The China`s economics

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The China is the world's second largest economy after the United States by purchasing power parity ($9.05 trillion in 2009) and the world's fastest-growing major economy, with average growth rates of 10% for the past 30 years. It is also the second largest trading nation in the world and the largest exporter and second largest importer of goods.

The news that China replaced Japan as the second largest economy is cautiously received by the Chinese government, stating that the country's per capita income was only at $6,567 (IMF, 98th) in 2009. While economies in provinces in coastal area of China tend to be more developed, many regions in the west still perform below the country's average. The disparity between urban and village population is also one of the major social concerns.

1. History

The economic history of modern China began with the fall of the Qing Dynasty in 1911. Following the Qing, China underwent a period of instability and disrupted economic activity. Under the Nanjing decade (1927-1937), China advanced several industries, in particular those related to the military, in an effort to catch up with the west and prepare for war with Japan. The Second Sino-Japanese War (1937-1945) and the following Chinese civil war caused the collapse of the Republic of China and formation of the People's Republic of China.

The new ruler of China, Mao Zedong, initially promised to develop «an socialist alliance with petit-bourgeois, workers, and nationalist bourgeois», but enacted collectivization upon consolidation of this regime. Collectivization resulted in the success of the first five-year plan, but Mao's second five-year plan, which included the Great Leap forward, did not meet with the same success. A new party faction who supported private plots eventually challenged Mao's economic policy. Unwilling to give up power, Mao launched the Cultural Revolution, which led to the collapse of the Chinese economy.

Following Mao's death, one of the most senior officials who had advocated private plots in the early 1960s, Deng Xiaoping, initiated gradual market reforms that abolished the communes and collectivized industries of Mao, replacing them with the free-market system. Deng's reforms vastly improved the standard of living of the Chinese people, the competitiveness of the Chinese economy, and caused China to become one of the fastest growing and most important economies in the world. It also led to one of the most rapid industrializations in world history. For this achievement he is sometimes known as «The Venerated Deng». As a result of Deng's reforms, China is widely regarded as a returning superpower.

1.1 1949-1978

In 1949, China followed a socialist heavy industry development strategy, or the «Big Push» strategy. Consumption was reduced while rapid industrialization was given high priority. The government took control of a large part of the economy and redirected resources into building new factories. Entire new industries were created. Most important, economic growth was jump-started. Tight control of budget and money supply reduced inflation by the end of 1950. Though most of it was done at the expense of suppressing the private sector of small to big businesses by the Three-anti/five-anti campaigns between 1951 to 1952. The campaigns were notorious for being anti-capitalist, and imposed charges that allowed the government to punish capitalists with severe fines. In the beginning of the Communist party's rule, the leaders of the party had agreed that for a nation such as China, which does not have any heavy industry and minimal secondary production, capitalism is to be utilized to help the building of the «New China» and finally merged into communism.

1.2 1978-1990

Since 1978, China began to make major reforms to its economy. The Chinese leadership adopted a pragmatic perspective on many political and socioeconomic problems, and sharply reduced the role of ideology in economic policy. Political and social stability, economic productivity, and public and consumer welfare were considered paramount and indivisible. In these years, the government emphasized raising personal income and consumption and introducing new management systems to help increase productivity. The government also had focused on foreign trade as a major vehicle for economic growth. In the 1980s, China tried to combine central planning with market-oriented reforms to increase productivity, living standards, and technological quality without exacerbating inflation, unemployment, and budget deficits. Reforms began in the agricultural, industrial, fiscal, financial, banking, price setting, and labor systems.

A decision was made in 1978 to permit foreign direct investment in several small «special economic zones» along the coast. The country lacked the legal infrastructure and knowledge of international practices to make this prospect attractive for many foreign businesses, however. In the early 1980s steps were taken to expand the number of areas that could accept foreign investment with a minimum of red tape, and related efforts were made to develop the legal and other infrastructures necessary to make this work well. This additional effort resulted in making 14 coastal cities and three coastal regions «open areas» for foreign investment. All of these places provide favored tax treatment and other advantages for foreign investment. Laws on contracts, patents, and other matters of concern to foreign businesses were also passed in an effort to attract international capital to spur China's development. The largely bureaucratic nature of China's economy, however, posed a number of inherent problems for foreign firms that wanted to operate in the Chinese environment, and China gradually had to add more incentives to attract foreign capital.

1.3 1990-2000

In the 1990s, the Chinese economy continued to grow at a rapid pace, at about 9.5%, accompanied by low inflation. The Asian financial crisis affected China at the margin, mainly through decreased foreign direct investment and a sharp drop in the growth of its exports. However, China had huge reserves, a currency that was not freely convertible, and capital inflows that consisted overwhelmingly of long-term investment. For these reasons it remained largely insulated from the regional crisis and its commitment not to devalue had been a major stabilizing factor for the region. However, China faced slowing growth and rising unemployment based on internal problems, including a financial system burdened by huge amounts of bad loans, and massive layoffs stemming from aggressive efforts to reform state-owned enterprises (SOEs).

