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INTRODUCTION

Since 20 years the Chinese economy has a very important role in the international scene,

and also continues to be subject of contrasting reviews.

The surface of China is 9,671,018 km square, making it the largest state in East Asia and

the population is approximately 20% of the world: China is the most populous country in

the world.

The importance of China in the XXI century is reflected in its role as second largest

economy to GDP after United States.

• China is also member of the many important institutions:

• United Nations, who has as one of his goals the achievement of international

cooperation in economic development.

• WTO, which aim to oversee a number of trade agreements between member

states, they representing approximately 97% of world trade in goods and services.

• APEC (Asia-Pacific Economic Cooperation): which aims to foster cooperation,

economic growth, free trade and investment in the Asia-Pacific

• ASEAN(Association of South-East Asian Nations):which the main purpose is to

promote cooperation and mutual assistance between member states to accelerate

economic progress and increased stability in the region of South-East Asia

• G20: that enclosing the most industrialized countries to encourage international

economic development by promoting new strategies and sustainable development.

With the introduction of economic reform based on capitalism, in 1978 China became

the country with the fastest economic development in the world. Also it is the second

largest exporter and third largest importer of goods.

There was a slow process of transformation in the Chinese economy, its institutions,

structure and regulations relating to the Financial sector. There were reforms in industry

and agriculture Also there were important and decisive initiatives to encourage foreign

investment: opening up to foreign countries and the introduction of the free market is so

central to the reform.

The reforms implemented have led to a "socialist market economy", a new economic

structure which combined socialism, which held the administrative and institutional

structure, an economic system which provided for the free market and free trade.

Over the last 20 years China has got an extremely high savings rate, averaging

around 40 %, Chinese economy has enjoyed one of the highest growth rates in the

world.

At the beginning of the nineties there was an incredible increase in GDP, from 4% in

1990 to 12.7% in 1994.In the ranking of GDP, in 2007 China surpassed Germany and in

2010 Japan. Of course the gap with the United State is still very large. In 2010, China is

expected to score a gross domestic product amounted to 5000 billion dollars, while the

U.S. is at an altitude of 15 thousand.In the last years the country has been able to rapidly

build up its capital stock and shift a massive pool of underutilized labour from the

subsistence-agriculture sector into higher-productivity activities that use capital.

THE HISTORY OF CHINA’S ECONOMIC DEVELOPMENT

China’s Economic Growth and Reforms: Prior to 1979 Prior to 1979, China, under the leadership of Chairman Mao Zedong, maintained a

centrally planned, or command, economy. A 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 only those goods that could not be made or obtained in China.

Government policies kept the Chinese economy relatively stagnant and inefficient,

mainly because most aspects of the economy were managed and run by the central

government (and thus there were few profit incentives for firms, workers, and farmers),

competition was virtually nonexistent, foreign trade and investment flows were mainly limited to Soviet bloc countries, and price and production controls caused widespread

distortions in the economy. Chinese living standards were substantially lower than those

of many other developing countries. The Chinese government in 1978 (shortly after the

death of Chairman Mao in 1976) decided to break with its Soviet-style economic policies

by gradually reforming the economy according to free market principles and opening up

trade and investment with the West, in the hope that this would significantly increase

economic growth and raise living standards.

China’s Economic Growth and Reforms: 1979-the Present Beginning in 1979, China launched several economic reforms. The central government initiated price and ownership incentives for farmers, which enabled them to sell a portion

of their crops on the free market. In addition, the government established four special

economic zones along the coast for the purpose of attracting foreign investment, boosting

exports, and importing high technology products into China. Additional reforms, which

followed in stages, sought to decentralize economic policymaking in several sectors,

especially trade. Economic control of various enterprises was given to provincial and

local governments, which were generally allowed to operate and compete on free market

principles, rather than under the direction and guidance of state planning. In addition,

citizens were encouraged to start their own businesses. Additional coastal regions and

cities were designated as open cities and development zones, which allowed them to

experiment with free market reforms and to offer tax and trade incenti ves to attract

foreign investment. In addition, state price controls on a wide range of products were

gradually eliminated. Trade liberalization was also a major key to China’s economic

success. Removing trade barriers encouraged greater competition and attracted foreign

direct investment (FDI) inflows. China’s gradual implementation of economic reforms

sought to identify which policies produced favorable economic outcomes (and which did

not) so that they could be implemented in other parts of the country.

Since the introduction of economic reforms, China’s economy has grown substantially

faster than during the pre-reform period. According to the Chinese government, from

1953 to 1978, real annual GDP growth was estimated at 6.7%, although many analysts

claim that Chinese economic data during this period are highly questionable because

government officials often exaggerated production levels for a variety of political

reasons. Economist Angus Madison estimated China’s average annual real GDP during

this period at 4.4%.

China has been able to double the size of its economy in real terms every eight years. The

global economic slowdown, which began in 2008, impacted the Chinese economy

(especially the export sector). China’s real GDP growth fell from 14.2% in 2007 to 9.6%

in 2008, and slowed to 9.2% in 2009. In response, the Chinese government implemented

a large economic stimulus package and an expansive monetary policy. These measures

boosted domestic investment and consumption and helped prevent a sharp economic slowdown in China. From 2009 to 2011, China’s real GDP growth averaged 9.6%.

China’s economy has slowed in recent years—real GDP grew by 7.7 in 2012 and 2013.

The international Monetary Fund (IMF) has projected that China’s real GDP growth will

grow by 7.4% in 2014 and 7.1% in 2015.

