China ranks among the world leaders in the production of coal and oil. Coal is the primary energy source among petroleum, electric power, and coal in China. Therefore, a vast majority of the coal that is mined is consumed domestically. On the other hand, the petroleum industry has expanded beyond the domestic consumption capacity. Thus, the petroleum industry also services foreign markets with crude oil and other refined petroleum products to a certain extent.
Chinas service sector (tertiary industry) includes many industries such as food & beverage, banking & financial services, retail trade, commerce, legal services, health services and insurance services. Similar to the manufacturing and industry sector, Chinas service sector has blossomed with the economic reforms of the last two decades. Before the reforms Chinas service sector was virtually non-existent. Today the service sector has grown to account for 33.8% of the countrys GDP (2002 est.).
Retail trade has taken in Chinas urban areas. The roads are now lined with a multitude of privately owned shops and street markets. In the larger towns and cities immense shopping centers and department stores are also common. Western food and beverage chains such as Kentucky Fried Chicken, Pizza Hut and McDonalds are also popping up in residential areas.
Before the reforms, tourism was very limited because government policies prevented almost all foreigners from visiting China. Today this industry is receiving more attention because the government sees this market as an opportunity to earn foreign dollars. To accommodate tourism many hotels have been built, airline destinations within the country have grown and historic sites, such as the Great Wall, have been opened to foreigners.
The communications industry has also benefited from the economic reforms. The telecommunications industry boomed during the 1990s and now telephone service can be found in basically every locality although only 16.7% of households have a phone. Today there are many magazines and over 2,000 newspapers published across China. Radio and television broadcast are also in abundant supply reaching 75% of the population although only 1 citizen out of 3 owns a television. The States heavy hand compels the media to refrain from reporting on politically sensitive issues. As a result, the media adheres to a strict code of self regulation to ward off further government manipulation.
Trends and Outlook
According to the official figures reported for real GDP, Chinas economy grew to $1,405.95 billion, an increase of 9.1% which is higher than the rate that was forecasted. Government officials speculated that with the spread of the Severe Acute Respiratory Syndrome (SARS) virus across China the consequences would be felt in the form of an underperforming economy, especially in the services sector. Therefore, an annual growth of 7-8% was predicted although many in the economic community felt this figure was too low. Chinese officials arent intentionally sandbagging the forecasts. Instead they are still acquiring the knowledge and skills necessary to make accurate macroeconomic forecasts, which can be quite difficult in China whose economic statistics are generally misrepresented, especially at the provincial and local levels. The following 2 graphs illustrate Chinas GDP, CPI & RPI since 1996.
After falling 0.8% in 2002, Chinas consumer price index (CPI) increased slightly in 2003 by 1.2% compared to the previous year. By location, CPI increased by 0.9% in urban areas and by 1.6% in rural areas. The increase in CPI is somewhat misleading because of state interference. Although price controls for commodities are virtually nonexistent, the state indirectly influences the prices for 13 broad categories of items such as electric power, transportation, communication, and some services. Retail prices continued to drop by 0.1% from the 2002 level, which has been on a downward trend for 6 consecutive years. Analyst believe this downward trend is an indicator that China might not be able to sustain or create the needed high levels of consumption and investment required to fix the structural problems that plague the countrys economy, especially from the private sector.
China essentially fixes (pegs) the exchange rate of the yuan to the U.S. dollar allowing it to float against other currencies in accordance with changes in the values of the dollar. Although officials recognize the need to eventually switch over to a market-based exchange rate mechanism, the time frame for implementing such a mechanism hasnt been defined. Consequently, the yuan exchange rate remained relatively stable in 2003.
Chinas balance of payments remained in a strong position as a result of interest rates that fell for countries in the west (United States) and due to Chinas current account which continued its good standing. Although the trade surplus was $25.5 billion in 2003, this was a decrease from the previous year by $4.9 billion. The countrys foreign exchange reserves saw considerable growth to $403.3 billion, an increase of $116.8 billion compared with 2002 end of year figures. The following 2 graphs depict Chinas foreign exchange reserves and foreign direct investment.
