Country Report

China

September 2008

Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom

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China 1

China

Executive summary 2 Highlights

Outlook for 2008-09 3 Political outlook 4 Economic policy outlook 6 Economic forecast

Monthly review: September 2008 10 The political scene 11 Economic policy 14 Economic performance

Data and charts 17 Annual data and forecast 18 Quarterly data 19 Monthly data 21 Annual trends charts 22 Monthly trends charts

Country snapshot 23 Political structure

Editors: Duncan Innes-Ker (editor); Gerard Walsh (consulting editor) Editorial closing date: August 22nd 2008 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: To request the latest schedule, e-mail [email protected]

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Executive summary Highlights

September 2008

Outlook for 2008-09 • Efforts to move economic growth on to a more socially and environmentally sustainable path, which are championed by the president, Hu Jintao, will guide government policy in 2008-09. • Accountability will improve within the ruling Chinese Communist Party, but wider reforms to increase democracy will not occur. The campaign against official corruption will be sustained. • Ethnic tensions will remain high, especially in Xinjiang and Tibet, but unrest in these regions will not threaten national political stability. • The government budget is forecast to remain in the black in 2008-09, following a surplus of 0.7% of GDP in 2007. • The Economist Intelligence Unit expects real GDP growth to moderate to 9.8% in 2008 and 8.5% in 2009, largely owing to the weaker outlook for net exports. • We now expect consumer price inflation to average 6.7% in 2008. The annual rate of inflation is expected to slow in the second half of 2008. Average inflation will moderate to 4.5% in 2009, owing to low food price inflation. • China!s current-account surplus will remain substantial during the forecast period (owing mostly to the huge trade surplus), although it will fall to the equivalent of 8.3% of GDP in 2008 and 6.3% in 2009.

Monthly review • A series of terrorist attacks in Xinjiang province occurred around the start of the Olympic Games in early August. • The Olympic Games have generally been perceived as a success, although the government!s handling of reporters and protesters has been criticised. • Consumer price inflation moderated to 6.3% year on year in July, from 7.1% in June, as food price rises decelerated. • Government statements have appeared to suggest that sustaining economic growth, rather than reining in inflation, is once again the administration!s main goal. • Several new initiatives have been launched to provide relief to the struggling small and medium-sized enterprise sector, especially in coastal provinces. • Export tax rebates have been raised for some labour-intensive industries, notably textiles, although those for some polluting and energy-intensive products have been further reduced. • The stock of unsold cars has reached a four-year high, but investment in vehicle production remains strong.

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Outlook for 2008-09 Political outlook

Domestic politics The government is enjoying a period of strong public support, following the success of the Olympic Games in China!s capital, Beijing, in August and the competent handling of the response to the massive earthquake in Sichuan in May. Despite the questions about issues such as human rights that have been raised in the foreign press, domestic opinion has been firmly behind the government. The ending of the Olympics will give government officials considerably more time to devote to other political goals. There is speculation that the president, Hu Jintao, will use the opportunity of the coming period, during which relatively few politically sensitive events at the national level are due to take place, to launch a major policy drive. Substantial reforms seem unlikely, however. Usually these are preceded by more localised experiments, but there are few pilot studies being carried out at the regional level of sufficient scale to be expanded into a nationwide programme. Despite this, advocates of reform are likely to use this window of opportunity to promote debate about political changes that increase accountability and the representation of groups such as migrant workers, and the number of pilot studies is also likely to increase. Guangdong province may well serve as a trial ground for many of these efforts. Guangdong!s Chinese Communist Party (CCP) secretary, Wang Yang, has a reputation as an innovative political liberal. In the meantime, the administration will continue to advance its "harmonious society" policy agenda, which is designed to narrow income disparities, improve state welfare provision, and boost spending on health and education. Slowing rates of economic growth give a boost to those who argue for the faster roll-out of welfare programmes and for increased worker rights. Unrest related to economic hardship and income disparities remains a threat to the CCP!s hold on power"albeit one that is manageable at present. Harmonious-society policies appear to have had some success in terms of reducing the incidence of rural disturbances. However, urban protests linked to anger over development projects constitute a new challenge. There is unlikely to be any repeat of the demonstrations in Tibet on the scale seen in March-April, and ethnic unrest is not expected to pose a threat to the government. However, a recent surge in terrorist violence in Xinjiang, another region whose dominant ethnic group, the Uighurs, chafes under CCP rule, highlights the fact that ethnic unrest will remain a security concern. The government is unlikely to offer the kinds of concessions to the ethnic minorities in these regions that might assuage their concerns, and its strategy of pointing to strong economic development as a means of justifying its rule has been undermined by the re-emergence of widespread unrest. Although there will be no major changes in the national leadership within the forecast period, future political leaders are emerging. Among those promoted in

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late 2007 at the 17th party congress and at the National People!s Congress in March 2008 was Xi Jinping, who became the most senior of the new members of the politburo standing committee (PSC, China!s top political body) as well as being appointed vice-president. This has made Mr Xi the leading candidate to take over the positions of CCP general secretary and state president when the incumbent, Mr Hu, steps down from the former post in 2012 and the latter in 2013. Mr Xi!s elevation above Li Keqiang, the presumed favourite of Mr Hu (who also won a place on the PSC, as well as promotion to the position of executive vice-premier), indicated that the CCP is still seeking to balance the various factions of the party. The collegiate nature of policy formation is thus likely to continue in coming years, suggesting that there will be a tendency towards caution and conservatism. Central government efforts to improve policy implementation at local level are also likely to be maintained in 2008-09. Other figures to watch in the outlook period include: Guangdong!s Wang Yang, Wang Qishan, a former mayor of Beijing, who was promoted to the position of vice-premier in March and was also given responsibility for the economy and trade; Bo Xilai, the party secretary of Chongqing municipality; and Li Yuanchao, the head of the CCP!s organisation department, who may push ahead with political reforms in the forecast period to strengthen democracy within the party. All these figures were promoted to the politburo in late 2007. Given their relative youth, they are likely to feature among the party!s top leadership in 2012.

International relations Relations between China and the Taiwan will improve significantly in the forecast period. This follows the recent election as Taiwan!s president of Ma Ying-jeou of the Kuomintang (KMT) party, who is strongly in favour of closer ties with the mainland. With the launch of direct flights between the mainland and Taiwan and the relaxation of restrictions on investments in China by Taiwan-based firms, progress is being made towards economic normalisation, forming a sharp contrast with the tension and rancour that pervaded cross- Strait relations for the previous nine years. However, the two sides remain far apart on the underlying dispute over Taiwan!s sovereignty. China!s ties with Japan have likewise improved significantly in recent months, but the rap- prochement at senior government level obscures continued deep popular mistrust of Japan. Without a change in public attitudes, minor disputes between the two countries may escalate quickly, causing their relationship to deteriorate.

