China - Economic analysis of the Chinese government's growth and job creation policies, investment climate and political risk.






CHINA: Economic Policy Analysis

This site presents an analysis of the Chinese government's economic policies compared to a list of 35 economic policies as prepared by student Lucien E. Rideau with the Mike P. McKeever Institute of Economic Policy Analysis (MIEPA). This study was written in December of 2019. To read the analyses scroll through this site. To learn more about the background policies, click here

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    The study by Specialist Lucien E. Rideau is presented immediately below.


    This study presents a detailed study of the economic policies of China, as written by Specialist Lucien E. Rideau. The ratings herein are based on the following rating scale:


    5.0 Perfect Facilitation of Wealth Creation
    4.0 Midway between Perfect and Neutral
    3.0 Neutral Effect on Wealth Creation
    2.0 Midway between Neutral and Obstructionist
    1.0 Perfectly Obstructionist to Wealth Creation
    [Rating scale copyright Mike P. McKeever, 2019. Used herein with permission]

            1               2.0           6.0             15.0        40 %
            2               1.0           3.0             15.0        20
            3               2.0           6.0             15.0        40
            4               2.0           6.0             15.0        40
            5               4.0          12.0             15.0        80
            6               5.0          15.0             15.0       100
            7               5.0          15.0             15.0       100
            8               2.0           6.0             15.0        40
            9               2.0           6.0             15.0        40  
            10              2.0           6.0             15.0        40
            11              5.0          15.0             15.0       100
            12              3.0           6.0             10.0        60
            13              4.0           8.0             10.0        80
            14              4.0           8.0             10.0        80
            15              4.0           8.0             10.0        80
            16              4.0           8.0             10.0        80 
            17              2.0           4.0             10.0        40
            18              3.0           6.0             10.0        60
            19              1.0           2.0             10.0        20
            20              2.0           4.0             10.0        40
            21              2.0           4.0             10.0        40
            22              2.0           4.0             10.0        40
            23              1.5           3.0             10.0        30      
            24              3.0           6.0             10.0        60
            25              2.0           4.0             10.0        40
            26              2.0           4.0             10.0        40
            27              1.0           2.0             10.0        20
            28              4.0           8.0             10.0        80
            29              4.5           4.5              5.0        90  
            30              3.0           3.0              5.0        60
            31              1.5           1.5              5.0        30
            32              2.0           2.0              5.0        40
            33              2.0           2.0              5.0        40 
            34              4.0           4.0              5.0        80
            35              2.0           2.0              5.0        40
       TOTAL               95.5          204.0           370.0        55.1%
                          =====          ======          =====        =====


    1. Freedom from internal control (2.0)

    China receives a low score due to its absolute manipulation upon its people, even though its measurements might help with maintaining order. As a nation with large demography and the largest population in the world, China enforces many internal control measurements, aims to ensure order and implement the will of the government.

    For preventing the large flow of population between cities and villages, the government enforces policies under a household system. Based on this system, people are still free to move wherever they like, but they will be treated differently. For instance, the agricultural household population (farmers, villagers, approximately 900m, according to the sixth population census in 2010) can only receive 40%~60% local healthcare cover, while the non-agricultural household can receive 60% ~ 100% cover. In the winter of 2018, Beijing City forces thousands of non-agricultural population to leave the city, as a response to a great fire happens in the slum.


    2. Freedom of speech (1.0)

    China deserves the lowest score due to its absolute manipulation of propaganda, censorship, and speech control.

    The Great Firewall is one of the most significant monuments of speech control. It disconnects the Chinese inner internet from the rest of the internet. The government has absolute manipulation in the inner internet, all information must be censored by the government. Any attempts of spreading information that is not in favor of the government will be suppressed and charged as a crime.

    China starts to put more pressure on academic freedom since Xi Jinping comes to power. Many college faculties were kicked out and investigated because of their criticism against the party and the government was reported by their students. All these signs the freedom of speech is in extreme danger in China.


    3. Effective, fair police force (2.0)

    China receives a low score, due to the erratic efficiency, lack of fairness, and the false role of the police force.