Despite China's impressive economic development during the past two decades, reforming the state sector and modernizing the banking system remained major hurdles. Over half of China's state-owned enterprises were inefficient and reporting losses. During the 15th National Communist Party Congress that met in September 1997, President Jiang Zemin announced plans to sell, merge, or close the vast majority of SOEs in his call for increased «non-public ownership» (feigongyou or privatization in euphemistic terms). The 9th National People's Congress endorsed the plans at its March 1998 session. In 2000, China claimed success in its three year effort to make the majority of large state owned enterprises (SOEs) profitable.

1.4 2000-present

Following the Chinese Communist Party's Third Plenum, held in October 2003, Chinese legislators unveiled several proposed amendments to the state constitution. One of the most significant was a proposal to provide protection for private property rights. Legislators also indicated there would be a new emphasis on certain aspects of overall government economic policy, including efforts to reduce unemployment (now in the 8-10% range in urban areas), to rebalance income distribution between urban and rural regions, and to maintain economic growth while protecting the environment and improving social equity. The National People's Congress approved the amendments when it met in March 2004.

The Fifth Plenum in October 2005 approved the 11th Five-Year Economic Program (2006-2010) aimed at building a «harmonious society» through more balanced wealth distribution and improved education, medical care, and social security. On March 2006, the National People's Congress approved the 11th Five-Year Program. The plan called for a relatively conservative 45% increase in GDP and a 20% reduction in energy intensity (energy consumption per unit of GDP) by 2010.

China's economy grew at an average rate of 10% per year during the period 1990-2004, the highest growth rate in the world. China's GDP grew 10.0% in 2003, 10.1%, in 2004, and even faster 10.4% in 2005 despite attempts by the government to cool the economy. China's total trade in 2006 surpassed $1.76 trillion, making China the world's third-largest trading nation after the U.S. and Germany. Such high growth is necessary if China is to generate the 15 million jobs needed annually-roughly the size of Ecuador or Cambodia-to employ new entrants into the job market internationally.

On January 14, 2009, as confirmed by the World Bank the NBS published the revised figures for 2007 fiscal year in which growth happened at 13 percent instead of 11.9 percent (provisional figures). China's gross domestic product stood at US$3.4 trillion while Germany's GDP was USD $3.3 trillion for 2007. This made China the world's third largest economy by gross domestic product. Based on these figures, in 2007 China recorded its fastest growth since 1994 when the GDP grew by 13.1 percent.

China launched its Economic Stimulus Plan to specifically deal with the Global financial crisis of 2008-2009. It has primarily focused on increasing affordable housing, easing credit restrictions for mortgage and SMEs, lower taxes such as those on real estate sales and commodities, pumping more public investment into infrastructure development, such as the rail network, roads and ports. By the end of 2009 it appeared that the Chinese economy was showing signs of recovery. At the 2009 Economic Work Conference in December 'managing inflation expectations' was added to the list of economic objectives, suggesting a strong economic upturn and a desire to take steps to manage it.

By 2010 it was evident to outside observers such as The New York Times that China was poised to move from export dependency to development of an internal market. Wages were rapidly rising in all areas of the country and Chinese leaders were calling for an increased standard of living.

In mid-2010, China became the world's second largest economy; surpassing Japan's economy and second only to the economy of the United States. In the second quarter of 2010, China's economy was valued at $1.33 trillion, ahead of the $1.28 trillion that Japan's economy was worth. Preliminary estimates China's 2010 total GDP to be worth $5.7 trillion. China could become the world's largest economy (by nominal GDP) sometime as early as 2020.

2. Government role

Since 1949 the government, under socialist political and economic system, has been responsible for planning and managing national economy. In the early 1950s, the foreign trade system was monopolized by the state. Nearly all the domestic enterprises were state-owned and the government had set the prices for key commodities, controlled the level and general distribution of investment funds, determined output targets for major enterprises and branches, allocated energy resources, set wage levels and employment targets, operated the wholesale and retail networks, and steered the financial policy and banking system. In the countryside from the mid-1950s, the government established cropping patterns, set the level of prices, and fixed output targets for all major crops.

Since 1978 when economic reforms were instituted, the government role in the economy has lessened to a great degree. Industrial output by state enterprises slowly declined, although a few strategic industries, such as the aerospace industry have today remained predominantly state-owned. While the role of the government in managing the economy has been reduced and the role of both private enterprise and market forces increased, the government maintains a major role in the urban economy. With its policies on such issues as agricultural procurement the government also retains a major influence on rural sector performance. The State Constitution of 1982 specified that the state is to guide the country's economic development by making broad decisions on economic priorities and policies, and that the State Council, which exercises executive control, was to direct its subordinate bodies in preparing and implementing the national economic plan and the state budget. A major portion of the government system (bureaucracy) is devoted to managing the economy in a top-down chain of command with all but a few of the more than 100 ministries, commissions, administrations, bureaus, academies, and corporations under the State Council are concerned with economic matters.