Economic policy outlook

Policy trends Now that inflation is slowing, the government!s focus of attention has reverted from inflation to maintaining growth. This is likely to mean the gradual unwinding of price controls that the government has imposed in 2007 and 2008 on a number of products, ranging from food to coal. This will have a positive impact in terms of removing market distortions. Overall economic liberalisation, however, appears to be stuttering. Progress on addressing the major factors distorting the economy, notably the artificially weak renminbi and excessively low interest rates, remains worryingly slow, increasing the risk

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that the economy will remain too heavily biased towards investment. The government!s industrial policy is also far more interventionist than that in any OECD economy. Although some aspects of its activism"such as the emphasis on more environmentally and socially sustainable development, and the move to promote research and development"have much to recommend them, others are less welcome. The increasing economic nationalism evident in policy- making is a particular worry. The government!s concern about falling equity prices may also have unfortunate repercussions if it leads officials to impede the sale of equity stakes in large listed state-owned firms that have recently become tradable. The sale of these shares would have a beneficial long-term impact on the country!s stockmarkets and corporate sector.

Fiscal policy China recorded a fiscal surplus of around 0.7% of GDP in 2007"its first budget surplus in over 20 years. The government!s "harmonious society" programme may see the tax system become more of a tool for redistributing funds from wealthier regions and individuals to the less well off. The programme calls for expenditure on social welfare"particularly on healthcare, education and poverty relief for rural regions and other socially deprived areas"to rise rapidly in the forecast period. Although this will probably happen, and although revenue growth will slow in 2008-09 in line with a deceleration in economic growth, the budget should remain in surplus during the forecast period. This partly reflects the likelihood that the central government will be cautious about allowing regional governments to ramp up spending. It has concerns that funds could be used for inappropriate purposes by local authorities unless super- vision is first strengthened. Post-earthquake reconstruction is unlikely to strain the budget, as departments are being asked to cut spending in other areas to offset the cost.

Monetary policy Reflecting its concerns about rising inflation and overly rapid growth in GDP and investment, in December 2007 the government shifted its monetary policy stance from "prudent" to "tight". Paradoxically, the same month also marked the last in a series of interest-rate rises, which took the one-year rate on renminbi deposits to 4.1% and that on loans to 7.5%. Real returns on deposits are thus negative, which may encourage savings to flow from bank accounts into other parts of the economy. This could increase the threat of asset price speculation. However, given the recent poor performance of property and share prices, the two traditional vehicles for speculation have become less appealing, at least in the short term. Rather than using interest rates, the government has relied on credit quotas applied to the banking sector to restrict liquidity growth. It has also used issuance of central bank debt and increases in the reserve ratio applying to commercial banks to sterilise liquidity. The use of such methods, although likely to continue in the short term at least, is unhelpful from an economic perspective. Credit quotas disadvantage small and medium-sized firms, the engine of China!s economic and employment growth, in favour of politically better-connected state enterprises. The also encourage greater use of informal and illegal financing methods, undermining the financial sector!s long-term stability. A more desirable route to achieving the same ends would be to relax

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credit quotas while raising the interest rate. However, the government and the People!s Bank of China (PBC, the central bank) fear that higher rates could put pressure on indebted state enterprises and that they could also attract greater inflows of hot money, putting upward pressure on the exchange rate. As inflation has fallen, the hand of those arguing for a loosening of policy, to support an increasingly beleaguered corporate sector, has been strengthened, and the PBC relaxed credit quotas slightly in July. Given that further cuts in US interest rates are expected by end-2008, the PBC is now unlikely to raise local interest rates for fear of attracting in more hot money. However, rates should rise in 2009 as those in the US do, offset by an easing of credit quotas. There is a significant risk that the current dovish line on interest rates could allow monetary and credit growth to accelerate again, necessitating a sharper upward adjustment in rates in 2009.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2006 2007 2008 2009 Real GDP growth World 5.0 4.8 3.8 3.3 OECD 3.1 2.7 1.7 1.2 EU27 3.1 2.9 1.5 1.1 Exchange rates ¥:US$ 116.2 117.8 105.5 101.8 US$:€ 1.256 1.369 1.540 1.520 SDR:US$ 0.680 0.651 0.616 0.619 Financial indicators ¥ 3-month repo rate 0.28 0.61 0.73 0.88 US$ 3-month commercial paper rate 5.03 5.06 2.60 2.75 Commodity prices Oil (Brent; US$/b) 65.4 72.7 110.0 91.0 Gold (US$/troy oz) 604.5 696.7 895.7 848.8 Food, feedstuffs & beverages (% change in US$ terms) 16.1 30.9 46.2 -1.7 Industrial raw materials (% change in US$ terms) 49.6 11.2 5.1 -8.5 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. Global economic growth (at purchasing power parity exchange rates) is forecast to slow to 3.8% in 2008 and 3.3% in 2009, sharply lower than the 4.8% expansion recorded in 2007. Growth in both the EU and the US will be very weak in 2009, and Japan!s economy is expected to continue to limp along. As a result, growth in global trade is forecast to slump to 4.4% in 2009, the slowest rate of increase since 2002. The poorer outlook for OECD market demand in 2009, especially in the EU, China!s largest export market, has led the Economist Intelligence Unit to revise down sharply its forecast for Chinese export growth next year. Nevertheless, high local productivity levels mean that exports from China may well hold up better than those from many other countries. The surge in global prices for food, oil and raw materials in 2008 has been a significant contributor to inflation in China; oil prices are forecast to be 51% higher on average this year than in 2007. However, with prices for oil, soft

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commodities and industrial raw materials expected to fall back in 2009, this trend will be reversed next year. Producer prices especially should fall in China as the cost of raw materials moderates.