    Definitely, Chinese police is the largest police force in the world, with abundant resources, and loose regulation of enforcement, compares with the West. John Sudwoth, a BBC journalist has challenged the Chinese police in 2017, aims to test the efficiency of the police force. Consequently, he is found by the police in 7 minutes, with the help of the Sky Web System. This case reveals how efficient could the police force be, however, such efficiency could only be practiced in some particular situations. Dong YaoQiong, a woman who spills ink on the image of Xi Jinping gets arrested on the same day, with her family isolated and under observed as well. Tan Qindong, a Cantonese medical doctor who queries the effectiveness of health care products from a giant health care company, Hongmao, gets arrested in Canton by the police from Inner Mongolia, which is where the HQ of Hongmao located. These two individual cases show what kind of wrongful role that the police force is playing in society, except simple order keeper solely, which they are supposed to be.


    4. Private property (2.0)

    Eventually, China has the term on the protection of private property in its Consitution, just like most of the western nations do. In Chapter I, Article XIII, it states that:

    (1) Citizens' lawful private property is inviolable.

    (2) The State, in accordance with the law, protects the rights of citizens to

    private property and to its inheritance.

    (3) The State may, in the public interest and in accordance with the law,

    expropriate or requisition private property for its use and shall make

    compensation for the private property expropriated or requisitioned.

    Nevertheless, the protection of the private property is still feeble because of the lack of civil laws, corruption, and bureaucratism. For instance, the creditors are suffering from a lack of legal protections---the vacuum of the laws provides the company and the executive plenty of opportunities to take advantage of the creditors. Hence, China obtains a score of 4 in the creditor’s right index (0 weak - 12 strong), lower than the average of the world (5.7 in 2019), and short term credit still takes a huge part of total credits, due to the doubt of protection impacts the creditors’ wills of issuing long-term-credits.

    Moreover, the government usually jumps in as both a player and a referee. The corruption, bureaucratists’ concern of self-interest and inefficiency of law enforcement bring up the cost of seeking justice and protection of private property. There are many cases of compulsory demolition are supported by the government, due to consideration of economic growth and their self-interest, instead of implementing the laws.


    5. Commercial banks (4.0)

    China receives a fair score, due to the commercial banks’ contribution to business and the management of its assets.

    According to the data published by the government, commercial banks have lent out 142 trillion yuan, due to the end of 2018, with a growth rate of 12.85%. The major commercial banks’ non-commercial equity takes 30.31% of the total asset, shrinks 7.8% year-on-year. The data tells a story of the great adjustment in national banking policies--the commercial banks are focusing on business investment instead of non-commercial function.


    6. Communication systems(5.0)

    China receives a high score, due to its advancement in technology and communication construction.

    In the report of the first half of 2019, the government claims that 98% of the realm acquires 4G and optic network, along with the prosperity of the e-economy. Furthermore, China makes a massive investment in the research of 5G technology and construction, as a core part of its Plan of 2025. The first commercial-use 5G network is already initiated in November 2019, and about 130 thousand 5G base station will be constructed at the end of the year, in order to ensure the coverage of 5G internet for all major cities in China. Undeniably, China is a leading player in the stage of 5G technology.


    7.Transportation (5.0)

    After years of construction with Chinese Speed, China owns a highly developed transportation system with fair capacity. Therefore, it receives a good score.

    According to the Minister of Nationtioanl Statistics’ report of 2018,

    The total mileage of railway reaches 132k kilometers (82k miles), with a 500% growth compares with 1949. The total mileage of highspeed railway reaches 30k km (18.6k miles), and also the first place in the world.

    The total mileage of road reaches 4.85 million km (3m miles), which is 60 times of 1949. The mileage of highspeed road reaches 143k km(88.9 miles),

    There are 23919 ports are in use currently, which is 148.6 times of 1949. China owes 7 out of the top 10 ports in the world, in terms of container throughput.

    The total number of scheduled flights has risen 412.1 times from 1950, reached 4945 flights.

    These are excellent figures.


    8. Education (2.0)

    China receives a low score, even though its course of education goes prosperous in scale, the quantity remains low and seems not able to meet the demand of the market.

    Undeniably, the scale of education is growing greater, and the system of compulsory education is consolidated. According to the annual report of 2017, made by the Administration Of Education, there are 145 million current students in 2017, with a growth of 2.93 million (2.1%). 93.8% of the school-age population is taken in the 9-year-compulsory-education, with a growth of 0.4%. The enrolment rate of elementary school is 99.91%, and 94.9% for middle school, which are excellent data. 195 million population obtains a bachelor or higher degree, and it has the largest number of graduated college students in the world.