Each significant economic sector is supervised by one or more of these organizations, which includes the People's Bank of China, National Development and Reform Commission, Ministry of Finance, and the ministries of agriculture; coal industry; commerce; communications; education; light industry; metallurgical industry; petroleum industry; railways; textile industry; and water resources and electric power. Several aspects of the economy are administered by specialized departments under the State Council, including the National Bureau of Statistics, Civil Aviation Administration of China, and the tourism bureau. Each of the economic organizations under the State Council directs the units under its jurisdiction through subordinate offices at the provincial and local levels.

The whole policy-making process involves extensive consultation and negotiation. Economic policies and decisions adopted by the National People's Congress and the State Council are to be passed on to the economic organizations under the State Council, which incorporates them into the plans for the various sectors of the economy. Economic plans and policies are implemented by a variety of direct and indirect control mechanisms. Direct control is exercised by designating specific physical output quotas and supply allocations for some goods and services. Indirect instruments-also called «economic levers» - operate by affecting market incentives. These included levying taxes, setting prices for products and supplies, allocating investment funds, monitoring and controlling financial transactions by the banking system, and controlling the allocation of key resources, such as skilled labor, electric power, transportation, steel, and chemicals (including fertilizers). The main advantage of including a project in an annual plan is that the raw materials, labor, financial resources, and markets are guaranteed by directives that have the weight of the law behind them. In reality, however, a great deal of economic activity goes on outside the scope of the detailed plan, and the tendency has been for the plan to become narrower rather than broader in scope. A major objective of the reform program was to reduce the use of direct controls and to increase the role of indirect economic levers. Major state-owned enterprises still receive detailed plans specifying physical quantities of key inputs and products from their ministries. These corporations, however, have been increasingly affected by prices and allocations that were determined through market interaction and only indirectly influenced by the central plan.

Total economic enterprise in China is apportioned along lines of directive planning (mandatory), indicative planning (indirect implementation of central directives), and those left to market forces. In the early 1980s during the initial reforms enterprises began to have increasing discretion over the quantities of inputs purchased, the sources of inputs, the variety of products manufactured, and the production process. Operational supervision over economic projects has devolved primarily to provincial, municipal, and county governments. The majority of state-owned industrial enterprises, which were managed at the provincial level or below, were partially regulated by a combination of specific allocations and indirect controls, but they also produced goods outside the plan for sale in the market. Important, scarce resources-for example, engineers or finished steel-may have been assigned to this kind of unit in exact numbers. Less critical assignments of personnel and materials would have been authorized in a general way by the plan, but with procurement arrangements left up to the enterprise management.

In addition, enterprises themselves are gaining increased independence in a range of activity. While strategically important industry and services and most of large-scale construction have remained under directive planning, the market economy has gained rapidly in scale every year as it subsumes more and more sectors. Overall, the Chinese industrial system contains a complex mixture of relationships. The State Council generally administers relatively strict control over resources deemed to be of vital concern for the performance and health of the entire economy. Less vital aspects of the economy have been transferred to lower levels for detailed decisions and management. Furthermore, the need to coordinate entities that are in different organizational hierarchies generally causes a great deal of informal bargaining and consensus building.

Consumer spending has been subject to a limited degree of direct government influence but is primarily determined by the basic market forces of income levels and commodity prices. Before the reform period, key goods were rationed when they were in short supply, but by the mid-1980s availability had increased to the point that rationing was discontinued for everything except grain, which could also be purchased in the free markets. Collectively owned units and the agricultural sector were regulated primarily by indirect instruments. Each collective unit was «responsible for its own profit and loss,» and the prices of its inputs and products provided the major production incentives.

Vast changes were made in relaxing the state control of the agricultural sector from the late 1970s. The structural mechanisms for implementing state objectives-the people's communes and their subordinate teams and brigades-have been either entirely eliminated or greatly diminished. Farm incentives have been boosted both by price increases for state-purchased agricultural products, and it was permitted to sell excess production on a free market. There was more room in the choice of what crops to grow, and peasants are allowed to contract for land that they will work, rather than simply working most of the land collectively. The system of procurement quotas (fixed in the form of contracts) has been being phased out, although the state can still buy farm products and control surpluses in order to affect market conditions.

Foreign trade is supervised by the Ministry of Commerce, customs, and the Bank of China, the foreign exchange arm of the Chinese banking system, which controls access to the foreign currency required for imports. Ever since restrictions on foreign trade were reduced, there have been broad opportunities for individual enterprises to engage in exchanges with foreign firms without much intervention from official agencies.