Economic growth Gross domestic product by expenditure (Rmb bn at constant 1995 prices where series are indicated; otherwise % change year on year) 2006a 2007 a 2008b 2009b Private consumptionc 6,156.7 6,749.9 7,396.6 8,114.1 8.3 9.6 9.6 9.7 Public consumptionc 2,304.1 2,520.7 2,767.7 3,047.3 8.5 9.4 9.8 10.1 Gross fixed investmentd 6,551.1 7,284.9 8,042.5 8,806.5 10.9 11.2 10.4 9.5 Final domestic demand 15,011.9 16,555.5 18,206.8 19,967.9 9.4 10.3 10.0 9.7 Stockbuildingd 308.9 89.0 140.0 175.0 0.4e -1.3 e 0.3e 0.2e Total domestic demand 15,320.8 16,644.5 18,346.8 20,142.9 9.6 8.6 10.2 9.8 Exports of goods & servicesf 8,138.7 9,722.5 10,699.4 11,399.3 18.2 19.5 10.0 6.5 Imports of goods & servicesg -6,680.8 -7,762.6 -8,576.2 -9,301.2 16.0 16.2 10.5 8.5 Foreign balancef 1,457.9 1,960.0 2,123.3 2,098.1 2.2e 3.0 e 0.9e -0.1e GDP 16,862.9h 18,869.6 h 20,720.1 22,471.0 11.6h 11.9 h 9.8 8.5 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Derived from nominal series and contribution of final consumption to real growth. d Derived from nominal series and contribution of gross fixed capital formation to real growth. e Contribution to real GDP growth (as a percentage of real GDP in the previous year). f Derived from nominal series and contribution of net exports to real growth. g Derived from nominal series deflated by import prices and contribution of net exports to real growth. h Actual. China!s GDP growth is set to decelerate sharply from 11.9% in 2007 to 9.8% in 2008 and 8.5% in 2009. The deteriorating outlook for China!s major export markets will be the most important factor behind the slowdown, with exports also being hit by the appreciation of the renminbi and rising domestic prices for land and labour, as well as by increasingly tough regulatory standards. The combination of cooling export growth and robust demand for imports will result in a much smaller contribution to overall growth from net external demand, which accounted for over 3 percentage points of GDP growth in 2007. Investment will remain the single most important driver of economic growth in 2008-09, supported by government infrastructure works, the low cost of borrowing, high levels of liquidity in the economy and the financial system!s bias towards lending for investment. Domestic consumption will also prove robust, with accelerating government spending and strengthening demand in rural areas playing significant roles. Private and government consumption combined will contribute more to growth than investment, signalling the start of a rebalancing of the economy away from its current overdependence on investment.

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The outlook for growth could be upset by a more serious deterioration in demand in China!s export markets, especially if US import demand were to contract. Although China survived the last US economic downturn in 2001 largely unscathed, exports now account for a larger share of GDP, so that a marked slowdown in export growth is likely to have a bigger impact on the headline rate of economic growth. Another risk is posed by inflation. If inflationary expectations become entrenched, the government could be forced to tighten monetary policy aggressively, potentially causing a sharp downturn in investment and consumption growth. Equity prices and property markets have cooled significantly since the start of 2008, illustrating how fragile domestic investor and consumer confidence could prove to be if the public comes to believe that growth is about to slow dramatically. However, there is room for the government to use fiscal spending and economic policy changes to support domestic demand if the outlook deteriorates. Moreover, there are also upside risks for China!s economy: wage inflation, the development of the state welfare net and exchange-rate appreciation could cause domestic consumption growth to exceed forecasts.

Inflation Although inflation is now decelerating, after reaching an 11-year high of 8.8% in February, it remains a major concern. Unlike in much of the rest of the world, the recent surge in prices was linked largely to one-off shocks"notably bad weather in February and a disease that wiped out much of China!s pig stock in 2007, sending pork prices soaring. As the impact of these events fades headline inflation is expected to fall throughout the second half of 2008 (inflation slowed to 6.3% in July). Nevertheless, underlying inflationary concerns remain. The government announced fuel and electricity price increases in June, and further rises are expected from September to bring retail prices for fuel and power closer into line with input costs. Although historically there has been little correlation between producer and consumer price inflation in China, soaring producer prices have increased the risk that companies will try to pass on higher expenses to customers. However, inflation in the cost of manufactures is likely to remain low, owing to intense competition and strong investment. Inflation should slow in 2009, to an average rate of 4.5%, owing to more stable supplies of staple food products, but there is always a risk that weather problems, such as drought, could affect local food production and push up prices rapidly. In the longer term the shrinking area of agricultural land, water shortages, and rising fuel and fertiliser costs will put upward pressure on food prices.

Exchange rates The government continues to intervene in the foreign-exchange markets to slow the renminbi!s appreciation against the US dollar. Although appreciation in 2008 has been faster than in 2006-07, there is still substantial pressure, especially from abroad, to allow the renminbi to appreciate even more quickly. Despite significant appreciation of the renminbi against the US dollar since the start of 2006, the US currency!s weakness has ensured that the renminbi has not gained greatly on a trade-weighted basis. Although the nominal exchange rate is set to appreciate by 9.6% against the US dollar in 2008, when it will average Rmb6.94:US$1, the renminbi will depreciate against the euro and the yen. Appreciation against the US dollar will continue at a slower rate in 2009,

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but the US currency!s rise will mean that the renminbi will strengthen significantly against the euro. Faster appreciation would be desirable in order to help cut the huge surpluses on China!s capital and current accounts, which complicate the government!s efforts to manage domestic monetary policy. Nevertheless, given government caution over appreciation, it appears that for the most part the realignment of China!s trade-competitiveness will occur through shifts in exporters! costs within China. As the trade surplus begins to fall in 2008-09, consensus about the degree to which the renminbi is overvalued will dissipate, and speculative hot money inflows should weaken. This will support a slower rate of appreciation in real trade weighted terms in 2009 than in 2008.

External sector The trade surplus will remain huge, but in response to rising domestic costs, policy changes, the renminbi!s appreciation and weaker world demand, export growth will cool sharply in 2008-09. Coupled with persistently strong domestic demand, this will ensure that the trade surplus falls in 2008 for the first time since 2001. A tightening of China!s visa policy in 2008 is expected to wipe out most of the gains in tourism earnings from the Olympics, leaving the services account in deficit throughout the outlook period. The surplus on the income account will remain substantial in 2008-09, reflecting earnings from the country!s growing stock of foreign-exchange reserves and income from rising overseas investment, although the weaker external environment means that dividend earnings from investment abroad will weaken in the outlook period. The current-account surplus is forecast to fall to the equivalent of 6.3% of GDP in 2009, from 11.5% in 2007.

Forecast summary (% unless otherwise indicated) 2006 a 2007 a 2008b 2009b Real GDP growth 11.6 11.9 9.8 8.5 Industrial production growth 16.6 18.5 c 15.7 13.0 Gross agricultural production growth 5.0 3.7 c 3.4 4.1 Unemployment rate (av) 9.5 c 9.2 c 9.0 8.9 Consumer price inflation (av) 1.8 4.8 6.7 4.5 Consumer price inflation (year-end) 2.8 6.7 3.5 4.1 Short-term interbank rate (year-end) 6.1 7.5 c 7.5 7.9 Government balance (% of GDP) -0.8 0.7 0.6 0.6 Exports of goods fob (US$ bn) 969.7 1,220.0 1,463.9 1,611.8 Imports of goods fob (US$ bn) 751.9 904.6 1,182.6 1,369.5 Current-account balance (US$ bn) 253.3 371.8 343.6 302.4 Current-account balance (% of GDP) 9.1 11.5 8.3 6.3 External debt (year-end; US$ bn) 322.8 350.1 c 425.3 473.2 Exchange rate Rmb:US$ (av) 7.97 7.61 6.94 6.73 Exchange rate Rmb:¥100 (av) 6.86 6.46 6.58 6.61 Exchange rate Rmb:€ (year-end) 10.31 10.67 10.43 9.88 Exchange rate Rmb:SDR (year-end) 11.75 11.66 10.98 10.67 a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates.