    Nevertheless, the greater quantity does not mean fair quality. The unemployment of college students is rising up-- about 7.5% of college students are unemployed--the quantity of graduated students is increasing constantly. In the year 2017, the graduated from technical secondary school has a higher employment rate than the college students for the first time, which is a signal of the shift of the demand for the labor force. However, All these reveal that the trend of the current education system might not be capable of satisfying what the economy demands most urgently--China needs more highly skilled workers and brilliant intellectuals to support its reformation and transition of its economy, instead of massive common bachelors who are not willing to take physical labor, but also not good enough to be part of the intellectuals.


    9. Social Mobility (2.0)

    In view of the serious situation of nepotism and class stratification in China, it receives a low score, due to the lack of fairness and efficiency impacts the possibility of social mobility.

    Eventually, the core of Chinese political power is based on the nepotism--the elites are in power because of their background, instead of their ability-- for example, Xi Jinping and his previous political rival, also his childhood friend, Bo Xilai are the heirs of the first generation of the revolutions. These Red-Nobles lays their hands on the very foundation of the nation, in both of wealth and power. The local government functions in the same way; the office of public sectors are given to bureaucrats’ relatives or bribers.

    The education institutions are open to anyone, however, the powerful and wealthy still be able to get into good schools without academic competitions.


    10. Share of All Jobs in Small Businesses (2.0)

    China receives a low score due to SME’s low share of general employment, while they are the core leading indicator of economic growth.

    According to a report from SAIC(State Administration for Industry and Commerce) in 2014, the total amount of labor force contains 800 million people approximately and 767 million of them are employed; the SME obtains a share of 150 thousand employees, which is 22.4% of the total labor force. Moreover, 70% of the new employment and re-employment are done by the SME. Meanwhile, 94.15% of the national enterprises are SME, and they become the major indicator that boosts the economy greatly. However, SME’s share of employment is low, and they will have to face many difficulties, including the competition pressure from the State-owned firms, limited source of funds, early business difficulties, etc.


    11. Freedom from outside control (5.0)

    China receives the highest rating, due to its strong sovereignty and formidable manipulation upon its citizens, which means it will not tolerate any outside influence on its citizens.

    Chinese censorship and boycott movement could be viewed as a successful anti-foreign-influence measure in the field of ideology. For instance, any firms, tv programs, and literary must be censored by the government; none can get into the Chinese market except they satisfy all requirements. The South Park, a popular satirical cartoon is banned in China because it teases Xi Jinping by relating him to Winnie the Pooh.


    12. Protection of Domestic Enterprises (3.0)

    Even though China carries out multiple very powerful measures to help its domestic enterprises, it still receives a neutral score, due to the potential negative efforts.

    China places very high tariffs on imported finished industrial goods, in order to protect its major industries. According to the customs law and policies on taxation on import & export goods(2004, last edited in 2016), the Chinese government places 20%~25% on industrial goods, 2%~10% on consumer goods generally. In May 2018, the speaker of the Ministry of Finance gave out an example of taxation on imported goods: An imported car with C.I.F. at 240,000 yuan (approximate value=$34,000), needs to be taxed 25% of the tariff, 18% of value-added tax, and consumption tax as well---the tariff is flexible based on the types of imported goods, but the rate of value-added tax and consumption tax remain the same. It cracks down the competitiveness of imported finished industrial goods badly and leads to the major trade conflict between China and the United States in 2018.

    Its unfair distribution of subsidy. An analysis of the first half of 2014 reveals that the government subsidizes approximate 32 billion yuan($ 4~5b ) to listed companies, but State-owned firms obtain more than 60% of total subsidy along(31.43% for central-owned firms, 30.21% for local-owned firms). Moreover, the growth rate of the subsidy(13.63%) is even higher than the growth rate of the net profits of the firms(10.13%). Although it excites the growth of the domestic industries, it also causes a potential risk of the lack of creation and health business as well. The major beneficiaries, which are the domestic industries should be aware of what is behind these protective measures and remain in a progressive and cautious attitude as well.


    13. Foreign currency transactions (4.0)

    China receives a decent score because of the status of its currency in the financial transaction.

    RMB is the only currency that is recognized by the major economic body as the intermediary of the financial transaction and payment. Small private transactions might be done with other currencies when both supplier and demander are in need, but it is not the major form of finical transactions.


