In 2005, China emerged as the world's third-largest trading nation. Its 2004 current account surplus jumped 50 percent to $68.7 billion—more than 10 percent of total exports. The Chinese government reports that 2004 GDP growth continued at a robust rate of 9.5 percent. Beijing moved to cool the economy with cutbacks of construction machinery and investment-related imports and by exporting surplus domestic production of chemicals and metals. Foreign direct investment inflows rose 13.32 percent to $60.63 billion in 2004. Stepped-up complaints of China's failure to address intellectual property crimes and other grievances, as well as pressure from U.S. protectionists, generated a groundswell of sentiment in Congress to sanction China for trade transgressions. In late 2004, China's septuagenarian leader Jiang Zemin finally passed the baton to his sexagenarian successor Hu Jintao, but this "transition" did not ease the machinery of political repression, much less presage political reforms. Through 2004 and 2005, even domestic observers of China's political scene bemoaned tighter controls on speech and expression, particularly via the Internet, and complained that President Hu had sold out to party hard-liners. China's trade policy score is 1.5 points better this year, and its fiscal burden of government score is 0.2 point better. As a result, China's overall score is 0.17 point better this year.
Trade Policy
Score: 3.0
According to the World Bank, China's weighted average tariff rate in 2004 was 6 percent, down from the 12.8 percent for 2001 reported in the 2005 Index. According to the Economist Intelligence Unit, "China has begun trimming its non-tariff import barriers" but continues to utilize quotas and licensing and "retains regulatory control over imports via commodity inspection, registration requirements and quarantine rules." Based on the lower tariff rate, as well as a revision of the trade factor methodology, China's trade policy score is 1.5 points better this year.
Fiscal Burden
Score: 3.9
China's top income tax rate is 45 percent. The top corporate tax rate is 30 percent. In 2003, according to the Economist Intelligence Unit, government expenditures as a share of GDP remained unchanged at 21.6 percent, compared to a 1.5 percentage point increase in 2002. On net, China's fiscal burden of government score is 0.2 point better this year.
Government Intervention
Score: 3.0
The World Bank reports that the government consumed 12.6 percent of GDP in 2003. In 2002, according to the International Monetary Fund, China reported receiving 4.31 percent of its total revenues from state-owned enterprises and government ownership of property. According to the U.S. Department of Commerce, however, the government retains much of the apparatus of a planned economy and owns major corporations in the energy, banking, telecommunications, steel, car manufacturing, food, and home appliances sectors. The Financial Times reports that "China's 150,000 state-owned enterprisesÂ…still employ more than 50m[illion] workers." Based on the apparent unreliability of reported figures for total revenues, 1 point has been added to China's government intervention score.
Monetary Policy
Score: 1.0
From 1995 to 2004, China's weighted average annual rate of inflation was 2.68 percent.
Foreign Investment
Score: 4.0
According to the U.S. Trade Representative, "General barriers to investment that plague China include a lack of transparency, inconsistently enforced laws and regulations, weak [intellectual property rights] protection, corruption and an unreliable legal system incapable of protecting the sanctity of contracts." The Economist Intelligence Unit reports that "China welcomes foreign investment and is bound under World Trade Organisation rules to open its industries further to foreign businesses, but it does not wish to see its control over important ‘strategic' sectors of its economy slip into foreign hands. Partly with this in mind, on July 25th 2004, China announced a significant structural change to its FDI regime…that allowed foreign investment only in specific, government-designated sectors." Foreign investment regulations that took effect on April 1, 2002, requiring various Chinese bureaucracies to regularly update a Foreign Investment Catalogue for the government to use as a guide in approving foreign investment projects remain in effect. In June 2004, the government opened the retail and distribution sector to 100 percent foreign-owned companies. The People's Bank of China regulates the flow of foreign exchange into and out of the country, and the government intervenes and controls foreign investment in the stock market. The International Monetary Fund reports extensive controls, government approval requirements, and quantitative limits on foreign exchange, current transfers, and capital transactions. Direct investment is subject to government approval, as are real estate transactions.
