US Congress looks at China’s Economic Rise

The Congressional Research Service has a 42 page report China’s Economic Rise: History, Trends, Challenges, and Implications for the United States

China’s economic rise has significant implications for the United States and hence is of major interest to Congress. On the one hand, China is a large (and potentially huge) export market for the United States. Many U.S. firms use China as the final point of assembly in their global supply chain networks. China’s large holdings of U.S. Treasury securities help the federal government finance its budget deficits. However, some analysts contend that China maintains a number of distortive economic policies (such as protectionist industrial policies and an undervalued currency) that undermine U.S. economic interests. They warn that efforts by the Chinese government to promote indigenous innovation, often through the use of subsidies and other distortive measures, could negatively affect many leading U.S. industries. This report surveys the rise of China’s economy, describes major economic challenges facing China, and discusses the implications of China’s economic rise for the United States.

China’s rapid economic growth has led to a substantial increase in bilateral commercial ties with the United States. According to U.S. trade data, total trade between the two countries grew from $5 billion in 1980 to an estimated $562 billion in 2013. China is currently the United States’ second-largest trading partner, its third-largest export market, and its largest source of imports. Many U.S. companies have extensive operations in China in order to sell their products in the booming Chinese market and to take advantage of lower-cost labor for export-oriented manufacturing. These operations have helped some U.S. firms to remain internationally competitive and have supplied U.S. consumers with a variety of low-cost goods. China’s large-scale purchases of U.S. Treasury securities (which totaled $1.3 trillion as of April 2014) have enabled the federal government to fund its budget deficits, which help keep U.S. interest rates relatively low.

The Economist Intelligence Unit(EIU) projects that China’s real GDP growth will slow considerably in the years ahead, averaging 6.1% from 2014 to 2020, and 2.3% from 2021 to 2030.

Many economic analysts predict that on a PPP basis China will soon overtake the United States as the world’s largest economy. The EIU, for example, projects this will occur in 2014, and that by 2030, China’s economy could be 36.1% larger than that of the United States.

The PPP measurement also raises China’s 2013 nominal per capita GDP (from $6,900) to $11,940, which was 22.5% 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.

According to IEA projections, China’s demand for energy from 2008 (the baseline year) to 2035 will account for 30% of the projected increase in global demand for energy during this period. By 2035, China is projected to consume 70% more energy than the United States (even though, on a per capita basis, China’s energy consumption will be less than half of U.S.
levels)

Major Long-Term Challenges Facing the Chinese Economy

China’s Incomplete Transition to a Market Economy
Industrial Policies and SOEs
The Banking System
An Undervalued Currency
Overdependence on Exporting and Fixed Investment
Growing Pollution
Corruption and the Relative Lack of the Rule of Law

China medium and long range goals

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.

Some of the broad goals of the MLP state that by 2020:
• The progress of science and technology will contribute 60% or above to China’s development.
• The country’s reliance on foreign technology will decline to 30% or below (from an estimated current level of 50%).
• Gross expenditures for research and development (R and D) would rise to 2.5% of gross domestic product (from 1.3% in 2005). Priority areas for increased R and D include space programs, aerospace development and manufacturing, renewable energy, computer science, and life sciences

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