    14. Border control 4.0

    China owns one of the largest customs systems in the world, with fair efficiency, henceforth, it receives a high score. With the improvements of technology, the corruption of custom systems is reduced greatly, and the value of uncovered smuggling case is rising up, which shows the effort of the custom system is playing in the economic system; it is extremely important due to the high tariff of many imported goods which are needed badly excites the course of smuggling.


    15. Currency 4.0

    China has a high score due to the oneness of the currency and issuer, but it is not yet perfect since the central bank and local banks are under the strong influence of the government or some reckless bureaucrats who are chasing after a quick success in his/her domination; such a structure reduces the independence of the banks heavily, which means extra financial risk-- the banking policy might be manipulated by the unprofessional bureaucrats based on their need, instead of decision made by the professional.

    The Law of People’s Bank states that the only issuer of the currency is the People’s Bank of China (i.17), and no other organizations, nor individuals are allowed to issue (i.19) currency. Besides the legal statements, RMB is made in fairly anti-counterfeiting technologies and materials, which means a relatively low risk of the massive existence of counterfeit money.


    16. Cultural, language homogeneity 4.0

    Regardless of the possible issue of cultural variety and human rights, China receives a high score, due to the soleness of the national population, education, and culture. It prevents China from separation movement at a certain level and promotes communications between regions.

    Firstly, according to the 6th national population census(2010), the majority population, Han, takes place of 91.6% of the total population. Second, the Mandarin is the only official language, also the only language which will be taught in the school.


    17. Political effectiveness 2.0

    Undeniably, the Chinese government has very strong political effectiveness, but it can only be motivated by certain factors, like revolts against the Party, or anything related to the government or bureaucrats’ interest.

    On July 4th, 2018, a lady named Qiongyao Dong, spilled ink on a picture of Jinping Xi, who is the current highest leader of the government and the Party. Consquencdlty, she was arrested immediately, her family was controlled by the government, all relative news was banned by the sensor system, and all police departments need to have an emergency meeting, aimed to discuss prevention of this sort of behavior. Another sample of strong political effectiveness happened on Jan 10th, 2018. After Tan, a doctor published an article against Hongmao Co, a controversial large company which sells suspicious health care product and has confirmed violating laws by many times, said the effort of its product is exaggerated, and it contains toxic herbs, he got arrested immediately. This case is only one example of normality--the police will arrest critics for the firms.

    Ironically, the regular function was extremely inefficient, compared with the previous cases. Regard to a severy hold by Sina, a highly popular media, 98% of participator claims that certification is a difficult experience, 41.6% of participator spent 1~2 months for one certification, 30.5% spent half to full year, 17.6% spent more than a year, while a Chinese citizen might need up to 400 certificates in its life.


    18. Institutional stability 3.0

    The institutional stability is hard to be evaluated, due to its complicated social and political situation.

    Obviously, China is ruled by the Communist Party for seven decades— a single government for a long time. However, the political complication still causes frequent impacts on all fields; it could be positive, like Xiaoping Deng’s reformation, it also could be negative, like Mao’s great cultural revolution.

    For the Political stability index (Range from -2.5 to 2.5) provided by the World Bank, China has an average of -0.45. For the Fragile States Index, it received 72.4 in 2018, with a ranking of 90 out of 184 nations.


    19. Honest government 1.0

    China receives a very low score, due to its bad government credibility; it is caused by the feature of the Chinese culture, bureaucratism, and current political system, the government

    According to the source from Xinhuanet, an authority party press, many branches of local government had falsified stats data, and it is becoming a routine. Liaoning, a north-eastern province, falsified 23% of its GDP in 2016, and exaggerated its income in 2011-2014, by 20%. In 2017, four provinces were found out they falsified income by adding 150 million yuan (21.4m dollars). Besides stats, the government also lies about any negative events. On November 4th, 2018, a toxic chemical leaking happened in Quanzhou Habor, and the local government claimed that only 6.97 tons of chemical were contained, and it is cleaned up on the same day, so the air and water quality is good. However, the news had been spread nationwide, after the failure of controlling information, the government had admitted that the actual leak-out quantity was 69.1 ton, and there were some police officers attempted to disturb the journalists who are going after this case, on 25th.


    20. Common Laws (2.0)

    China has a low score due to its inefficient law enforcement and conflicting laws.