China’s Achievements since the Reform and Opening in 1979: China started its reform and opening in 1979 and achieved an annual growth rate of 9

percent between 1979 and 1990. At the end of that period and even up to early 2000s,

many scholars still believed that China could not continue that growth rate much longer due to the lack of fundamental reforms.1 However, China’s annual growth rate during the

period 1990–2010 increased to 10.4 percent.

On the global economic scene, China’s growth since the reform and opening started has

been unprecedented. This was a dramatic contrast with the depressing performance of

other transitional economies in Eastern Europe and the former Soviet Union.

As a result of the extraordinary performance, there has been a dramatic change in China’s

status in the global economy. When China embarked on its economic reform program in

1979, the world’s most populous country barely registered on the global economic scale,

commanding a mere 1.8 percent of global gross domestic product (GDP) (measured in

current U.S. dollars). Today, it is the world’s second-largest economy and produces 9.3

percent of global GDP China’s exports grew by 16 percent per year from 1979 to 2009.

At the start of that period, China’s exports represented a mere 0.8 percent of global

exports of goods and nonfactor services. Now China is the largest exporter of goods in

the world, with 9.6 percent of the global share and an 8.4 percent share of goods and

nonfactor services.

In 1980, China was still a low-income country; in fact, its income per capita (measured in

purchasing power parity or PPP) was only 30 percent of the level of the average sub Saharan African country.2 Today, its income per capita of $7,500 (in terms of PPP;

$4,400 in current dollars) is over three times the level of sub-Saharan Africa, and China

is well-established as a middle-income country Behind this growth, there has been a

dramatic structural transformation—in particular, rapid urbanization and

industrialization. At the start of economic reforms in the 1980s, China was primarily an

agrarian economy. Even in 1990, 73.6 percent of its population still lived in rural areas,

and primary products composed 27.1 percent of GDP. These shares declined to 27.1

percent for the rural population and 11.3 percent for primary products composition of

GDP in 2009. A similar change occurred in the composition of China’s exports. In 1984,

primary products and chemicals composed an important share of merchandise exports

(about 55 percent). Now, almost all of China’s exports are manufactures Accompanying

the change in the composition of China’s exports is the accumulation of foreign reserves.

In 1990, China’s foreign reserves were $11.1 billion USD, barely enough to cover 2.5

months of imports, and its reserves today exceed $3 trillion USD—the largest in the world.

CAUSES OF CHINA’S ECONOMIC GROWTH

Economists generally attribute 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.

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

2013 was $9.5 trillion, about 56% the size of the U.S. economy, according to the

IMF.The per capita GDP (a common measurement of a country’s living standards) of

China was $6,959, which was 13% the size of U.S. levels.

Many economists contend that using nominal exchange rates to convert Chinese data (or

that of other countries) into U.S. dollars fails to reflect the true size of China’s economy

and living standards relative to the United States. Nominal exchange rates simply reflect

the prices of foreign currencies vis-à-vis the U.S. dollar and such measurements exclude

differences in the prices for goods and services across countries. To illustrate, one U.S.

dollar exchanged for local currency in China would buy more goods and services there than it would in the United States. This is because prices for goods and services in China

are generally lower than they are in the United States. Conversely, prices for goods and

services in Japan are generally higher than they are in the United States (and China).

Thus, one dollar exchanged for local Japanese currency would buy fewer goods and

services there than it would in the United States. Economists attempt to develop estimates

of exchange rates based on their actual purchasing power relative to the dollar in order to

make more accurate comparisons of economic data across countries, usually referred to

as purchasing power parity (PPP).

The PPP exchange rate increases the (estimated) measurement of China’s economy and

its per capita GDP. According to the IMF which periodically does international price

surveys, prices for goods and services in China are about 56% the level they are in the

United States. Adjusting for this price differential raises the value of China’s 2013 GDP

from $9.5 trillion (nominal dollars) to $16.1 trillion (on a PPP basis).This would indicate

that China’s economy is 96% the size of the U.S. economy. China’s share of global GDP

on a PPP basis rose from 2.3% in 1980 to 15.8% in 2013 (the U.S. share of global GDP

on a PPP basis was 24.3% in 1980, but by 2013, had fallen to 16.5%).

The IMF October 2014 Economic Outlook report predicts that China will overtake the

United States to become the world’s largest economy in 2014 on a PPP basis, and that by

2019, China’s economy will be 21.3% larger than the U.S. economy. This would not be

the first time in history that China was the world’s largest economy.

The PPP measurement also raises China’s 2013 nominal per capita GDP (from $6,959) to

$11,869, which was 22.4% of the U.S. level. The EIU projects that, even by the year 2030, U.S. living standards will be close to three times greater than those in China. Thus,

although China could become the world’s largest economy in a few years on a PPP basis,

it will likely take many years for its living standards to approach U.S. levels.

Source: CIA Factbook

Source: CIA Factbook

China as the World’s Largest Manufacturer

China has emerged as the world’s largest manufacturer according to the United Nations.

In 2012, the value of China’s manufacturing on a gross value added basis was 28.2%

higher than that in the United States. Manufacturing plays a considerabl y more important

role in the Chinese economy than it does for the United States and Japan. In 2011,

China’s gross valued added manufacturing was equal to 30.5% of GDP, compared to

12.3% for the United States and 18.7% for Japan. In its 2013 Global Manufacturing

Competitiveness Index, Deloitte (an international consulting firm) ranked China first in

manufacturing in 2013 and projected it would remain so in five years (the United States

ranked third in 2013 and was projected to rank fifth in 2018). The report stated that

“China’s competitiveness is bolstered by conducive policy environment either

encouraging or directly funding investments in science and technology, employee

education and infrastructure development,” and further stated that “the landscape for

competitive manufacturing is in the midst of a massive power shift, in which twentieth-

century manufacturing stalwarts like the United States, Germany and Japan will be challenged to maintain their competitive edge to emerging nations, including China.”

