China’s Economic Conditions
SUMMARY
Since the initiation of economic reforms in 1979, China has become one of the world’s fastest-growing economies. From 1979 to
2005 China’s real GDP grew at an average annual rate of 9.6%. Many economists spec- ulate that China could become the world’s largest economy at some point in the near future, provided that the government is able to continue and deepen economic reforms, par- ticularly in regard to its inefficient state- owned enterprises (SOEs) and the state bank- ing system. In addition, China faces several other difficult challenges, such as pollution and growing income inequality that threaten social stability.
Trade continues to play a major role in
China’s booming economy. In 2005, exports rose by 28.4% to $762 billion, while imports grew by 17.6% to $660 billion, producing a
$102 billion trade surplus. China is now the world’s third-largest trading economy after the
United States and Germany. China’s trade boom is largely the result of large inflows of foreign direct investment (FDI) into China, which totaled $61 billion in 2004 and an estimated $58 billion in 2005. Over half of
China’s trade is accounted for by foreign-
Many economists contend that China’s policy of pegging its currency (the yuan), which forces the government to trade yuan for dol- lars (to keep the peg at about 8.3 yuan to the dollar), could boost the level of inflation in
China at some point in the future. They also contend that the sharp increase in the mone- tary supply (due to the peg) may induce Chi- nese banks to make bad loan decisions and thus increase the level of non-performing loans. Secretary of Treasury John Snow stated that China’s currency peg posed a risk to its economy and that of its trading partners. On
July 21, 2005, China announced that it would appreciate its currency to the dollar from 8.28 to 8.11 and replace its dollar peg