    The laws are always conflicting. For instance, while the Constitution proclaims the freedom of religion, the Law of Religious Affairs states that all religious activities must be recognized by the government; any unpermitted religious practices could lead the practicers to jail. In another case, some local courts auction toy guns in public, which are confiscated from peddles in the name of public safety. Moreover, corruption and the characteristic culture of the Chinese bureaucrats prefer to silencing the commoners, instead of solving problems, which brings up the cost of seeking justice graetly.


    21. Central bank (2.0)

    Regard to the Law of Central Bank, first issued in 1995, last edited in 2003, the People’s Bank of China is the legal central bank in the Republic Of China. However, the lack of independence is disturbing the PBC from doing its duty effectively.

    The independence of a central bank could be evaluated from its legal independence and actual independence. Eventually, the issue of the Law of Central Bank did develop the legal independence of the central bank up to a point; according to GMT index, the score rises from 2 (1986) to 6 (1995), and CWN also rises from 0.29 (1986) to 0.34 (1995) as well. However, its score is relatively much lower than European central banks and the Federal Reserve System. On the other hand, the law also limits the legal independence, due to every decision made by the central bank must follow the guidance of the government, and get approved by the State Council. Moreover, any monetary policies or decisions must be approved by the Committee of Currency. Even though the term of the committee members is short, and reappointment is not allowed, but most of the committees are government bureaucrats but not relative specialists, which means a high likelihood of intervening in monetary policy by bureaucrats, leads to poor actual independence. Due to the p.29 & 30 of the Law of Central Bank, the Central Bank is not allowed to provide loans to local government, hence re-lending is going to be a major mean to support the need of government, even though it is beyond the laws, and causes great loss of the fund.


    22. Domestic budget management 2.0

    In this section, the procedure of budgeting, the management of deficit, and strong dependency on single income are evaluated.

    Theoretically, the budget proposal will be raised by the financial department of state/local government, then it needs to be approved by the state/local Council, and ultimately reaches the National People’s Congress. However, due to the limited symbolic power that the National People’s Congress, the budget is made by bureaucrats eventually. Even though it ensures the success of budgeting, the risk behind bureaucrats-made-budget without checking by the democratic branch is worrisome.

    Due to the rapid increase in debts, the government tends to reduce spending and increase income. In 2018, the revenue of the public budget reached 18.34 trillion yuan ( 2.6t dollars), which is 100.1% of the budget with a growth of 6.2%, compared with 2017. What’s more, an additional income of 1.48 trillion (0.21t dollars) was seized from the government fund and state company fund. On the other hand, the expenditure was 22.09 trillion yuan (3.14t dollars), which is 105% of the budget, along with a growth of 8.7%. Hence, the government cuts the expenditure in 2019; the Department of Taxation, the Customs, the Department of Business, the Department of Agriculture & Rural Region suffer major budget cuts. Particularly, the Department Of Agriculture & Rural Region receives only 27.14 billion yuan, suffers the greatest cut-down among all departments, reduces 2.5 billion yuan with a negative growth of 8.7%. Moreover, the local governments have the power to make a deficit budget, and they rely on the sale of land usage right as the mean to maintain their budget extremely. In 2018, regardless of the funding from the state government and local treasury bonds, the revenue of the local government was 7.14 trillion yuan (1.02t dollars), with a growth of 23.8%. However, the income from the sale of land usage right was 6.99 trillion yuan (0.99t dollars), with a growth of 34.2%, comparatively higher than the growth rate of revenue while it is a major income source. After all, the high-risk behind strong dependence on land sales and cut-down in public departments should be realized.


    23. Government Debt (1.5)

    According to the official financial report in 2018, due to the end of 2018, the total government debt is 33 trillion yuan (4.6t dollars), equivalent to 37% of the GDP (90t yuan, or 12.7 dollars). The key points of the report should be the government debt ratio and deficit policy. The total amount of the local government debt is 18.4 trillion yuan (2.6t dollars), with a 76.6% debt ratio. Additionally, the current trend of government expenditure is going upward, which means a larger amount of debts in the future.

    However, the documented debts might be only the tip of the iceberg. Attribute to corruption, bureaucratism, and bad management, a large amount of under-reported debts are generated. The approximate estimates of implicit debt are between 2,000 billion yuan to 6,000 billion yuan, which means a great risk of debt default.


    24. Economic statistics (3.0)

    There are numerous varied economic statistical data providers in China, in both the public and private sectors, like Caixin, Phoenix Finance, and 36KR.