China as Global Player

Thirty years ago China launched economic reforms that would transform the country and

its place in the world. At a speed no one could have predicted even a decade ago, the

nation has re-emerged as a global player on multiple fronts.

Consider China's progress in technology. As the Annual Meeting of the New Champions

2008 was getting underway in Tianjin, a Chinese astronaut was making the nation's first -

ever space walk. On the diplomatic front, Beijing's hosting of the 29th Olympic Games in

August was regarded as a major success, despite some critical overseas coverage at the

outset. But it is in the arena of economics that China's gains are most apparent.

Prior to travelling to Tianjin to deliver the opening address at the Annual Meeting of the

New Champions, Premier Wen Jiabao spoke before the UN General Assembly in New

York of China's ongoing efforts to fulfill the Millennium Development Goals. "China has

brought down the number of people in absolute poverty from 250 million to 15 million in

less than 30 years," he said. With its economic achievements well certified, China now

stands as a haven of economic stability at a time when the US and other developed

economies are engulfed in financial turmoil and entering what could be a prolonged

recession.

More important, its longer term economic outlook appears strong, underpinned by an

expanding middle class and growing investments in technology. China's export -led

economy is certainly not immune to a global slowdown that originates from the US credit

crunch and liquidity crisis.

Liu Mingkang, Chairman of the China Banking Regulatory Commission, predicted GDP

growth could slide from 11% to 9%. However, even if exports fall, Chinese firms can

expect to profit from the country's growing consumer market.

One of Beijing's top priorities in recent years has been to wean the economy off its

reliance on exports and encourage the growth of the domestic market. As Alibaba

Chairman and Chief Executive Officer Jack Ma Yun said, "the future of China is

domestic demand and consumption."

The government is also seeking to transform China from a country best known for its

low-cost manufacturing to one respected for its innovative capacity. "The most important

thing for China is human intellectual capital," said Guo Shuqing, Chairman of China

Construction Bank.

"In the coming 10 to 20 years, we will have to transform to an innovation-driven growth

model." China has already emerged as a preferred destination for R&D investment, both

foreign and domestic. Beijing has set a goal to increase national spending on R&D from

1.4% of GDP in 2005 to 2.5% by 2020. Domestic technology leaders predict that in the

next decade, China will for the first time create globally relevant technology standards.

China's sturdy economic fundamentals and high ambitions are all the more striking

against the current backdrop of financial turbulence in the West.

In light of the nation's nearly US$ 2 trillion in foreign reserves and its US$ 200 billion

sovereign wealth fund, it is no surprise that some foreigners perceive China as a potential

economic savior amid deepening global troubles. Indeed, one near-term challenge for

China will be managing international expectations about just how much help it will be

able to provide to the rest of the world.

Its own leaders view China still as a developing country that needs time to mature – a

nation hardly prepared to assume the mantle of global leader. They are also wary of the

political blowback that can come with any attention grabbing moves. But those who point

to China's rapid ascent up the global economic rankings are less patient as they see the

country as possessing characteristics of both an industrialized and developing economy.

There is perhaps no better indicator of China's growing clout than the recent calls for it to

become more active in global governance institutions. "I think with this flat world in

which we live, China has a bigger role to play in line with its current position as one of

the leading countries of the world," said Publicis Group Chairman and Chief Executive

Officer Maurice Lévy. Some have gone so far as to argue that China risks becoming a

"free rider" on the international stage, reaping the benefits of its growing international

influence without playing as active a role in shaping the global financial and geopolitical

agenda as it should.

That said, the Group of Seven economies has yet to expand its roster to include on a

permanent basis major emerging economies such as Russia, Brazil, India and China in its

regular deliberations on global economic governance.

Yet there also remains a strong consensus among Chinese elites that the nation is not yet

ready to take up the responsibilities of the developed world. In their view, maintaining

stability at home remains top priority. Presiding over the next stage of reforms in this

highly complex and diverse country is task enough for now. "What China can do is

maintaining the momentum of sustained growth and avoid ups and downs," said Premier

Wen Jiabao. "That would be our most important contribution to global stability.

CHINA & MULTIPOLAR GROWTH WORLD

It is important to place this moment in history in a broader historical context. After the Industrial Revolution, the world was polarized. Growth in industrialized countries

accelerated. Later in the 20th century, a few developing economies in East Asia were able

to accelerate growth, and they caught up with the industrialized countries. Most other

developing countries failed to have sustained and accelerated growth. As a result, there is

a great divergence between the developed and developing countries.

Given this history, the global economy was dominated by the G-7 economies consistently

throughout the latter half of the 20th century. At market exchange rates, the G-7

represented about two-thirds of the global economy. Even accounting for purchasing

power parity, half of global income was concentrated in the G-7.

With the rapid growth in the past 20 years, China has become a major driving force for

the emergence of a multipolar growth world. In the 1980s and the 1990s, except for

China, the other top five contributors to the growth of global GDP were all members of

the G-7 industrialized countries, and China’s contributions were respectively 13.4 percent and 26.7 percent of the contributions of the United States in those two decades. However,

in the decade beginning in 2000, China became the top contributor to the growth of

global GDP. Among the G-7 countries only the United States and Japan remained in the

top-five list, and China’s contribution exceeded that of the United States by 4 percentage

points. A multipolar growth world emerged in the 21st century, with many of the new

growth poles in emerging market economies.

In addition, the Chinese government and Chinese firms will also provide funds for natural

resource and infrastructure investment in emerging markets and low-income countries.