Though private sector companies still dominate small and medium sized businesses, the government still plays a large part in the bigger industries. The fact that government accounts for a third of the GDP shows this. Foreign owned companies hold significant stakes. The public sector is mainly made up of State Owned Enterprises (SOE's).

3. Development

China, economically frail before 1978, has again become one of the world's major economic powers with the greatest potential. In the 22 years following reform and opening-up in 1979 in particular, China's economy developed at an unprecedented rate, and that momentum has been held steady into the 21st century.

China adopts the «five-year-plan» strategy for economic development. The 11th Five-Year Plan (2006-2010) is the currently being implemented.

3.1 Three-Step Development Strategy

China's overall economic construction objectives were clearly stated in the Three Step Development Strategy set out in 1978: Step One-to double the 1980 GNP and ensure that the people have enough food and clothing-was attained by the end of the 1980s; Step Two-to quadruple the 1980 GNP by the end of the 20th century-was achieved in 1995 ahead of schedule; Step Three-to increase per-capita GNP to the level of the medium-developed countries by 2050-at which point, the Chinese people will be fairly well-off and modernization will be basically realized.

3.2 Regional development

These strategies are aimed at the relatively poorer regions in China in an attempt to prevent widening inequalities:

· China Western Development, designed to increase the economic situation of the western provinces through capital investment and development of natural resources.

· Revitalize Northeast China, to rejuvenate the industrial bases in Northeast China. It covers the three provinces of Heilongjiang, Jilin, and Liaoning, as well as the five eastern prefectures of Inner Mongolia.

· Rise of Central China Plan, to accelerate the development of its central regions. It covers six provinces: Shanxi, Henan, Anhui, Hubei, Hunan, and Jiangxi.

· Third Front, focused on the southwestern provinces.

Foreign investment abroad:

· Go Global, to encourage its enterprises to invest overseas.

3.3 Key national projects

The «West-to-East Electricity Transmission,» the «West-to-East Gas Transmission,» and the «South-North Water Transfer Project» are the government's three key strategic projects, aimed at realigning overall economic development and achieving rational distribution of national resources across China. The «West-to-East Electricity Transmission» project is in full swing, involving hydropower and coal resources in western China and the construction of new power transmission channels to deliver electricity to the east. The southern power grid line, transmitting three million kW from Guizhou to Guangdong, was completed in September 2004. The «West-to-East Gas Transmission» project includes a 4,000 km trunk pipeline running through 10 provinces, autonomous regions or municipalities, conveying natural gas to cities in northern and eastern China. This was finished in October 2004 and has a design capacity of 12 billion cu m per year. Construction of the «South-to-North Water Diversion» project was officially launched on 27 December 2002 and completion of Phase I is scheduled for 2010; this will relieve serious water shortfall in northern China and realize a rational distribution of the water resources of the Yangtze, Yellow, Huaihe, and Haihe river valleys.

4. Macroeconomic trends

In 1985, the State Council of China approved to establish a SNA (System of National Accounting), use the GDP (Gross Domestic Product) to measure the national economy. China started the study of theoretical foundation, guiding, and accounting model etc., for establishing a new system of national economic accounting. In 1986, as the first citizen of the People's Republic of China to receive a Ph.D. in economics from an overseas country, Dr. Fengbo Zhang headed Chinese Macroeconomic Research - the key research project of the seventh Five-Year Plan of China, as well as completing and publishing the China GDP data by China's own research. The summary of the above has been included in the book Chinese Macroeconomic Structure and Policy (1988) Editor: Fengbo Zhang, collectively authored by the Research Center of the State Council of China. This is the first GDP data which was published by China. The State Council of China issued «The notice regarding implementation of System of National Accounting» in August 1992, the SNA system officially is introduced to China, replaced Soviet Union's MPS system, Western economic indicator GDP became China's most important economic indicator (WikiChina: China GDP, The First China GDP).

The table below shows the trend of the GDP of China at market prices estimated by the IMF with figures in millions (Chinese yuan).

For purchasing power parity comparisons, the US dollar is exchanged at 2.05 CNY only.

4.1 Systemic problems

The government has in recent years struggled to contain the social strife and environmental damage related to the economy's rapid transformation; collect public receipts due from provinces, businesses, and individuals; reduce corruption and other economic crimes; sustain adequate job growth for tens of millions of workers laid off from state-owned enterprises, migrants, and new entrants to the work force; and keep afloat the large state-owned enterprises, most of which had not participated in the vigorous expansion of the economy and many of which had been losing the ability to pay full wages and pensions. From 50 to 100 million surplus rural workers were adrift between the villages and the cities, many subsisting through part-time low-paying jobs. Popular resistance, changes in central policy, and loss of authority by rural cadres have weakened China's population control program. Another long-term threat to continued rapid economic growth has been the deterioration in the environment, notably air and water pollution, soil erosion, growing desertification and the steady fall of the water table especially in the north. China also has continued to lose arable land because of erosion and infrastructure development.

