumped from just USD 267 billion in 2001 to USD 2.2 trillion in 2013, which represents annual average growth of 20.2%. According to FocusEconomics Consensus Forecast panelists’ projections from September 2014, Chinese exports are expected to slow to a 6.6% increase in 2014 following an expansion of 7.9% in 2013. Panelists see exports picking up in 2015 to an 8.8% expansion.
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