Trade Guide: China

Do you know?

With over 1.35 billion citizens, China (official name: the People’s Republic of China) is the most populous country in the world, and the second largest by land area.

Economic Overview

Since embarking upon an ambitious program of market-based reforms in 1978, China has transformed itself from a poor, isolated, agricultural economy into the second largest economy in the world, a manufacturing and export powerhouse, and a formidable high tech competitor in a number of sectors, including avionics and environmental technologies.

China has effectively pursued a variety of means to acquire Western technology from companies eager to do business in the China market. This has allowed China to develop world-class capabilitiesseemingly overnight.

Employing an export-led development model capitalizing on an abundant pool of inexpensive labor and a tightly controlled exchange rate designed to boost exports, China has become the leading export nation in the world. With three decades of approximately 10% GDP growth rates beginning from the late 1970s, China is perhaps the most remarkable economic development example in modern history, having lifted more than 500 million people out of poverty.Thanks to large-scale and aggressive monetary and financial stimulus measures, China weathered the Global Financial Crisis in remarkably good shape, growing by 9.2 % in 2009, 10.3% in 2010, and 9.2% in 2011.

In recent years however, wage pressures have begun to grow, thanks to a declining labor pool, and greater expectations on the part of citizens for a middle class lifestyle. Combined with a gradual appreciation in the value of China’s currency, the RMB, the effectiveness of the export-led model has now begun to reach its limitations. Policy makers are in the process of attempting to shift China towards a more balanced, domestic consumption-driven economic model. Chinese domestic consumption has traditionally been extremely low -- about 35% of GDP, as compared to roughly 70% in the United States.

Executing the shift to a domestic demand economy would constitute the most far-reaching transformation since the introduction of market based reforms in the late 1970s. Double digit growth rates are no longer considered realistic, and current targets and projections are in the 7% -7.5% range. China is now entering a fundamentally different chapter in its economic evolution.

Despite its impressive overall growth rates over the past several decades, China remains a developing country, with per capita income levels which are much closer to Ecuador than wealthy developed world neighbors such as Korea or Singapore. According to the World Bank, almost 100 million Chinese continue to live below the official poverty level. However, wealthy “tier one” cities such as Shanghai and Beijing do in fact boast per capital income levels that approach those of the developed nations, whereas most rural areas lag significantly behind.

While China is likely to continue to grow at rates most large economies would envy, significant challenges remain. Concerns are mounting over the actual amount of non-performing loans in the financial sector, as well as the potential instability created by the largely unregulated “shadow banking” system. Signs are also growing that rapid increases in real estate values could be inflating a massive asset bubble, bringing with it the likelihood of serious economic dislocations, should it burst. And the ultimate success of policy makers in shifting to a more domestic consumption driven economy remains to be seen.

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