    However, because of the strong censorship, any information or analysis that is not optimistic nor favorable in China’s economy will be highly likely to be banned, and the relative discussion will be restricted. For instance, the report and discussion of the trade conflict between China and America never call out that China is having a lower hand in the game, but either claims China is winning it ultimately with very limited risk, or how Americans are suffering the loss.


    25. Protection of public health and safety (2.0)

    The safety of food, pollution, and medicine is still poorly nowadays. The local bureaucrats usually prefer to cooperating with the films and cracking down the victims. Issues won’t be solved until they are revealed fully to the public and caused uncontrollable anger. Even so, it might not be the end; in 2016, huge amounts of unqualified children vaccines are provided to infants and children, and it outraged the people. When the government failed to suppress the issue, the prime minister, Li gave a speech and promised that the government will solve this issue. Ironically, the vaccine crisis happened again in 2018, and the largest vaccine produced, which is a state company, got involved in this crisis.

    Undeniably, the government has pushed forward the healthcare and regulation. However

    Law and regulation are in the process, however, it is not progressive enough. Moreover, due to bureaucracy and corruption, there is a high likelihood that existing law and regulation can not be enforced effectively.


    26. High wage policies 2.0

    The policy on minimum wage was enforced since 2003, but its influence is neglectable; it failed to regulate the market for the reasons of lack of deterrence and local bureaucrats. Due to the lack of punishment, enterprises are unlikely to follow the instructions. Moreover, local bureaucrats usually concentrated on cooperating with the entrepreneur for meeting the annual target and personal profit, which means they will be entrepreneurs’ friends on the issue of wages. Hence, although the government claims it concentrates on rising minimum wage, the actual outcome is questionable.

    In fact, the policy on minimum wage is rather a suggested guide on the mercy of enterprises rather than a regulation of the wage and labor market. This failure harms individuals’ interest, lowers the average lifespan of capable labor, and impacts the purchasing power of the domestic market, but it also lowers the cost of production, lead to a more prosperous business environment.


    27. Environmental protection 1.0

    Owing to the contribution of massive poor regulated industries, China received great economic benefits with a costly price; the rapid deterioration of the ecological environment in China is no longer a negligible issue. Regard to the government's data, which is already a smaller number, there are approximately 250 million acres of agricultural land is polluted, which is one-tenth of the total area of agricultural land. On the other hand, the lack of lawsuits on environmental protection makes enforcement extremely difficult. Consequently, the government claims that it is concentrating on the legislation of relevant laws.

    Even so, it does not mean that the government is not capable of managing and regulating environmental protection. For preparation for some international events, like the Olympics(2008), APEC(2018), and G20 Summit(2016), some dramatic changes were made in the hosting region---the haze dispersed, and the clear blue sky was back for a while, because the government compelled factories to close down during the events--the government showed their capability. However, the bureaucrats are lack of motivation, because they need to cooperate with the enterprises for meeting the planned target and earning bribery.


    28. Strong army 4.0

    Regard to the government report, China has the largest military in the world, with approximately 2 million regular soldiers in active service. In view of the economic demand for labor, saving budget, and the change of modern warfare, China government kept reducing the number of active soldiers since Chairman Deng’s period, and the current Chairman, Xi, continues in this direction as well. Nonetheless, the military budget rises with a rate higher than the growth rate of GDP. In 2019, 1.2 trillion Yuan (170b dollars) is scheduled for the military budget, with a growth rate of 7.5%. Even though the growth of the military budget tends to be slow down, the rapid growth of the military budget is still higher than the growth of GDP, and it leads to some misgivings of overmuch

    Eventually, a strong army with a suitable scale guarantees a stable environment for economic activities, and the military budget also provides great opportunities for the market. However, in China’s circumstance, things could be different. Whereas most of the military industries are owned by the government, the inefficient usage, and corruption, the benefit of the large military budget might be not as optimist as it should be, but is still in favor of economic growth. Regardless, PLA(People's Liberation Army) is one of the strongest armies in the world, and capable of causing deterrence to rival, in order to maintain the peace.


    29. Foreign trade impact 4.5

    Foreign trade had been the greatest leading factor of the Chinese economy, since the Chinese economic reform, and it rised particularly since China joined WTO, got fair access to the global market.