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Monthly review: September 2008 The political scene

Ethnic tensions erupt into Ethnic tensions in the north-western province of Xinjiang erupted into an

terrorism in Xinjiang outbreak of terrorist incidents in early August, apparently designed to coincide with the Olympic Games being held in the capital, Beijing. State-owned media reported that militants from the Uighur ethnic group had launched an attack on a police facility near Kashgar, killing 16 border police and wounding 16 others. This represented the most serious outbreak of violence in the province for years, and was one of the most deadly terrorist incidents that the country has experienced in the post-reform era. The attack was followed by a series of blasts in Kuqa in southern Xinjiang, apparently targeting houses and commercial properties owned by ethnic Han Chinese, which left at least one person dead. A number of perpetrators were said to have been killed as police pursued the groups responsible for the two attacks. A further incident saw three guards stabbed to death and another injured in an attack at a road checkpoint in the province. The technical sophistication of the attacks was not high"they involved knives and crude homemade explosives. However, the co-ordination of several attacks suggests a new phase in the previously low-key insurgency in Xinjiang. Shortly before the Olympics, a shadowy ethnic-Uighur group terming itself the Turkestan Islamic Party claimed responsibility for alleged terrorist incidents in several Chinese provinces. It also claimed to have plans to disrupt the Olympics with terrorist attacks. However, it is unclear whether the group was responsible for the recent surge in violence, as individual and groups involved in Xinjiang!s separatist movement often make inflated claims. The government has said that Xinjiang separatists have ties to the al-Qaida international terrorist network, but the evidence for this remains inconclusive. Security in Beijing was tightened for the Olympics partly in response to government concerns about terrorism, and there were several anecdotal reports of Uighurs being forced to leave the capital during the period of the games. Prior to the bombings in August, some had argued that the government was trying to talk up the risk of terrorism to justify the security clampdown ahead of the Olympics. The Uighur people constituted the vast majority of Xinjiang’s population in 1949, when only 6% were from the Han ethnic group that accounts for the vast majority of China!s total population. However, nearly one-half of the region’s population is now Han. China can point to substantial economic development in the region in recent years, but many of the fruits of this growth have been claimed by Han immigrants. Uighurs are increasingly resentful of their perceived economic marginalisation and employment discrimination in a region that they view as their homeland. Tensions have not been alleviated by the tough line taken by recent provincial leaders in Xinjiang, who have cracked down on cultural and religious autonomy in the region. Xinjiang University, which was once bilingual, has in recent years been forbidden to teach in Uighur, and a number of government policies are in place to regulate the

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practice of Islam (most Uighurs are Muslim). Mosques may be attended only by adults, and sermons are required to be recorded (and in some cases pre- approved by the government). Some fear that this has encouraged the radicalisation of younger Uighurs and a move towards more public demonstrations of piety, such as wearing of the full veil by women.

Olympic protesters face Although the Olympic Games have been a televisual success and the triumphs

detention and harassment of China!s athletes have boosted national pride, the government has maintained a tough stance against demonstrators during the event. A number of foreign protesters have been deported after launching small-scale actions in protest against China!s policies regarding abortion and Tibet. The government!s initiative to set aside three "protest parks" in Beijing to allow those to wish to protest a setting in which to do so has also proven to be a cynical exercise. The state-owned Xinhua news agency was forced to admit that, of 77 applications to conduct a protest, two had been suspended, one rejected and 74 resolved through other means. Although the government claimed that these other means involved discussions with officials, the reality appears to be that coercion was a key factor in deterring potential demonstrators. A number of those who applied to protest have since been detained by police. Although restrictions on foreign journalists have been relaxed for the games, they have also continued to face more harassment than the government earlier promised. There have been several reports of official interference with foreign journalists, including the wrestling of a British journalist to the ground while covering a pro-Tibet protest in Beijing. Two Japanese journalists were beaten in the far western region of Xinjiang for attempting to report on a terrorist attack in the city of Kashgar. A member of the International Olympic Committee (IOC) later told Australian television reporters that there was considerable anger on the committee that Chinese promises on press freedom had not been kept, and that the IOC would never have awarded the games to China had it known that the government did not intend to keep its promises to the committee on the issue. In public, however, the IOC continues to stress that it believes China has been a good host for the games.

Economic policy

Monetary policy eases, but In the third week of July the Central Leading Group of Financial and

only slightly Economic Affairs within the politburo met to analyse the impact of economic- tightening measures on the export sector and to adjust economic policy appropriately. The session followed inspection tours to several coastal provinces by China!s top politicians, including the premier, Wen Jiabao, and the president, Hu Jintao. After the gathering, government rhetoric appeared to signal a shift away from citing inflation as the primary challenge facing the economy, instead emphasising the need to maintain stable but rapid economic growth (albeit while containing inflationary pressures). In line with this change of emphasis, a series of adjustments to government policies regarding credit quotas and export tax rebates were subsequently announced.

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In practice the relief measures were precisely targeted, favouring narrow sectors"notably the labour-intensive textile industry, and small and medium- sized enterprises (SMEs). Although the measures clearly represent a slight loosening, claims of a major shift have not yet been borne out. Government officials have talked up the changes in an effort to shore up public confidence in the economy, but the overall balance of policy remains relatively tight, reflecting the threat from underlying inflationary pressures.

The government comes to the The People!s Bank of China (PBC, the central bank) announced in early August

rescue of the SME sector 2008 that it would raise lending quotas for both domestic and foreign banks. National-level banks will be granted a 5% increase in the amount of credit that they are permitted to extend, while the level will rise by 10% for local-level commercial banks. The quota for locally incorporated foreign banks will also be raised. The PBC added the caveat that the additional credit should be channelled towards SMEs, the agricultural sector and reconstruction work in the zone affected by May!s earthquake disaster. Credit facilities for small businesses in China have been particularly strained by the restrictions that the central government imposed on lending in 2007 and early 2008. However, even before they were put in place Chinese banks tended to have an aversion to lending to SMEs, so forcing smaller enterprises in many sectors to rely on informal banking channels. This type of company has also been affected most severely by the surging cost of production in China. When faced with rising raw-material costs, soaring wage bills, renminbi appreciation, and tighter regulation of labour and environmental standards, larger firms can force suppliers to bear some of the extra cost burden, and are more able to pass rising costs on to consumers. Smaller firms, lacking these options, have faced a choice between closure and consolidation. According to the National Development and Reform Commission (NDRC, China!s top economic planning body), over 67,000 SMEs (including over 10,000 textile manufacturers) were forced to close in the first half of 2008. This has been a concern for the government, as these enterprises have been an engine of both economic and employment growth. The SME sector has also been a major driving force behind China!s export growth, but it was hit hard by the removal or reduction of export tax rebates for many types of export products last year. In July 2008 the State Administration for Taxation announced a slight adjustment to the tax rebate system for exporters, notably for labour-intensive manufacturing. Export tax rebates will be raised for silk, wool and other textiles, as well as for bamboo-based items. However, the government!s efforts constitute an adjustment of policy, designed to favour employment-intensive sectors, rather than a policy reversal; the increase in the rebate for textiles from 11% to 13%, for example, will provide only minimal relief. Meanwhile, the emphasis on advancing basic policy goals was underlined by the reduction in rebates for a number of energy-intensive and polluting products, such as high-grade silver and zinc and some types of battery.