Other major problems concern the labor force and the pricing system. There is large-scale underemployment in both urban and rural areas, and the fear of the disruptive effects of major, explicit unemployment is strong. The prices of certain key commodities, especially of industrial raw materials and major industrial products, are determined by the state. In most cases, basic price ratios were set in the 1950s and are often irrational in terms of current production capabilities and demands. Over the years, large subsidies were built into the price structure, and these subsidies grew substantially in the late 1970s and 1980s. By the early 1990s these subsidies began to be eliminated, in large part due to China's admission into the World Trade Organization (WTO) in 2001, which carried with it requirements for further economic liberalization and deregulation. China's ongoing economic transformation has had a profound impact not only on China but on the world. The market-oriented reforms China has implemented over the past two decades have unleashed individual initiative and entrepreneurship.

By 2010, rapidly rising wages and a general increase in the standard of living had put increased energy use on a collision course with the need to reduce carbon emissions in order to control global warming. There were diligent efforts to increase energy efficiency and increase use of renewable sources; over 1,000 inefficient power plants had been closed, but projections continued to show a dramatic rise in carbon emissions from burning fossil fuels.

4.2 Inflation

During the winter of 2007-2008, inflation ran about 7% on an annual basis, rising to 8.7% in statistics for February 2008, released in March 2008. The food and fuel sectors were major problem areas, with meat and fuel posing special difficulties.

Shortages of gasoline and diesel fuel developed in the fall of 2007 due to reluctance of refineries to produce fuel at low prices set by the state. These prices were slightly increased in November 2007 with fuel selling for $2.65 a gallon, still slightly below world prices. Price controls were in effect on numerous basic products and services, but were ineffective with food, prices of which were rising at an annual rate of 18.2% in November 2007. The problem of inflation has caused concern at the highest levels of the Chinese government. On January 9, 2008, the government of China issued the following statement on its official website: «The Chinese government decided on Wednesday to take further measures to stabilize market prices and increase the severity of punishments for those guilty of driving up prices through hoarding or cheating.»

Pork is an important part of the Chinese economy with a per capita consumption of a fifth of a pound per day. The worldwide rise in the price of animal feed associated with increased production of ethanol from corn resulted in steep rises in pork prices in China in 2007. Increased cost of production interacted badly with increased demand resulting from rapidly rising wages. The state responded by subsidizing pork prices for students and the urban poor and called for increased production. Release of pork from the nation's strategic pork reserve was considered.

By January 2008, the inflation rate rose to 7.1%, which BBC News described as the highest inflation rate since 1997, due to the winter storms that month. China's inflation rate jumped to a new decade high of 8.7 percent in February 2008 after severe winter storms disrupted the economy and worsened food shortages, the government said March 11, 2008.

Throughout the summer and fall, however, inflation fell again to a low of 6.6% in October 2008.

4.3 Labor shortages and rising export costs

By 2005, there were signs of stronger demand for labor with workers being able to choose employment that offered higher wages and better working conditions, enabling some to move away from the restrictive dormitory life and boring factory work that have characterized export industries in provinces such as Guangdong and Fujian. Minimum wages began rising toward the equivalent of 100 U.S. dollars a month as companies scrambled for employees, with some paying as much as $150 a month on average. The labor shortage was partially driven by the demographic trends, as the proportion of people of working age fell as the result of strict family planning.

It was reported in The New York Times in April 2006 that labor costs continued to increase and a shortage of unskilled labor had developed with a million or more employees being sought. Operations that relied on cheap labor were contemplating relocations to cities in the interior or to other low-cost countries such as Vietnam or Bangladesh. Many young people were attending college rather than opting for minimum-wage factory work. The demographic shift resulting from the one-child policy continued to reduce the supply of young entry-level workers. Also, government efforts to advance economic development in the interior of the country were beginning to be effective at creating better opportunities there. A follow-up article in The New York Times in late August 2007 reported acceleration of this trend. The minimum wage a young unskilled factory worker could be hired at had increased to $200 with experienced workers commanding more. There was strong demand for young workers willing to work long hours and live in dormitory conditions, while older workers, over forty, were considered unsuitable.

Rising wages were being, to a certain extent, offset by increases in productivity, but in 2007, a slight rise in the cost of imports from China was recorded by the United States government: «After falling since its inception in December 2003, the price index for imports from China rose 0.4 percent in July 2007, the largest monthly increase since the index was first published in December 2003. The July increase was the third consecutive monthly advance. Over the past year, import prices from China increased 0.9 percent.» By February 2008, concerns were being raised that rising wages and inflation in China were beginning to create inflationary pressure in the United States and Europe, which had depended on cheap prices for consumer goods from China exerting downward pressure on prices.