    Previously, the total sum of import and export took over 40%~50% of GDP for most of the time in the first and second decade of the 21st century, even for the Crisis of 2008. until the trade conflict broke out after 2018, the sum sunk to 30% ~ 40% of GDP.

    Even so, the side effect is worrisome as well. The prosperous market and over-optimistic future appeal an excess of investment ( 40%~50% of GDP), obviously lead to overproduction and limit the purchasing power of the domestic market.


    30. Management of foreign currency budget 3.0

    China is a nation with the largest quantity of foreign exchange reserves in the world, with a total quantity of 3.11 trillion dollars. Moreover, the structure of foreign currency reserves is getting more and more various, the ratio of dollars in total reserve drops from 79%(1995) to 58%(2014). Undeniably, China has a great quantity of more and more varial foreign currency reserves, but half of the reserve is held as debt but not equity, which means the additional risk for this part of foreign reserve.

    Ironically, the private foreign currency exchange market is illegal, and only the government can run the exchange market through a few banks controlled by the government, according to Chinese law. Additionally, since the export is reduced, and the fear of recession leads to enterprises’ offshoring, the government places harsher restrictions on the official exchange market. For instance, every citizen can only exchange 50k dollars annually, and formal/oral applications are required; the enterprises need to apply for foreign currency exchange as well. Definitely, it causes additionally difficulty to the private enterprises and individuals, but it also prevents capital flight by overruling the free currency market.


    31. Layers of collective action 1.5

    On the purpose to maintain stability and order, China has very strict control over collective activities. According to the Law on Assemblies & Processionaed Demonstrations, the requirements for initiating a collective action are not very different from western nations. However, flexible Chinese bureaucrats do one thing when the law says another thing.

    The government actually has double standards in this affair. For instance, China anti-Japanese demonstration broke out in 2012, after the Japanese government claimed its sovereignty on Fishing Island, a controversial island in Esat Sea. The demonstration was a series of violence and raid against Japanese, Japanese product and its owners. Quirkily, the police forces did not intervene in the riots actively. Comparative with another type of situation, like the Tiananmen Square protests in 1989, ended with military suppression, caused approximately 10,000 civilian dead, or a more recent one, a series of protests happened in 2016, caused by unqualified children vaccines produced by government enterprises, was put down by arresting some “inciters” as soon as possible.

    In a word, the China government is content with any type of government-organized collective activities and encourages patriotic assemblies, but absolute intolerant to any collective movements as long as they are considered as a threat to stability or the rule.


    32. Pro-business climate 2.0

    After staggering growth for a decade, the economy starts slowing down in the second decade of the 21st century, since the cost of manufacturing industries has risen greatly. What’s more, the trade conflict between the United States and China has impacted this economy.

    The Chinese government claims it keeps making policies in favor of small & mid private enterprises. However, these private enterprises still struggle with financial difficulty, because of high requirement, high interset rate, and complicated process. Besides, the PMI and PPI reduce, while CPI keeps going high. Furthermore, the poor regulation on patent protection harms the creativity in the business, restricts the competition to pure price competition (lower the cost) with limited technological progress.


    33. Government enterprises 2.0

    Under the policies and guidelines of the CCP(China Communist Party), government enterprises are an indispensable part of the domestic economy, and they do actually have significant influence. There are roughly three types of government-owned enterprises: central enterprises(commanded by the Central Party/government directly), state-owned enterprise(controlled by the local government/party branches), and government-sponsored enterprise (a combination of government capital and other capitals). If classified them based on the operational modes, they are either ran by party members or government fully, or government/party does not intervene for a lot. The government considers these enterprises as irreplaceable income, the safeguard of the domestic economy, and means to influence the economy.

    According to the report of 2018 from the Treasury of China, over 160,000 government-owned enterprises earned a revenue of 58.75 trillion Yuan(9 trillion dollars) and a profit of 3.387 trillion (0.529 trillion dollars), with profit growth of 12.9%, an obvious slowdown, comparative to 2017 (23.5%). Besides the massive quantity, the status of these enterprises is questionable. For example, the Changchun Pharmacy, a government-owned enterprise, largest supplier of vaccine, amid a scandal of selling massive unqualified vaccines. Moreover, monopoly, low efficiency, and corruption are serious issues.