Local initiatives provide Two of the provinces most severely affected by changing government policy

further support to SMEs and rising costs in 2007-08 are Zhejiang and Guangdong, whose industrial sectors include a disproportionately large number of SMEs engaged in low

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value added manufacturing and export-processing. Governments at both central and local levels have been looking to provide support to these economically important regions. Zhejiang has many family-owned enterprises and (partly as a result) a large number of informal banking channels that have offered innovative, albeit limited, solutions to credit shortfalls. In the past year these channels have been frequently used for trade financing. Because such lending is technically illegal, there are no accurate figures showing how extensive such financing is, but government officials acknowledge that the pool of funding in the city of Wenzhou alone is worth several hundred billion renminbi. In mid-July local officials at the China Banking Regulatory Commission in Wenzhou confirmed that the city would start a pilot programme to license such local lending groups, permitting them to borrow capital from banks, thus providing a more legitimate source of funds for local SMEs. In addition, in Guangdong the provincial party secretary, Wang Yang, has announced the launch of a Rmb40bn (US$5.8bn) package to help SME plants in the province!s Pearl River Delta to relocate to cheaper parts of Guangdong. They will also be given discounts on water and electricity fees in the new locations. The need for assistance has been highlighted by a surge in factory closures. Mr Wang noted that over 30,000 enterprises had shut so far in 2008, although he added that 40,000 new ones had been started.

China takes a hard line in the Despite considerable pressure from the US and the EU at the Doha round of Doha round World Trade Organisation (WTO) negotiations in Geneva, Switzerland, in late July, China (along with India) maintained its support for a special safeguard mechanism to protect subsistence farmers in developing countries against temporary surges in cotton and rice imports that would harm domestic producers. China’s hard line appeared to surprise many negotiators, as the country had not previously highlighted the strength of its commitment to the safeguard mechanism. The issue of agricultural tariffs and protective measures for farmers in both OECD and developing economies has long been contentious, but China!s level of fiscal and tariff support for agriculture is low relatively to that in many other developing countries. When China joined the WTO in 2001, it also agreed to allow relatively open access to many of its agricultural-product markets. Partly this reflected political motives. American cotton imports, for example, were permitted despite their negative impact on Xinjiang!s cotton sector, to placate the US in response to its complaints about China!s trade surplus. However, the surge in global food prices appears to have made China more concerned about protecting its right to take measures to ensure long- term food security"including steps to ensure that local grain production is not undermined by imports.

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Economic performance

Concerns about inflation Consumer price inflation decelerated in July, to 6.3% year on year"the third

recede successive month of lower figures. The fall in inflation was expected, as supplies of staple food products are starting to recover following disruptions in 2007-08. Notably, pig herds are now being replenished in the wake of the outbreak of blue-ear disease that decimated stocks in 2007 and drove up pork prices. Price inflation for vegetables has also slowed from its peak in February 2008, when ice storms damaged fields and disrupted supply chains across much of China. Prices have also been curbed by surging imports. Swiss-based Global Trade Information Services recently noted that China recorded a deficit of US$5.8bn on trade in agricultural products in the first half of this year, compared with a surplus of US$2.5bn in January-June 2007. The value of imports rose by 72% in January-June, while exports were up by 12%. Food price inflation stood at 14.4% in July, compared with 23.3% in February. A deceleration in broad money (M2) supply growth, from 18.9% year on year in January to 16.3% in July, has been seen by some as indicating that the monetary forces pushing up inflation are dissipating. However, underlying inflationary pressures remain a worry. Non-food inflation has continued to edge up, reaching 2.1% in July, compared with 1.5% in January. Moreover, although the direct linkage between producer price inflation and consumer prices in China has historically been weak, there is mounting concern that manufacturers may be forced to pass on rising costs to customers. Producer price inflation reached a 12-year high of 10.1% in July. Several multinational companies have already blamed rising costs for large increases in the price of their products, both in China and around the world. A US-based consumer goods firm, Proctor & Gamble, said in July that it would raise prices by as much as 10% in China, in line with global price increases for its products. Two US-based fast-food retailers, KFC and McDonald!s, have also raised prices this year to offset rising commodity costs, as has a US-based chemicals giant, Dow.

Industrial output growth Industrial output growth slowed to 14.7% year on year in July, in a marked

slows decrease from the rate of 16% recorded in June. This may reflect the impact that higher costs and weaker external demand have had on the export sector. But it may also be the result of the temporary impact of the disruption to industrial activity caused by the Olympic Games in Beijing. Several industries, notably power generation, cement, construction, metallurgy and chemicals, have faced restrictions in a swathe of provinces across northern China, as the government has sought to reduce pollution during the games. Transport logistics have also been heavily disrupted, and not just because of restrictions on vehicles in and around Beijing"ports across the country, for example, have become more cautious about allowing in certain types of chemicals. The slowdown comes at a particularly sensitive time, as factories are usually revving up output to supply goods for the Christmas retail season at this time of year. Nevertheless, while Olympic effects are likely to hit production in August and September, some of the loss may well be made up in subsequent months.

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Despite the slowdown in industrial output growth, urban fixed investment was up by 27.3% year on year in January-July, with major increases in investment in heavy industry. Investment in metals, mining and smelting was up by 192% year on year in July (compared with year-on-year growth of 37% in the first half of 2008), while investment in electricity generation was up by 23% in July (compared with 7.5% in January-June). In comparison, investment in export- reliant light industries grew by only 9% year on year in July, slowing from 29% in the first half of 2008. Investment growth in real estate also slowed in July, to 13%, down from 35% in January-June.

