The Chinese Economy and its Integration in the World Economy

The growing importance of the Chinese economy is a striking feature of global economic developments in the last quarter of a century. This increasing importance translates into the higher contribution to world economic growth, the significant strengthening of China’s weight in international trade flows and the significant amounts of foreign direct investment attracted by this country (Table 1). In 2004 the world economy grew by 5.1 per cent, around a quarter of that growth being attributable to China. On the other hand, growth in Chinese imports accounted for around 15% of the world trade expansion between 2000 and 2004. In 2004 China was the third largest recipient of foreign direct investment in the world. The Chinese economy still has a high growth potential. China continues to be a relative poor country, where per capita GDP is far lower than in the main advanced economies or in other Asian economies. On the other hand, the process of structural reforms observed in China since the late 1970s is likely to continue, in particular in the context of the accession to the World Trade Organisation (WTO) in December 2001. Considering that China concentrates around 20 per cent of the world population, the maintenance of its economic growth and integration with the exterior process will naturally continue to influence significantly the world economy. In this context, the objective of this paper is to present the key elements that characterise the Chinese economy and its integration in the international economy. Section 2 briefly describes economic growth factors and some structural changes seen since the launching of economic reforms in the late 1970s. Section 3 focuses on China’s integration in the world economy, namely on its growing importance in international trade flows. These are largely related to the strong comparative advantage of China regarding the production and assembly of goods, where labour costs are decisive. Section 4 outlines recent macroeconomic developments, given that over the past few years concerns have arisen about an eventual “overheating” – and the consequent slowdown in the Chinese economy – and the possible impact of such developments on other economies. In turn, Section 5 presents the outlook for the Chinese economy and a number of economic policy challenges, namely as regards the financial situation of the banking and public sectors and the conduct of the monetary and foreign exchange policies. Finally, Section 6 concludes.