This is already happening, and it is likely to continue into the future. In particular, there is

a growing role for Chinese finance in the African region—the developing region with the

most constrained access to finance.

FOREIGN DIRECT INVESTMENT (FDI) IN CHINA

China’s trade and investment reforms and incentives led to a 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.FIEs account for a significant share of China’s industrial output.

That level rose from 2.3% in 1990 to a high of 35.9% in 2003, but fell to 25.9% as of

2011.In addition, FIEs are responsible for a significant level of China’s foreign trade. In

2013, FIEs in China accounted for 47.3% of China’s exports and 44.8% of its imports,

although this level was down from its peak in 2006 when FIEs’ share of Chinese exports and imports was 58.2% and 59.7%, respectively.FIEs in China dominate China’s high

technology exports. From 2002 to 2010, the share of China’s high tech exports by FIEs

rose from 79% to 82%. During the same period, the share of China’s high tech exports by

wholly owned foreign firms (which excludes foreign joint ventures with Chinese firms)

rose from 55% to 67%.

According to the United Nations, annual FDI flows to China grew from $2 billion in

1985 to an estimated $121 billion in 2013 and may have reached $127 billion in 2013.

The U.N. further estimates the stock of FDI in China through 2012 at $832.9 billion.

China was the world’s second-largest destination for FDI flows in 2013 (after the United

States).According to Chinese government data o n non-financial FDI inflows, the largest

sources of cumulative FDI in China for 1979-2013 were Hong Kong (47.0%),the British

Virgin Islands(BVI), Japan, the United States, and Taiwan. The largest sources of non-

financial FDI inflows into China in 2013 were Hong Kong (67% of total), Singapore, Japan, Taiwan, and The United States. According to Chinese data, annual U.S. non-

financial FDI flows to China peaked at $5.4 billion in 2002 (10.2% of total FDI in

China). In 2013, they were $3.4 billion or 2.9% of total FDI flows to China. The stock of

U.S. non-financial FDI in China (based on Chinese data) was $74.6 billion through 2013.

IMPORT-EXPORT WITH OUTSIDE WORLD

The vast majority of China's imports consists of industrial supplies and capital goods,

notably machinery and high-technology equipment, the majority of which comes from

the developed countries, primarily Japan and the United States.

Regionally, almost half of China's imports come from East and Southeast Asia, and about

one-fourth of China's exports go to the same destinations. About 80 percent of China's

exports consist of manufactured goods, most of which are textiles and electronic

equipment, with agricultural products and chemicals constituting the remainder. Out of

the five busiest ports in the world, three are in China.

Exports of goods and services represent the value of all goods and other market services provided to the rest of the world. They include the value of merchandise, freight ,

insurance, transport, travel, royalties, license fees, and other services, such as

communication, construction, financial, information, business, personal, and government

services. They exclude compensation of employees and investment income (formerly

called factor services) and transfer payments.

Imports of goods and services represent the value of all goods and other market services

received from the rest of the world. They include the value of merchandise, freight,

insurance, transport, travel, royalties, license fees, and other services, such as

communication, construction, financial, information, business, personal, and government

services. They exclude compensation of employees and investment income (formerly

called factor services) and transfer payments.

CHINA’S MERCHANDISE TRADE PATTERNS

Economic reforms and trade and investment liberalization have helped transform China

into a major trading power. Chinese merchandise exports rose from $14 billion in 1979 to

$2.2 trillion in 2013, while merchandise imports grew from $18 billion to $1.9 trillion.

From 1990 to 2013, the annual growth of China’s exports and imports averaged 18.5%

and 17.3%, respectively. China’s exports and imports in 2013 grew by 7.8% and 7.3%,

respectively. During the first half of 2014, China’s exports and imports grew by 0.9% and

1.7% over same period in 2013. China’s merchandise trade surplus grew sharply from

2004 to 2008, rising from $32 billion to $297 billion. That surplus fell each year from

2009 to 2011, dropping to $158 billion. However, in 2012, China’s trade surplus rose to $233 billion, and in 2013 it increased to $261 billion.

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.

China’s share of global merchandise exports more than tripled from 2000 to 2013, rising

from 3.8% to 12.1%; the World Bank projects this figure could increase to 20% by

2030.Merchandise trade surpluses, large-scale foreign investment, and large purchases of

foreign currencies to maintain its exchange rate with the dollar and other currencies have

enabled China to become by far the world’s largest holder of foreign exchange reserves at

nearly $3.9 trillion as of March 2014.

FUTURE PROSPECTS IN COMING 20 YEARS

Looking forward, China can still rely on the advantage of backwardness, and it has the

potential to maintain dynamic growth for another 20 years or more because of the

following reasons:

1. In 2008, China’s per capita income was 21 percent of U.S. per capita income

measured in PPP.5 The income gap between China and the United States indicates

that there is still a large technological gap between China and industrialized

countries. China can continue to enjoy the advantage of backwardness before

closing up the gap.

2. Maddison’s (2010) estimation shows that China’s current relative status to the

United States is similar to that of Japan’s in 1951, Korea’s in 1977, and Taiwan’s

in 1975. The annual growth rate of GDP grew 9.2 percent in Japan between 1951

and 1971, 7.6 percent in Korea between 1977 and 1997, and 8.3 percent in Taiwan

between 1975 and 1995. China’s development strategy after the reform in 1979 is

similar to that of Japan, Korea, and Taiwan. China has the potential to achieve

another 20 years of 8 percent growth. By that time, China’s per capita income

measured in PPP may reach about 50 percent of U.S. per capita income. (Note that

Japan’s per capita measured in PPP was 65.6 percent of that of the United States in

1971, Korea’s was 50.2 percent in 1997, and Taiwan’s was 54.2 percent in 1995.)