On January 1, 2008, China introduced a new Labor Law, increasing the rights of the workforce, this caused many foreign and private companies, whose operations in China were based on low wages, to move to countries with lower labor costs, like Thailand, Vietnam or Bangladesh. In the summer of 2008 the growth in export orders began to fall sharply as the sub-prime crisis in export markets reduced demand in Guangdong province, particularly in toy and textile manufacture. According to Chinese Government sources 20 million jobs in 67,000 factories were reported to have been lost. The government initially was happy to see factories close down in labour intensive low wage factories, and the Labor law was seen as a means of helping to eradicate them, but the global financial crisis led to a far more rapid process of private sector collapse in Guangdong than was expected, raising fears of a contagious spread of social unrest.

In early 2010 a labor shortage developed in coastal areas with many migrant workers not returning after the new year holiday. Wages rose rapidly with temp agencies charging over $1.00 US per hour for factory workers in Guangzhou. Following the strikes in 2010 at Japanese auto plants, the shortage continued with many factories unable to fully staff their factories.

According to Fan Gang, professor of economics at Beijing University and director of China's National Economic Research Institute, due to the large volume of workers engaged in relatively unremunerative agricultural work there is considerable room for increased nominal wages in China without changing the competitive position of the Chinese export industry for the next few decades. Lower wages in other countries may not represent productivity comparable to the increasing productivity of Chinese workers.

5. Financial and banking system

economic strategy export labor

Most of China's financial institutions are state owned and governed and 98% of banking assets are state owned. The chief instruments of financial and fiscal control are the People's Bank of China (PBC) and the Ministry of Finance, both under the authority of the State Council. The People's Bank of China replaced the Central Bank of China in 1950 and gradually took over private banks. It fulfills many of the functions of other central and commercial banks. It issues the currency, controls circulation, and plays an important role in disbursing budgetary expenditures. Additionally, it administers the accounts, payments, and receipts of government organizations and other bodies, which enables it to exert thorough supervision over their financial and general performances in consideration to the government's economic plans. The PBC is also responsible for international trade and other overseas transactions. Remittances by overseas Chinese are managed by the Bank of China (BOC), which has a number of branch offices in several countries.

Other financial institutions that are crucial, include the China Development Bank (CDB), which funds economic development and directs foreign investment; the Agricultural Bank of China (ABC), which provides for the agricultural sector; the China Construction Bank (CCB), which is responsible for capitalizing a portion of overall investment and for providing capital funds for certain industrial and construction enterprises; and the Industrial and Commercial Bank of China (ICBC), which conducts ordinary commercial transactions and acts as a savings bank for the public.

Map of countries by foreign currency reserves and gold minus external debt based on 2009 data from CIA Factbook

China's economic reforms greatly increased the economic role of the banking system. In theory any enterprises or individuals can go to the banks to obtain loans outside the state plan, in practice 75% of state bank loans go to State Owned Enterprises (SOEs). Even though nearly all investment capital was previously provided on a grant basis according to the state plan, policy has since the start of the reform shifted to a loan basis through the various state-directed financial institutions. Increasing amounts of funds are made available through the banks for economic and commercial purposes. Foreign sources of capital have also increased. China has received loans from the World Bank and several United Nations programs, as well as from countries (particularly Japan) and, to a lesser extent, commercial banks. Hong Kong has been a major conduit of this investment, as well as a source itself.

With two stock exchanges (Shanghai Stock Exchange and Shenzhen Stock Exchange), mainland China's stock market had a market value of $1 trillion by January 2007, which became the third largest stock market in Asia, after Japan and Hong Kong. It is estimated to be the world's third largest by 2016.

6. Currency system

The renminbi («people's currency») is the currency of China, denominated as the yuan, subdivided into 10 jiao or 100 fen. The renminbi is issued by the People's Bank of China, the monetary authority of the PRC. The ISO 4217 abbreviation is CNY, although also commonly abbreviated as «RMB». The Latinised symbol is Ґ. The yuan is generally considered by outside observers to be undervalued by about 30%.

The renminbi is held in a floating exchange-rate system managed primarily against the US dollar. On July 21, 2005, China revalued its currency by 2.1% against the US dollar and, since then has moved to an exchange rate system that references a basket of currencies and has allowed the renminbi to fluctuate at a daily rate of up to half a percent.

The rate of exchange (Chinese yuan per US$1) on July 31, 2008, was RMB 6.846, in mid-2007 was RMB 7.45, while in early 2006 was RMB 8.07:US $1=8.2793 yuan (January 2000), 8.2783 (1999), 8.2790 (1998), 8.2898 (1997), 8.3142 (1996), 8.3514 (1995).