Banking and Finance
Score: 4.0
The Economist Intelligence Unit reports that over 35,000 financial institutions were operating in China as of 2004. However, the dominant banking institutions remain four state-owned banks, which accounted for 55 percent of total banking assets and deposits as of March 2004. According to The Economist, "Most capital isÂ…provided by banks, and the most important banks are still owned by the state. Some of their customers bid for capital at the prevailing rate of interest. Others, the least enterprising and best connected, hustle for it, by pulling strings or calling in favours. But perhaps two-thirds of the banks' loans serve to prop up state-owned enterprises." The Wall Street Journal reported on June 2, 2005, that the "financial system is plagued by bad debts, lack of transparency, corruption and other abuses." The government has injected vast sums into the four major banks to reduce bad loans. According to the U.S. Department of Commerce, "Authoritative estimates of the total stock of bad debt in China's financial system range from 25 to 75 percent of the country's annual gross domestic product." Although the government is relaxing controls on interest rates, the central bank affects the allocation of credit by setting interest rates on deposits and loans. "China's banking sector remains almost entirely state owned, either directly or through state-owned companiesÂ…[but the] financial sector is evolving more quickly to a market-oriented system now that the country is a member of the World Trade Organisation," reports the EIU. "Foreign banks are gradually being allowed greater scope for their investments in both permissible business areas and geographical scope." Foreign groups are limited to minority stakes in Chinese banks. In December 2004, the government loosened restrictions to permit foreign insurers to operate throughout the country, changing previous rules restricting their activity to a few major cities, and permitted foreign brokers to own up to 51 percent of joint ventures.
Wages and Prices
Score: 3.0
"In general," reports the Economist Intelligence Unit, "prices remain controlled only for goods and services deemed essential, such as foodstuffs and tobaccoÂ…. Coal, which accounts for three-fourths of China's energy consumption, has been one of the most important commodities under price controlsÂ…. Price controls generally apply at the ex-factory level, in the form of subsidies to state-owned enterprises to let them produce and sell goods to wholesalers and retailers at artificially low prices." China does not have a national mandatory minimum wage, but the Labor Law allows local governments to determine their own minimum wages.
Property Rights
Score: 4.0
China's judicial system is weak. The Economist Intelligence Unit reports that "many [foreign firms] prefer arbitration because of concerns about the speed and impartiality of the courts. A related concern for foreign companies is the weak tradition of consistent implementation of court rulingsÂ…." According to the U.S. Department of Commerce, "Enforcement of arbitral awards is sporadic. Sometimes, even when a foreign company wins in arbitration in China, the local court may delay or fail to enforce the decision. Even when the courts do attempt to enforce a decision, local officials often ignore court decisions with impunity." The EIU reports that corruption extends to the courts. In 2004, according to The Wall Street Journal, China introduced a constitutional amendment establishing that a citizen's private property is inviolable. Enforcement of this amendment has yet to be tested.
Regulation
Score: 4.0
The U.S. Department of Commerce reports that "China's legal and regulatory system lacks transparency and consistent enforcement despite the promulgation of thousands of regulations, opinions, and notices affectingÂ…investmentÂ…. Foreign investors continue to rank the inconsistent and arbitrary enforcement of regulations and the lack of transparency as two major problems in China's investment climate." Corruption is widespread. According to the Economist Intelligence Unit, "Foreign companies investing in China tend to encounter rather different forms of organized dishonestyÂ…. [M]unicipal officials have often given their approval to foreign-invested projects after their children have been granted places in schools abroadÂ…."
Informal Market
Score: 3.5
Transparency International's 2004 score for China is 3.4. Therefore, China's informal market score is 3.5 this year.
http://www.heritage.org/research/features/index/country.cfm?id=China
Things are slowly getting better in China