Firms adopt new labour Amid the increasingly tough corporate climate, some companies are being

practices forced to depart from traditional approaches to labour issues. A US-based retailer, Wal-Mart, renowned outside China for its tough stance against the formation of unions by its staff, has become an unlikely pioneer in collective bargaining with its workforce in China. The company recently signed an agreement for a 9% rise in salaries covering 8,500 employees in Shenzhen. According to the agreement, annual wage negotiations are to take place, and the wage rates offered by Wal-Mart are to be higher than the minimum wage rates for the city (Shenzhen’s minimum monthly wage is the highest in China, currently standing at Rmb1,000, or US$145). The agreement also covers hours of employment and benefits. Wal-Mart has signed similar agreements with its employees in Shenyang and Quanzhou. Other firms are adopting a more legally dubious approach. Cost pressures on labour-intensive firms, notably in southern China, have seen a growing number of companies taking on illegal foreign labour, most frequently Vietnamese and Burmese nationals. The problem has been noted in Guangdong, where police report having investigated 7,940 cases involving foreigners suspected of illegal immigration last year. Crossborder influxes of such workers have increased following the devastation wreaked by Cyclone Nargis in Myanmar earlier this year and the economic slowdown in Vietnam.

The local car-manufacturing One of the sectors that has been negatively affected by weakening domestic

industry faces capacity issues demand rather than troubles abroad is the automotive industry. According to the NDRC!s chief automotive analyst, Chen Xiaodong, vehicle sales rose by 19% year on year in the first half of 2008, to 5.2m units. However, this was down from growth of 23% in the same period of 2007, and the stock of unsold vehicles hit 170,000, the highest level since June 2004. Despite rising inventories, investment in the sector is increasing, as manufacturers (and their suppliers) experience rising demand for commercial vehicles and come to view China as offering greater potential for long-term car sales growth than developed markets in the West. China had also attempted to force foreign vehicle-makers to shift production to the country through punitive tariffs on imports of car parts. Although such tariffs were struck down by a WTO ruling in July, the government has recently instituted a new "green" tax designed to discourage fuel-intensive vehicles. This doubled the tax on cars with engine capacities over 4.1 litres to 40%, and raised the levy on those with engines between 3 litres and 4.1 litres to 25%, up from 15% previously. As most large-engine vehicles are imported,

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the measure will increase the cost-competitiveness of smaller vehicles manufactured locally. In addition, high transport costs for imports and the growing sophistication of Chinese domestic supply chains are seeing more foreign carmakers increase production in China. Japan!s Nissan and its local counterpart, Dongfeng, have announced investment plans for a new plant making 3-litre engines in Zhengzhou, where they already operate a joint- venture plant specialising in light commercial vehicles. The additional capacity will boost the companies! output in Zhengzhou to 120,000 vehicles a year. Nissan’s objective is to reach total annual sales of 1m units in China by 2012; this would represent an ambitious 64% improvement on its 2007 sales performance. A UK-based news agency, Reuters, has also reported that Nissan is set to begin exports of Chinese-made cars in the next few months, initially to Egypt. Several foreign manufacturers, including General Motors of the US and Honda of Japan, already export some of their Chinese production, and local car companies are rapidly increasing vehicle sales abroad.

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Data and charts Annual data and forecast

Production to remove 2003a 2004a 2005a 2006a 2007 a 2008b 2009b GDP Nominal GDP (US$ bn) 1,648 1,936 2,303 2,774 3,242 4,160 4,838 Nominal GDP (Rmb bn) 13,640 16,028 18,869 22,117 24,662 28,867 32,546 Real GDP growth (%) 10.0 10.1 10.4 11.6 11.9 9.8 8.5 Expenditure on GDP (% real change) Private consumption 6.3c 7.1c 6.7c 8.3c 9.6 c 9.6 9.7 Government consumption 6.0c 7.3c 9.7c 8.5c 9.4 c 9.8 10.1 Gross fixed investment 17.0c 12.4c 11.5c 10.9c 11.2 c 10.4 9.5 Exports of goods & services 21.9c 29.2c 17.6c 18.2c 19.5 c 10.0 6.5 Imports of goods & services 26.5c 32.6c 13.5c 16.0c 16.2 c 10.5 8.5 Origin of GDP (% real change) Agriculture 2.5 6.3 5.2 5.0 3.7 c 3.4 4.1 Industry 12.7 11.1 11.7 13.0 13.4 c 10.7 9.0 Services 9.5 10.0 10.5 12.1 12.6 c 10.3 8.8 Population and income Population (m) 1,292 1,300 1,308 1,314 1,321 c 1,331 1,337 GDP per head (US$ at PPP) 3,217 3,608 4,186 4,793c 5,478 c 6,101 6,736 Fiscal indicators (% of GDP) Central government revenue 15.9 16.5 16.8 17.5 20.8 20.9 21.0 Central government expenditure 18.1 17.8 18.0 18.3 20.1 20.3 20.4 Central government balance -2.2 -1.3 -1.2 -0.8 0.7 0.6 0.6 Net public debt 26.8c 25.1c 23.0c 20.9c 18.4 c 15.5 13.4 Prices and financial indicators Exchange rate Rmb:US$ (end-period) 8.28 8.28 8.07 7.81 7.31 6.77 6.63 Exchange rate ¥:Rmb (end-period) 10.44 11.21 9.52 10.31 10.67 10.43 9.88 Consumer prices (end-period; %) 3.2 2.3 1.7 2.8 6.7 3.5 4.1 Producer prices (av; %) 2.3 6.1 4.9 3.0 2.5 c 7.0 3.7 Stock of money M1 (% change) 18.7 13.9 11.6 17.9 21.0 15.4 14.2 Stock of money M2 (% change) 19.2 14.9 16.7 22.1 16.7 16.6 12.5 Lending interest rate (end-period; %) 5.3 5.6 5.6 6.1 7.5 c 7.5 7.9 Current account (US$ bn) Trade balance 44.7 59.0 134.2 217.7 315.4 281.3 242.3 Goods: exports fob 438.3 593.4 762.5 969.7 1,220.0 1,463.9 1,611.8 Goods: imports fob -393.6 -534.4 -628.3 -751.9 -904.6 -1,182.6 -1,369.5 Services balance -8.6 -9.7 -9.4 -8.8 -7.9 -8.8 -16.2 Income balance -7.8 -3.5 10.6 15.2 25.7 24.0 25.3 Current transfers balance 17.6 22.9 25.4 29.2 38.7 47.1 51.1 Current-account balance 45.9 68.7 160.8 253.3 371.8 343.6 302.4 External debt (US$ bn) Debt stock 208.5 247.7 281.6 322.8 350.1 c 425.3 473.2 Debt service paid 37.0 23.3 27.4 27.9 30.7 c 28.8 32.8 Principal repayments 29.9 16.3 20.8 18.1 20.5 c 19.8 21.7 Interest 7.1 7.0 6.5 9.8 10.3 c 9.0 11.1 International reserves (US$ bn) Total international reserves 412.2 618.6 825.6 1,072.6 1,534.4 2,072.0 2,235.6 a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates. Sources: IMF, International Financial Statistics.