There is a complex relationship between China's balance of trade, inflation, measured by the consumer price index and the value of its currency. Despite allowing the value of the yuan to «float», China's central bank has decisive ability to control its value with relationship to other currencies. Inflation in 2007, reflecting sharply rising prices for meat and fuel, is probably related to the worldwide rise in commodities used as animal feed or as fuel. Thus rapid rises in the value of the yuan permitted in December 2007 are possibly related to efforts to mitigate inflation by permitting the renminbi to be worth more.

7. Agriculture

China is one of the world's largest producers and consumers of agricultural products - and some 300 million Chinese farm workers are in the industry, mostly laboring on small pieces of land about the size of U.S farms. Virtually all arable land is used for food crops. China is the world's largest producer of rice and is among the principal sources of wheat, corn (maize), tobacco, soybeans, peanuts (groundnuts), cotton, potatoes, sorghum, peanuts, tea, millet, barley, oilseed, pork, and fish. Major non-food crops, including cotton, other fibers, and oilseeds, furnish China with a small proportion of its foreign trade revenue. Agricultural exports, such as vegetables and fruits, fish and shellfish, grain and meat products, are exported to Hong Kong. Yields are high because of intensive cultivation, for example, China's cropland area is only 75% of the U.S. total, but China still produces about 30% more crops and livestock than the United States. China hopes to further increase agricultural production through improved plant stocks, fertilizers, and technology.

According to the United Nations World Food Program, in 2003, China fed 20 percent of the world's population with only 7 percent of the world's arable land. China ranks first worldwide in farm output, and, as a result of topographic and climatic factors, only about 10-15 percent of the total land area is suitable for cultivation. Of this, slightly more than half is unirrigated, and the remainder is divided roughly equally between paddy fields and irrigated areas. Nevertheless, about 60 percent of the population lives in the rural areas, and until the 1980s a high percentage of them made their living directly from farming. Since then, many have been encouraged to leave the fields and pursue other activities, such as light manufacturing, commerce, and transportation; and by the mid-1980s farming accounted for less than half of the value of rural output. Today, agriculture contributes only 13% of China's GDP.

Production of wheat from 1961 to 2004. Data from FAO, year 2005. Y-axis: Production in metric ton

Animal husbandry constitutes the second most important component of agricultural production. China is the world's leading producer of pigs, chickens, and eggs, and it also has sizable herds of sheep and cattle. Since the mid-1970s, greater emphasis has been placed on increasing the livestock output. China has a long tradition of ocean and freshwater fishing and of aquaculture. Pond raising has always been important and has been increasingly emphasized to supplement coastal and inland fisheries threatened by overfishing and to provide such valuable export commodities as prawns.

Environmental problems such as floods, drought, and erosion pose serious threats to farming in many parts of the country. The wholesale destruction of forests gave way to an energetic reforestation program that proved inadequate, and forest resources are still fairly meagre. The principal forests are found in the Qinling Mountains and the central mountains and on the Sichuan-Yunnan plateau. Because they are inaccessible, the Qinling forests are not worked extensively, and much of the country's timber comes from Heilongjiang, Jilin, Sichuan, and Yunnan.

Western China, comprising Tibet, Xinjiang, and Qinghai, has little agricultural significance except for areas of floriculture and cattle raising. Rice, China's most important crop, is dominant in the southern provinces and many of the farms here yield two harvests a year. In the north, wheat is of the greatest importance, while in central China wheat and rice vie with each other for the top place. Millet and kaoliang (a variety of grain sorghum) are grown mainly in the northeast and some central provinces, which, together with some northern areas, also provide considerable quantities of barley. Most of the soybean crop is derived from the north and the northeast; corn (maize) is grown in the center and the north, while tea comes mainly from the hilly areas of the southeast. Cotton is grown extensively in the central provinces, but it is also found to a lesser extent in the southeast and in the north. Tobacco comes from the center and parts of the south. Other important crops are potatoes, sugar beets, and oilseeds.

There is still a relative lack of agricultural machinery, particularly advanced machinery. For the most part the Chinese peasant or farmer depends on simple, nonmechanized farming implements. Good progress has been made in increasing water conservancy, and about half the cultivated land is under irrigation.

In the late 1970s and early 1980s, economic reforms were introduced. First of all this began with the shift of farming work to a system of household responsibility and a phasing out of collectivized agriculture. Later this expanded to include a gradual liberalization of price controls; fiscal decentralization; massive privatization of state enterprises, thereby allowing a wide variety of private enterprises in the services and light manufacturing; the foundation of a diversified banking system (but with large amounts of state control); the development of a stock market; and the opening of the economy to increased foreign trade and foreign investment.