Measured by PPP, China’s economic size may then be twice as large as that of the

United States; and measured by market exchange rates, China may be at least the

same size as the United States.

MAJOR LONG-TERM CHALLENGES

FACING THE CHINESE ECONOMY

Over the last three years, the global economy has witnessed its most tumultuous times

since the Great Depression. The impressive coordinated policy response of the G-20

nations has helped the world avoid the worst possible scenario. Economic activity started to recover around the world in 2009. Global GDP performance improved from a

contraction of 2 percent in 2009 to a growth of 4.2 percent in 2010, and a projected

growth of 2.7 percent in 2011.

However, we are observing a two-speed recovery. On the one hand, high income

countries’ growth rates in 2010 and 2011 are estimated 3.1 percent and only 1.6 percent,

respectively—far below the historical average following other crises. On the other hand,

developing countries have been growing at 7.6 percent in 2010 and are likely to be at 6.0

percent in 2011, much faster than advanced countries and returning to their pre-crisis

rates. Developing countries, especially China and India, but others too, have increasingly

become engines of the world economy growth.

China’s economy has shown remarkable growth over the past several years, and many

economists project that it will enjoy fairly healthy growth in the near future. However, economists caution that these projections are likely to occur only if China continues to

make major reforms to its economy. Failure to implement such reforms could endanger

future growth. They note that China’s current economic model has resulted in a number

of negative economic (and social) outcomes, such as over-reliance on fixed investment

and exporting for its economic growth, extensive inefficiencies that exist in many sectors

(due largely to government industrial policies), wide-spread pollution, and growing

income inequality, to name a few. Many of China’s economic problems and challenges

stem from its incomplete transition to a free market economy and from imbalances that

have resulted from the government’s goal of economic growth at all costs.

1. China’s Incomplete Transition to a Market Economy

Despite China’s three-decade history of widespread economic reforms, Chinese officials contend that China is a “socialist-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.

2. Industrial Policies and SOEs

According to the World Bank, “China has become one of the world’s most active users of

industrial policies and administrations.”According to one estimate, China’s SOEs may

account for up of 50% of non-agriculture GDP.In addition, although the number of SOEs

has declined sharply, they continue to dominate a number of sectors (such as petroleum

and mining, telecommunications, utilities, transportation, and various industrial sectors);

are shielded from competition; are the main sectors encouraged to invest overseas; and

dominate the listings on China’s stock indexes. One study found that SOEs constituted

50% of the 500 largest manufacturing companies in China and 61% of the top 500 service sector enterprises. It is estimated that there were 154,000 SOEs as of 2008, and

while these accounted for only 3.1% of all enterprises in China, they held 30% of the

value of corporate assets in the manufacturing and services sectors.

3. The Banking System

China’s banking system is largely controlled by the central government, which attempts

to ensure that capital (credit) flows to industries deemed by the government to be

essential to China’s economic development. 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.In addition; the government sets interest rates for depositors at very low rates, often

below the rate of inflation, which keeps the price of capital relatively low for firms.

4. An Undervalued Currency

China does not allow its currency to float and therefore must make large-scale purchases

of dollars to keep the exchange rate within certain target levels. Although the renminbi

(RMB) has appreciated against the dollar in real terms by about 40% since reforms were introduced in July 2005, some analysts contend that it remains highly undervalued.

China’s undervalued currency makes its exports less expensive, and its imports more

expensive, than would occur under a floating exchange rate system. In order to maintain

its exchange rate target, the government must purchase foreign currency (such as the

dollar) by expanding the money supply. This makes it much more difficult for the

government to use monetary policy to combat inflation.

5. Overdependence on Exporting and Fixed Investment

2009 IMF report estimated that fixed investment related to tradable goods plus net

exports together accounted for 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%).

6. Growing Pollution

China’s economic growth model has emphasized the growth of heavy industry in China,

much of which is energy-intensive and high polluting. The level of pollution in China

continues to worsen, posing serious health risks to the population. The Chinese

government often disregards its own environmental laws in order to promote rapid

economic growth.

7. Corruption and the Relative Lack of the Rule of Law

The relative lack of the rule of law in China has led to widespread government

corruption, financial speculation, and misallocation of investment funds. In many cases,

government “connections,” not market forces, are the main determinant of successful firms in China. Many U.S. firms find it difficult to do business in China because rules

and regulations are generally not consistent or transparent, contracts are not easily

enforced, and intellectual property rights are not protected (due to the lack of an

independent judicial system).

PLANS ANNOUNCED BY THE CHINESE GOVT. TO

REFORM AND RESTRUCTURE THE ECONOMY

1. The Central Government Five-Year Plans

China’s last two five-year plans (FYP), the 11 th FYP (2006-2010) and the 12 th

FYP (2011-

2015), have placed strong emphasis on promoting consumer demand, addressing income

disparities (such as by boosting spending on social safety net programs), boosting energy

efficiency, reducing pollution, improving the rule of law, and deepening economic

reforms. Those plans have also identified a number of industries and technologies that the government has targeted for

Development.

2. The Drive for “Indigenous Innovation”

Many of the industrial policies that China has implemented or formulated since 2006

appear to stem largely from a comprehensive document issued by China’s State Council

(the highest executive organ of state power) in 1996 titled

The National Medium-and Long-Term Program for Science and Technology

Development (2006-2020), often referred to as the MLP. The MLP appears to represent

an ambitious plan to modernize the structure of China’s economy by

Transforming it from a global center of low-tech manufacturing to a major center of

innovation (by the year 2020) and a global innovation leader by 2050. As some observers

describe it, China wants to go from a model of “made in China” to “innovate in China.” It

also seeks to sharply reduce the country’s dependence on foreign technology.