The principal growth sectors in China continue to be within the secondary and tertiary industries. The value added in the secondary industry for 2003 was $744.31 billion and $453.84 billion for the tertiary industry which represents an increase of 12.5% and 6.7% respectively over last year. Conversely the value added for the primary industry, which employs half of the labor force, was only $207.8 billion representing a meager growth of 2.5% year-on-year. The continued high growth rates in the secondary industries is fueled by government spending to build the states infrastructure, technical upgrades by leading enterprises, and a tremendous upsurge in the output of steel, which is needed to supply the construction materials and manufacturing equipment required to service real estate development. Although the SARS outbreak had detrimental effects on the retail sales and other service industries, this segment is expected to show signs of a rebound in the near future. This holds true especially for the telecommunications sector. China is now home to the largest wireless and wireline networks in the world and preferential government policies have made this sector very attractive.
Although its not reflected in official figures, Chinas labor surplus continues to be problematic for the economy. Income inequality is also an area of concern where urban residents annual disposable per capita income amounts on average to $928 compared to rural figures of $298 which is will below the World Banks $1 per day, i.e. $365, poverty line standard. Other main problems that quell economic and social development include energy shortages, a weak legal structure, corruption, nonperforming loans, inefficient state operated enterprises and most important a socialist system that interferes too much with pricing, interest rates & fees, and general market control.
China ranks 4th in the world for exports at $431.6 billion based on 2003 estimates, trailing the United States, German, and Japanese exports. On the other hand, 2003 estimates indicate that the PRC ranks 3rd in the worlds imports at $397.4 billion. The trade balance between the values of imports and exports continued Chinas long standing trend of having a trade surplus. As Chinas foreign relationships improve and barriers against trade fall, its projected that the trade surplus will eventually diminish in magnitude.
The worlds economic community frequently had problems with Chinas human rights policies during the 1990s. American disapproval was particularly poignant to the point that the United States teetered on the verge of withdrawing Chinas normal trading status (historically referred to most-favored-nation trading status). Understanding how important the normal trading status was for the countrys continued growth, Chinese officials radically changed the regulations and rules governing trade and investment. The sweeping reforms were aimed at increasing international competition and investment, decreased protectionism for domestic enterprises by limiting previous barriers on U.S. imports of agricultural and industrial goods, and by decreasing tariffs. In turn, the U.S. Congress ratified legislation in 2000 granting the PRC permanent normal trading status based on the belief that improved trading relations will foster labor, environmental and human rights reforms in China.
Regulations and Standards
Chinas foreign investment and trade policies have historically lacked transparency. This has resulted in a system that generally creates a great deal confusion when it comes to trade and foreign investment because the rules and regulations governing business activity can not be obtained easily; therefore, they arent applied consistently and they often vary by region. Other downsides include poor protection of intellectual property, unequal treatment between domestic and foreign companies, and an inadequate mechanism for resolving disputes.
December 11th, 2001, marked Chinas accession to the World Trade Organization (WTO). Even though China is now a standing member of the WTO, the PRC still has a long way to go to adopt all the necessary WTO regulations, which is being accomplished through reforms and the passage of new legislation. Chinas entry into the WTO has not only improved the countrys growth potential but it will also service the Chinese people by improving labor, environmental, and human rights conditions, which will ultimately affect the Chinese culture to a certain degree.
Significant changes resulting from the WTO accession include tariff cuts and a dramatic expansion of trading rights in 2002. In 2003, China further reduced tariffs and reformed its tax system in an effort to lessen the distinction between foreign and domestic enterprises based on the principle of national treatment. Quotas on imported goods have also been considerably lowered. The latest change deals with the WTOs transparency requirement.
As of July 1st, 2004, the Chinese government promulgated reforms for business licensing. In the past enterprises wishing to do business with China had to undergo an approval process through the Ministry of Commerce which was time consuming, cumbersome, and not clearly defined. The new system utilizes a registration process that is clearly defined and easily accessible with little or no barriers to trade for individuals or legal entities seeking import and or export licensing. Therefore, the registration process is expected to remove yet another trade barrier by making Chinas market more accessible to foreign entities wishing to operate within and to China.