8. Industry and manufacturing

Industry and construction account for 46.8% of China's GDP. Around 8% of the total manufacturing output in the world comes from China itself. China ranks third worldwide in industrial output. Major industries include mining and ore processing; iron and steel; aluminium; coal; machinery; armaments; textiles and apparel; petroleum; cement; chemical; fertilizers; food processing; automobiles and other transportation equipment including rail cars and locomotives, ships, and aircraft; consumer products including footwear, toys, and electronics; telecommunications and information technology. China has become a preferred destination for the relocation of global manufacturing facilities. Its strength as an export platform has contributed to incomes and employment in China. The state-owned sector still accounts for about 30% of GDP. In recent years, authorities have been giving greater attention to the management of state assets-both in the financial market as well as among state-owned-enterprises-and progress has been noteworthy.

Since the founding of the People's Republic, industrial development has been given considerable attention. Among the various industrial branches the machine-building and metallurgical industries have received the highest priority. These two areas alone now account for about 20-30 percent of the total gross value of industrial output. In these, as in most other areas of industry, however, innovation has generally suffered at the hands of a system that has rewarded increases in gross output rather than improvements in variety, sophistication and quality. China, therefore, still imports significant quantities of specialized steels. Overall industrial output has grown at an average rate of more than 10 percent per year, having surpassed all other sectors in economic growth and degree of modernization. Some heavy industries and products deemed to be of national strategic importance remain state-owned, but an increasing proportion of lighter and consumer-oriented manufacturing firms are privately held or are private-state joint ventures.

The predominant focus of development in the chemical industry is to expand the output of chemical fertilizers, plastics, and synthetic fibers. The growth of this industry has placed China among the world's leading producers of nitrogenous fertilizers. In the consumer goods sector the main emphasis is on textiles and clothing, which also form an important part of China's exports. Textile manufacturing, a rapidly growing proportion of which consists of synthetics, account for about 10 percent of the gross industrial output and continues to be important, but less so than before. The industry tends to be scattered throughout the country, but there are a number of important textile centers, including Shanghai, Guangzhou, and Harbin.

Major state industries are iron, steel, coal, machine building, light industrial products, armaments, and textiles. These industries completed a decade of reform (1979-1989) with little substantial management change. Prior to 1978, most output was produced by state-owned enterprises. As a result of the economic reforms that followed, there was a significant increase in production by enterprises sponsored by local governments, especially townships and villages, and, increasingly, by private entrepreneurs and foreign investors. The 1996 industrial census revealed that there were 7,342,000 industrial enterprises at the end of 1995; total employment in industrial enterprises was approximately 147 million. The 1999 industrial census revealed that there were 7,930,000 industrial enterprises at the end of 1999 (including small-scale town and village enterprises); total employment in state-owned industrial enterprises was about 24 million. The automobile industry has grown rapidly since 2000, as has the petrochemical industry. Machinery and electronic products became China's main exports. China is the world's leading manufacturer of chemical fertilizers, cement, and steel. By 2002 the share in gross industrial output by state-owned and state-holding industries had decreased to 41%, and the state-owned companies themselves contributed only 16% of China's industrial output.

China's construction sector has grown substantially since the early 1980s. In the 21st century, investment in capital construction has experienced major annual increases. In 2001 investments increased 8.5% over the previous year. In 2002 there was a 16.4% increase, followed by a 30% increase in 2003. The manufacturing sector produced 44.1% of GDP in 2004 and accounted for 11.3% of total employment in 2002. Industry and construction produced 53.1% of China's GDP in 2005. Industry (including mining, manufacturing, construction, and power) contributed 52.9% of GDP in 2004 and occupied 22.5% of the workforce.

Energy production has increased rapidly, but it still falls considerably short of demand. This is partly due to artificial energy prices that have been held so low that industries have had few incentives to conserve. Coal provides about 75-80 percent of China's energy consumption. Petroleum production, which began growing rapidly from an extremely low base in the early 1960s, has basically remained at the same level since the late 1970s. There are large petroleum reserves in the inaccessible northwest and potentially significant offshore petroleum deposits, but about half of the country's oil production still comes from the major Daqing oilfield in the northeast. China has much, and partially undeveloped, hydroelectric power potential and natural gas reserves. The government has made plans to develop nuclear power plants in the coastal and western regions (see Nuclear power in China).

Overall, the distribution of industry remains very uneven, despite serious efforts from the mid-1950s to the late 1970s to build up industry in the interior at the cost of the major cities on the east coast. While percentage growth of industry in the interior provinces generally greatly exceeded that of the coastal areas, the far larger initial industrial base of the latter has meant that a few coastal regions have continued to dominate China's industrial economy. The establishment of special economic zones in coastal areas only heightened this disparity. Shanghai by itself accounts for about 8-10 percent of China's gross value of industrial output, and the east coast accounts for about 60 percent of the national industrial output. The rate of industrialization increased and diversified after the early 1990s. Notable were the development of aerospace, aircraft, and automobile manufacturing. In addition, China expanded rapidly into the production of pharmaceuticals, software, semiconductors, electronics, and precision equipment.