COMPARISON BETWEEN

CHINA AND INDIA ECONOMY

This is a comparative study of China and India, two of the most populous

Countries of the world, and which combine to constitute nearly one-third of the world’s

population. Both India and China have undertaken fairly extensive economic reform

policies during the past two decades.

Since the adoption of economic reform policies in 1978, China’s economic growth

performance has been truly dramatic. Similarly, in terms of social progress, welfare and

poverty reduction, Chinese performance has been quite remarkable in the last two

decades. On the other hand, in India, the second most populous country and largest

democracy in the world, growth performance since the initiation of economic reform

policies in 1991 has been relatively modest, falling behind on many fronts relative to the

Chinese performance indicators. Figure 1 shows trends over the past decade of China’s

GDP per capita vis-à-vis India’s, where the improvement has been much less fast.3 It is

evident that until the 1990s, GDP per capita (PPP international dollars) in China and

India was at very similar levels, but since then China accelerated phenomenally leaving

India far behind in the race.

However, development indicators such as adult literacy rates and life expectancy show

that India is still behind China in absolute levels. For example, the adult literacy rate in China rose from 67% in 1980 to 93% in 2007. In India, the adult literacy rate increased

from 41% in 1980 to 64% in 2007. This clearly shows that India’s recent figure for adult

literacy rate is still below China’s literacy rate of 1980. A similar trend can be observed

in life expectancy figures. Chinese life expectancy grew from 66 years in 1980 to about

72 years in 2007, while India’s life expectancy grew from 54 years in 1980 to about 65

years in 2007. So, India’s life expectancy is still below China’s 1980 level.

Hence, the essential inspiration behind this paper is to compare and understand China and

India’s differential level of development performance. I intend to discuss the results at the

national and regional level performance so as to see how far the policy changes can

contribute to the difference in development dividend in China and India

Since the late 1970s China has moved from a closed, centrally planned system to a more

market-oriented one that plays a major global role - in 2010 China became the world's

largest exporter. Reforms began with the phasing out of collectivized agriculture, and

expanded to include the gradual liberalization of prices, fiscal decentralization, increased

autonomy for state enterprises, growth of the private sector, development of stock

markets and a modern banking system, and opening to foreign trade and investment.

China has implemented reforms in a gradualist fashion. In recent years, China has

renewed its support for state-owned enterprises in sectors considered important to

"economic security," explicitly looking to foster globally competitive industries. Af ter

keeping its currency tightly linked to the US dollar for years, in July 2005 China moved

to an exchange rate system that references a basket of currencies. From mid 2005 to late

2008 cumulative appreciation of the renminbi against the US dollar was more than 20%,

but the exchange rate remained virtually pegged to the dollar from the onset of the global

financial crisis until June 2010, when Beijing allowed resumption of a gradual

appreciation and expanded the daily trading band within which the RMB is permitted to fluctuate. The restructuring of the economy and resulting efficiency gains have

contributed to a more than tenfold increase in GDP since 1978. Measured on a

purchasing power parity (PPP) basis that adjusts for price differences, China in 2013

stood as the second-largest economy in the world after the US, having surpassed Japan in

2001. The dollar values of China's agricultural and industrial output each exceed those of

the US; China is second to the US in the value of services it produces. Still , per capita

income is below the world average. The Chinese government faces numerous economic

challenges, including: (a) reducing its high domestic savings rate and correspondingly

low domestic consumption; (b) facilitating higher-wage job opportunities for the aspiring

middle class, including rural migrants and increasing numbers of college graduates; (c)

reducing corruption and other economic crimes; and (d) containing environmental

damage and social strife related to the economy's rapid transformation. Economic

development has progressed further in coastal provinces than in the interior, and by 2011

more than 250 million migrant workers and their dependents had relocated to urban areas to find work. One consequence of population control policy is that China is now one of

the most rapidly aging countries in the world. Deterioration in the environment - notably

air pollution, soil erosion, and the steady fall of the water table, especially in the North -

is another long-term problem. China continues to lose arable land because of erosion and

economic development. The Chinese government is seeking to add energy production

capacity from sources other than coal and oil, focusing on nuclear and alternative energy

development. Several factors are converging to slow China's growth, including debt

overhang from its credit-fueled stimulus program, industrial overcapacity, inefficient

allocation of capital by state-owned banks, and the slow recovery of China's trading

partners. The government's 12th Five-Year Plan, adopted in March 2011 and reiterated at

the Communist Party's "Third Plenum" meeting in November 2013, emphasizes

continued economic reforms and the need to increase domestic consumption in order to

make the economy less dependent in the future on fixed investments, exports, and heavy

industry. However, China has made only marginal progress toward these rebalancing

goals. The new government of President XI Jinping has signaled a greater willingness to undertake reforms that focus on China's long-term economic health, including giving the

market a more decisive role in allocating resources.