Monthly Report September 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008 18 China

Quarterly data

Production to remove 2006 2007 2008 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Output Real GDP (% change, year on year) 10.6 10.4 11.7 11.9 11.5 11.2 10.6 10.1 Industrial production, gross value added (1990 prices; % change, year on year) 16.2 14.8 15.1 18.3 18.1 17.5 16.6 15.9 Electricity production (% change, year on year) 16.5 15.3 12.4 17.7 16.3 16.1 16.0 11.9 Prices Consumer prices (2000=100) 101.2 102.4 104.8 105.1 107.4 109.3 113.2 113.3 Consumer prices (% change, year on year) 1.7 2.0 2.8 3.5 6.1 6.7 8.1 7.8 Financial indicators Exchange rate Rmb:US$ (av) 7.97 7.86 7.76 7.68 7.56 7.43 7.16 6.96 Exchange rate Rmb:US$ (end-period) 7.91 7.81 7.73 7.62 7.51 7.31 7.02 6.86 Deposit rate (end-period; %) 2.5 2.5 2.8 3.1 3.9 4.1 4.1 4.1 Prime lending rate (end-period; %) 6.1 6.1 6.4 6.6 7.3 7.5 7.5 7.5 3-month interbank rate (av; %) 2.9 2.9 3.0 3.1 3.3 4.5 4.6 4.5 Lending & deposits (end-period; % change, year on year) Total loans 15.8 15.7 16.1 16.5 17.2 16.2 14.8 14.1 Short-term loans 11.8 12.6 14.6 15.6 15.4 16.2 14.2 12.7 Medium- & long-term loans 21.8 21.8 22.6 23.2 23.9 23.5 23.5 21.8 Urban & rural savings deposits 16.0 14.6 12.8 9.4 6.9 6.8 8.8 14.7 M1 (end-period; Rmb bn) 11,681 12,604 12,788 13,585 14,259 15,256 15,087 n/a M1 (% change, year on year) 15.9 17.9 19.8 20.9 22.1 21.0 18.0 n/a M2 (end-period; Rmb bn) 33,187 34,560 36,409 37,783 39,310 40,344 42,306 n/a M2 (% change, year on year) 21.8 22.1 17.3 17.1 18.5 16.7 16.2 n/a Shanghai “A” share price index (end-period; Feb 21st 1992=100) 1,840 2,701 3,346 4,010 5,828 5,521 3,643 2,870 Shanghai “A” share price index (% change, year on year) 51.6 119.5 145.8 128.1 216.7 104.4 8.9 -28.4 Sectoral trends (% change, year on year) Retail sales, consumer goods 13.8 14.4 14.9 15.8 16.8 19.1 20.6 22.2 Foreign trade (US$ bn) Exports fob 262.6 277.9 252.0 294.8 331.4 339.5 305.8 360.5 Imports cif -213.9 -210.2 -205.8 -228.9 -257.8 -263.5 -264.7 -302.9 Trade balance 48.7 67.7 46.3 66.0 73.6 76.1 41.1 57.6 Capital flows Foreign direct investment (US$ bn) 14.2 20.4 15.9 16.0 15.3 27.6 27.4 25.0 Foreign direct investment (% change, year on year) -3.5 19.7 11.5 12.8 8.2 34.8 72.6 56.1 Reserves excl gold (end-period; US$ bn) 990 1,068 1,204 1,335 1,436 1,530 1,684 n/a

Sources: IMF, International Financial Statistics; China Statistical Information Centre; National Bureau of Statistics, China Monthly Economic Indicators; People's Bank of China, Quarterly Statistics Bulletin.

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Monthly data

Production to remove Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Exchange rate Rmb:US$ (av) 2006 8.07 8.05 8.04 8.02 8.01 8.01 7.99 7.97 7.94 7.90 7.87 7.82 2007 7.79 7.76 7.74 7.73 7.67 7.63 7.58 7.58 7.52 7.50 7.42 7.37 2008 7.25 7.17 7.08 7.00 6.97 6.90 n/a n/a n/a n/a n/a n/a Exchange rate Rmb:US$ (end-period) 2006 8.06 8.04 8.02 8.02 8.02 8.00 7.97 7.96 7.91 7.88 7.84 7.81 2007 7.78 7.74 7.73 7.71 7.65 7.62 7.57 7.56 7.51 7.47 7.40 7.31 2008 7.19 7.11 7.02 7.00 6.95 6.86 n/a n/a n/a n/a n/a n/a Real effective exchange rate (2000=100; CPI basis) 2006 94.09 94.83 94.65 94.28 91.97 92.97 92.94 93.00 94.14 95.45 95.12 95.48 2007 96.71 97.25 96.83 96.66 97.80 99.38 99.98 100.62 100.18 99.57 99.10 100.87 2008 101.83 103.99 102.55 104.04 n/a n/a n/a n/a n/a n/a n/a n/a Money supply M1 (% change, year on year) 2006 10.3 12.4 12.8 12.7 14.2 14.1 15.5 15.7 15.9 16.5 17.0 17.9 2007 20.1 21.2 19.8 20.0 19.3 20.9 20.9 22.8 22.1 22.2 21.7 21.0 2008 20.5 18.9 18.0 18.8 17.7 n/a n/a n/a n/a n/a n/a n/a Money supply M2 (% change, year on year) 2006 23.4 23.0 23.1 23.5 23.7 23.2 23.2 22.9 21.8 22.0 21.9 22.1 2007 15.9 17.8 17.3 17.1 16.7 17.1 18.5 18.1 18.5 18.5 18.4 16.7 2008 18.9 17.4 16.2 16.9 18.0 n/a n/a n/a n/a n/a n/a n/a Deposit rate (end-period; %) 2006 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.5 2.5 2.5 2.5 2.5 2007 2.5 2.5 2.8 2.8 3.1 3.1 3.3 3.6 3.9 3.9 3.9 4.1 2008 4.1 4.1 4.1 4.1 4.1 4.1 4.1 n/a n/a n/a n/a n/a Prime lending rate (end-period; %) 2006 5.6 5.6 5.6 5.9 5.9 5.9 5.9 6.1 6.1 6.1 6.1 6.1 2007 6.1 6.1 6.4 6.4 6.6 6.6 6.8 7.0 7.3 7.3 7.3 7.5 2008 7.5 7.5 7.5 7.5 7.5 7.5 7.5 n/a n/a n/a n/a n/a Industrial production (% change, year on year) 2006 9.8 20.1 17.8 16.6 17.9 19.5 16.7 15.7 16.1 14.7 14.9 14.7 2007 n/a 12.6 17.6 17.4 18.1 19.4 18.0 17.5 18.9 17.9 17.3 17.4 2008 n/a 15.4 17.8 15.7 16.0 16.0 14.7 n/a n/a n/a n/a n/a Retail sales of consumer goods (% change, year on year) 2006 15.5 9.4 13.5 13.6 14.2 13.9 13.7 13.8 13.9 14.3 14.1 14.6 2007 12.7 16.9 15.3 15.5 15.9 16.0 16.4 17.1 17.0 18.1 18.8 20.2 2008 21.2 19.1 21.5 22.0 21.6 23.0 23.3 n/a n/a n/a n/a n/a Shanghai “A” share price index (end-period; Feb 21st 1992=100) 2006 1,319 1,363 1,361 1,512 1,724 1,758 1,695 1,744 1,840 1,931 2,206 2,701 2007 2,928 3,026 3,346 4,035 4,310 4,010 4,689 5,480 5,828 6,252 5,112 5,521 2008 4,600 4,563 3,643 3,875 3,603 2,870 2,912 n/a n/a n/a n/a n/a Consumer prices (av; % change, year on year) 2006 1.9 0.9 0.8 1.2 1.4 1.5 1.0 1.3 1.5 1.4 1.9 2.8 2007 2.2 2.7 3.3 3.0 3.4 4.4 5.6 6.5 6.2 6.5 6.9 6.7 2008 7.1 8.8 8.3 8.5 7.8 7.1 6.3 n/a n/a n/a n/a n/a Producer prices (av; % change, year on year) 2006 3.1 3.0 2.5 1.9 2.4 3.5 3.6 3.4 3.5 2.9 2.8 3.1 2007 3.3 2.6 2.7 2.9 2.8 2.5 2.4 2.6 2.7 3.2 4.6 5.4 2008 6.1 6.6 8.0 8.1 8.2 8.8 10.0 n/a n/a n/a n/a n/a