India is developing into an open-market economy, yet traces of its past autarkic policies

remain. Economic liberalization measures, including industrial deregulation, privatization

of state-owned enterprises, and reduced controls on foreign trade and investment, began

in the early 1990s and served to accelerate the country's growth, which averaged under

7% per year from 1997 to 2011. India's diverse economy encompasses traditional village

farming, modern agriculture, handicrafts, a wide range of modern industries, and a

multitude of services. Slightly less than half of the work force is in agriculture, but,

services are the major source of economic growth, accounting for nearly two-thirds of

India's output with less than one-third of its labor force. India has capitalized on its large

educated English-speaking population to become a major exporter of information

technology services, business outsourcing services, and software workers. India's economic growth began slowing in 2011 because of a decline in investment, caused by

high interest rates, rising inflation, and investor pessimism about the government's

commitment to further economic reforms and about the global situation. In late 2012, the

Indian Government announced additional reforms and deficit reduction measures,

including allowing higher levels of foreign participation in direct investment in the

economy. The outlook for India's long-term growth is moderately positive due to a young

population and corresponding low dependency ratio, healthy savings and investment

rates, and increasing integration into the global economy. However, India has many

challenges that it has yet to fully address, including poverty, corruption, violence and

discrimination against women and girls, an inefficient power generation and distribution

system, ineffective enforcement of intellectual property rights, decades-long civil

litigation dockets, inadequate transport and agricultural infrastruct ure, limited non-

agricultural employment opportunities, high spending and poorly-targeted subsidies,

inadequate availability of quality basic and higher education, and accommodating rural -to-urban migration. Growth in 2013 fell to a decade low, as India's economic leaders

struggled to improve the country's wide fiscal and current account deficits. Rising

macroeconomic imbalances in India and improving economic conditions in Western

countries, led investors to shift capital away from India, prompting a sharp depreciation

of the rupee. However, investors' perceptions of India improved in early 2014, due to a

reduction of the current account deficit and expectations of post-election economic

reform, resulting in a surge of inbound capital flows and stabilization of the rupee.

China India

GDP (purchasing power parity)

$13.39 trillion (2013 est.) $12.43 trillion (2012 est.) $11.54 trillion (2011 est.)

note: data are in 2013 US dollars

$4.99 trillion (2013 est.) $4.833 trillion (2012 est.) $4.63 trillion (2011 est.)

note: data are in 2013 US dollars

GDP - real

growth rate

7.7% (2013 est.)

7.7% (2012 est.)

3.2% (2013 est.)

5.1% (2012 est.)

China India

9.3% (2011 est.) 7.5% (2011 est.)

GDP - per capita (PPP)

$9,800 (2013 est.) $9,100 (2012 est.)

$8,300 (2011 est.) note: data are in 2013 US dollars

$4,000 (2013 est.) $3,900 (2012 est.)

$3,800 (2011 est.) note: data are in 2013 US dollars

GDP -

composition by sector

agriculture: 10%

industry: 43.9% services: 46.1%

(2013 est.)

agriculture: 17.4%

industry: 25.8% services: 56.9% (2013 est.)

Population below poverty

line

6.1% note: in 2011, China set a new

poverty line at RMB 2300 (approximately US $3,630)

(2013)

29.8% (2010 est.)

Household income or

consumption by percentage share

lowest 10%: 1.7% highest 10%: 30%

note: data are for urban households only (2009)

lowest 10%: 3.6% highest 10%: 31.1% (2005)

Inflation rate (consumer

prices)

2.6% (2013 est.) 2.6% (2012 est.)

9.6% (2013 est.) 9.7% (2012 est.)

Labor force 797.6 million note: by the end of 2012,

China's population at working age (15-64 years) was 1.0040 billion (2013 est.)

487.3 million (2013 est.)

Labor force - by

occupation

agriculture: 33.6%

industry: 30.3% services: 36.1%

(2012 est.)

agriculture: 49%

industry: 20% services: 31% (2012 est.)

China India

Unemployment rate

4.1% (2013 est.) 4.1% (2012 est.)

note: data are for registered urban unemployment, which excludes private enterprises and

migrants

8.8% (2013 est.) 8.5% (2012 est.)

Distribution of family income -

Gini index

47.3 (2013) 47.4 (2012)

36.8 (2004) 37.8 (1997)

Budget revenues: $2.118 trillion expenditures: $2.292 trillion

(2013 est.)

revenues: $181.3 billion expenditures: $281.6 billion

(2013 est.)

Industries world leader in gross value of industrial output; mining and ore

processing, iron, steel, aluminum, and other metals, coal; machine building;

armaments; textiles and apparel; petroleum; cement; chemicals;

fertilizers; consumer products (including footwear, toys, and electronics); food processing;

transportation equipment, including automobiles, rail cars

and locomotives, ships, aircraft; telecommunications equipment, commercial space launch

vehicles, satellites

textiles, chemicals, food processing, steel, transportation

equipment, cement, mining, petroleum, machinery, software, pharmaceuticals

Industrial production

growth rate

7.6% (2013 est.) 0.9% (2013 est.)

Agriculture - products

world leader in gross value of agricultural output; rice, wheat,

potatoes, corn, peanuts, tea, millet, barley, apples, cotton,

rice, wheat, oilseed, cotton, jute, tea, sugarcane, lentils, onions,

potatoes; dairy products, sheep, goats, poultry; fish

China India

oilseed; pork; fish

Exports $2.21 trillion (2013 est.)

$2.049 trillion (2012 est.)

$313.2 billion (2013 est.)

$296.8 billion (2012 est.)

Exports - commodities

electrical and other machinery, including data processing equipment, apparel, radio

telephone handsets, textiles, integrated circuits

petroleum products, precious stones, machinery, iron and steel, chemicals, vehicles,

apparel

Exports - partners

Hong Kong 17.4%, US 16.7%, Japan 6.8%, South Korea 4.1% (2013 est.)

UAE 12.3%, US 12.2%, China 5%, Singapore 4.9%, Hong Kong 4.1% (2012)

Imports $1.95 trillion (2013 est.)

$1.818 trillion (2012 est.)

$467.5 billion (2013 est.)

$488.9 billion (2012 est.)

Imports - commodities

electrical and other machinery, oil and mineral fuels; nuclear

reactor, boiler, and machinery components; optical and

medical equipment, metal ores, motor vehicles; soybeans

crude oil, precious stones, machinery, fertilizer, iron and

steel, chemicals

Imports - partners

South Korea 9.4%, Japan 8.3%, Taiwan 8%, United States 7.8%,

Australia 5%, Germany 4.8% (2013 est.)

China 10.7%, UAE 7.8%, Saudi Arabia 6.8%, Switzerland 6.2%,

US 5.1% (2012)

Debt - external $863.2 billion (31 December

2013 est.) $737 billion (31 December 2012 est.)

$412.2 billion (31 December

2013 est.) $378.9 billion (31 December 2012 est.)

Exchange rates Renminbi yuan (RMB) per US

dollar -

Indian rupees (INR) per US

dollar -

China India

6.2 (2013 est.) 6.3123 (2012 est.)

6.7703 (2010 est.) 6.8314 (2009) 6.9385 (2008)

58.68 (2013 est.) 53.437 (2012 est.)

45.726 (2010 est.) 48.405 (2009) 43.319 (2008)

Fiscal year calendar year 1 April - 31 March

Public debt 22.4% of GDP (2013 est.)

26.1% of GDP (2012) note: official data; data cover

both central government debt and local government debt, which China's National Audit

Office estimated at RMB 10.72 trillion (approximately US$1.66

trillion) in 2011; data exclude policy bank bonds, Ministry of Railway debt, China Asset

Management Company debt, and non-performing loans

51.8% of GDP (2013 est.)

51.7% of GDP (2012 est.) note: data cover central

government debt, and exclude debt instruments issued (or owned) by government entities

other than the treasury; the data include treasury debt held by

foreign entities; the data exclude debt issued by subnational entities, as well as intra-

governmental debt; intra-governmental debt consists of

treasury borrowings from surpluses in the social funds, such as for retirement, medical

care, and unemployment; debt instruments for the social funds

are not sold at public auctions

Reserves of foreign exchange and

gold

$3.821 trillion (31 December 2013 est.) $3.388 trillion (31 December

2012 est.)

$295 billion (31 December 2013 est.) $296 billion (28 December 2012

est.)

Current Account Balance

$182.8 billion (2013 est.) $215.4 billion (2012 est.)

-$74.79 billion (2013 est.) -$91.47 billion (2012 est.)

GDP (official

exchange rate)

$9.33 trillion

note: because China's exchange rate is determine by fiat, rather

than by market forces, the

$1.67 trillion (2013 est.)

China India

official exchange rate measure of GDP is not an accurate

measure of China's output; GDP at the official exchange rate substantially understates the

actual level of China's output vis-a-vis the rest of the world; in

China's situation, GDP at purchasing power parity provides the best measure for

comparing output across countries (2013 est.)

Stock of direct

foreign investment - at home

$1.344 trillion (31 December

2012 est.) $1.232 trillion (31 December 2011 est.)

$310 billion (30 November 2013

est.) $225.1 billion (31 December 2012 est.)

Stock of direct

foreign investment -

abroad

$541 billion (31 December 2013

est.) $531.9 billion (31 December

2012 est.)

$120.1 billion (31 December

2013 est.) $118.1 billion (31 December

2012 est.)

Market value of publicly traded shares

$6.499 trillion (31 December 2013 est.) $5.753 trillion (31 December

2012) $3.389 trillion (31 December

2011 est.)

$1.263 trillion (31 December 2012 est.) $1.015 trillion (31 December

2011) $1.616 trillion (31 December

2010 est.)

Central bank discount rate

2.25% (31 December 2013 est.) 2.25% (31 December 2012 est.)

7.75% (31 December 2013 est.) 8% (31 December 2010 est.)

note: this is the Indian central bank's policy rate - the repurchase rate

Commercial

bank prime lending rate

5.73% (31 December 2013 est.)

6% (31 December 2012 est.)

10.6% (31 December 2013 est.)

10.63% (31 December 2012 est.)

China India

Stock of domestic credit

$11.79 trillion (31 December 2013 est.)

$10.02 trillion (31 December 2012 est.)

$1.379 trillion (31 December 2013 est.)

$1.401 trillion (31 December 2012 est.)

Stock of narrow money

$5.532 trillion (31 December 2013 est.)

$4.911 trillion (31 December 2012 est.)

$303.1 billion (31 December 2013 est.)

$317.4 billion (31 December 2012 est.)

Stock of broad

money

$18.15 trillion (31 December

2013 est.) $15.5 trillion (31 December

2012 est.)

$1.376 trillion (31 December

2013 est.) $1.396 trillion (31 December

2012 est.)

Taxes and other revenues

19.4% of GDP (2013 est.) 10.3% of GDP (2013 est.)

Budget surplus (+) or deficit (-)

-2.1% of GDP (2013 est.) -5.7% of GDP (2013 est.)

GDP - composition, by end use

household

consumption: 36.3% government

consumption: 13.7% investment in fixed

capital: 46% investment in

inventories: 1.2%

exports of goods and

services: 25.1% imports of goods and

services: -22.2% (2013 est.)

household

consumption: 56.4% government

consumption: 12.4% investment in fixed

capital: 29.6% investment in

inventories: 8.2%

exports of goods and

services: 25.2% imports of goods and

services: -31.8% (2013 est.)

Gross national

saving

50% of GDP (2013 est.)

51.2% of GDP (2012 est.)

33.7% of GDP (2013 est.)

28.8% of GDP (2012 est.)

China India

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

Source: CIA Factbook