Monthly Report September 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008 20 China

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total exports fob (US$ bn) 2006 65.1 54.1 78.0 76.8 73.1 81.3 80.3 90.7 91.6 88.1 95.8 94.0 2007 86.6 82.0 83.4 97.4 94.1 103.4 107.7 111.4 112.3 107.7 117.5 114.3 2008 109.6 87.3 108.9 118.7 120.6 121.2 136.7 n/a n/a n/a n/a n/a Total imports cif (US$ bn) 2006 55.5 51.6 66.9 66.5 60.1 66.9 65.7 71.9 76.3 64.3 72.9 73.0 2007 70.7 58.4 76.7 80.8 71.6 76.5 83.3 86.2 88.3 80.5 91.2 91.7 2008 90.2 78.9 95.6 102.2 100.5 100.2 111.4 n/a n/a n/a n/a n/a Trade balance fob-cif (US$ bn) 2006 9.6 2.5 11.1 10.4 12.9 14.4 14.6 18.8 15.3 23.8 22.9 21.0 2007 15.9 23.7 6.7 16.7 22.4 26.9 24.4 25.2 24.0 27.1 26.3 22.6 2008 19.4 8.4 13.3 16.5 20.1 21.0 25.3 n/a n/a n/a n/a n/a Foreign-exchange reserves excl gold (US$ bn) 2006 848 856 878 897 928 944 957 975 990 1,012 1,041 1,068 2007 1,107 1,159 1,204 1,249 1,295 1,335 1,387 1,411 1,436 1,457 1,499 1,530 2008 1,592 1,649 1,684 1,759 n/a n/a n/a n/a n/a n/a n/a n/a

Sources: IMF, International Financial Statistics; Haver Analytics.

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Annual trends charts

Production to remove Annual trends charts

Real GDP growth Consumer price inflation (% change) (av; %)

China Asia (excl Japan) World China Asia (excl Japan) World 14.0 8.0

12.0 7.0

10.0 6.0

8.0 5.0

6.0 4.0

4.0 3.0

2.0 2.0

0.0 1.0 2003 04 05 06 07 08 09 2003 04 05 06 07 08 09

Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Budget balance Public debt (% of GDP) (% of GDP)

China Asia (excl Japan) World China Asia (excl Japan) 12,000 10.0 9.0 10,000 8.0 8,000 7.0 6.0 6,000 5.0 4.0 4,000 3.0 2,000 2.0 1.0 0 0.0 2003 04 05 06 07 08 09 2003 04 05 06 07 08 09

Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Leading markets, 2007 Leading suppliers, 2007 (share of total) (share of total)

Other US Other Japan 52.8% 19.1% 57.3% 14.0%

South Korea 10.9% Hong Kong 15.1% Taiwan 10.6%

Japan 8.4% South Korea US 4.6% 7.3%

Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Monthly trends charts

Production to remove Monthly trends charts

Price inflation Monetary aggregates (% change, year on year) (% change, year on year)

Consumer prices Producer prices M1 M2 10.0 24.0 9.0 22.0 8.0 7.0 20.0 6.0 18.0 5.0 4.0 16.0 3.0 14.0 2.0 12.0 1.0 0.0 10.0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 2005 06 07 08 2005 06 07 08 Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Retail sales Foreign trade (% change, year on year) (US$ m; goods only)

24.0 Exports Imports Balance 140,000 22.0 120,000 20.0 100,000 18.0 16.0 80,000 14.0 60,000 12.0 40,000 10.0 20,000 8.0 0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul 2005 06 07 08 2005 06 07 08 Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Foreign-exchange reserves Exchange rate (US$ m) (Rmb:US$; av; inverted scale)

1,800,000 6.8

1,600,000 7.0 7.2 1,400,000 7.4 1,200,000 7.6 1,000,000 7.8 800,000 8.0 600,000 8.2 400,000 8.4 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 2005 06 07 08 2005 06 07 08

Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Country snapshot Political structure

Official name People!s Republic of China

Form of government One-party rule by the Chinese Communist Party (CCP)

The executive The state council, approved by the legislature; state council members, including the premier, may serve no more than two consecutive five-year terms

Head of state A president and a vice-president are approved by the NPC for a maximum of two consecutive five-year terms

National legislature Unicameral National People!s Congress (NPC): 2,989 delegates are selected by provinces, municipalities, autonomous regions and the armed forces. The NPC approves the president and members of the state council, as well as the members of the standing committee of the NPC, which meets when the NPC is not in session. All arms of the legislature and the executive sit for five-year terms

Regional assemblies & There are 22 provinces, four municipalities directly under central government control and administrations five autonomous regions. These elect local people!s congresses, and are administered by people!s governments

National elections A new government was approved at the NPC meeting in March 2008

National government The politburo (political bureau) of the CCP sets policy and controls all administrative, legal and executive appointments; the nine-member politburo standing committee is the focus of power

Main political organisation The CCP, of which Hu Jintao is the general secretary

Politburo standing committee Hu Jintao members Wu Bangguo Wen Jiabao Jia Qinglin Li Changchun Xi Jinping Li Keqiang He Guoqiang Zhou Yongkang

HeadsKey of members selected stateof government ministries President Hu Jintao & commissions Vice-president Xi Jinping Premier Wen Jiabao Vice-premiers Li Keqiang Hui Liangyu Zhang Dejiang Wang Qishan Commerce Chen Deming Finance Xie Xuren Foreign affairs Yang Jiechi National development & reform commission Zhang Ping

Central bank governor Zhou Xiaochuan