    In the opponents’ views, the state-owned enterprises are “Zombies Economy”, inflexible clumsy state apparatus, not capable of fulfilling the need of market and developing the economy, but keeps squeezing the available space for private enterprises. Regard to the monopoly and government support, the critics also consider unfair competition could harm private enterprise, leads to a phenomenon referred to as “the state advances, the private retreats”. Furthermore, these enterprises are hotbeds of corruption and inefficient production. On the other hand, the supporters of the state-owned enterprises consider these enterprises to make great contribution to the nation by stabilizing the economy, providing jobs, and constructing infrastructure, regardless of the cost. They also criticize the rejection of government-owned enterprises is influenced by western liberalism, which won’t work in China.


    34. International security agreements 4.0

    As a new major power in the global political platform, China focuses on establishing a partnership or allies with some other nations, in order to counter the traditional western rivals---United States, its allies, and partners---and China claims all these actions are defensive and targetting peace in Asia. Broadly speaking, China has three types of mutual allies/partners in the world: proteges (North Korea, Pakistan, Kazakhstan), ambiguous partners (Russia), current of potential SOFA partners(Status of Forces Agreement partners, like Djibouti)

    China has formed a tight cooperative relationship with Russia, a nation that owns one of the two strongest militaries in the world. From 2005~2019, they had held multiple massive military drills together in the Far East Region. However, both sides remain in an intriguing attitude on forming a military alliance; Russia claims that both China and Russia consider a formal military alliance is not necessary to them. Regardless, the military drills could be a warning red cloth to their rivals as well. Furthermore, in the pact with proteges like Pakistan, China takes more responsibilities in mutual cooperations; its proteges are usually minor powers that are facing the pressure from the friends of the U.S. Besides, China has begun setting up overseas military bases as well, especially in African nations.

    Even though China takes more responsibly in most of its mutual pact, and the partnership with Russia is full of uncertainty, they still provide decent space to China for operating and rebalancing before the approach of the mutual threat to the homeland, which means a relatively stable environment for economic activities.


    35. Protection of domestic enterprises from government-mandated costs 2.0

    The evaluation of the protectionism presentation in China's economy is not optimistic, because it causes distractions to fair competition and market self-regulation.

    The Chinese government claims that it sticks to the code of fairness and equality in dealing with the affairs of all enterprises, no matter they are domestic or foreign. However, such an attitude is questionable since the government is enforcing different measurements: placing heavy tariffs on imported goods, setting up strict limitations on foreign investment.

    According to the customs law and policies on taxation on import & export goods(2004, last edited in 2016), the Chinese government places 20%~25% on industrial goods, 2%~10% on consumer goods generally. In May 2018, the speaker of the Ministry of Finance gave out an example of taxation on imported goods: An imported car with C.I.F. at 240,000 yuan (approximate value=$34,000), needs to be taxed 25% of the tariff, 18% of value-added tax as well, and consumption tax as well---the tariff is flexible based on the types of imported goods, but the rate of value-added tax and consumption tax remain the same.

    Original C.I.F.: 240k($34k)

    Tariff :240k ×25% = 60k

    Consumption Tax:(240k+60k)/(1-40%) X 40% =200k

    Valued-Added Tax: (240k+60k+200k)X17%=85k

    Actual Cost: 240k+60k+200k+85k=585K($84k~$85k)

    Official Suggested Price: 900k ($130k), cost & profit are included.

    As the calculation above has shown, the actual C.I.F. rise over 140% after taxation and 275% higher when it gets to the suggested price; compare with the domestic goods, even though value-added tax is inevitable for domestic enterprise as well, domestic goods do still have an advantage in price competition since the tax rate is lower( 0%~13%). All these signals tell a different than what the Chinese government is saying---strong protectionism exists in China economy-- imported industrial goods, especially finished goods will suffer a severe disadvantage in the competition with Chinese domestic goods since its cost is raised substantially.

    On the other hand, the government sets up numerous restrictions on foreign investment, such as limiting the percentage of equity ownership, prohibiting or creating boundaries for entry to some industries and markets.

    Regardless to the possible influence of the trade conflict, China take actions. The Chinese government starts loosing the restrictions on oversea goods and investment since 2018, after President Trump started the trade conflict. It reduces its tariffs, also removes some of the restrictions. For instance, according to the govenmenrt’s report, the value-added tax on imported goods is reduced four times since 2019: For industrial goods, the rate drops from 17% to 16%, ends up with 13%; from consumer goods, it drops to 9%. Meanwhile, the contribution that the protectionism made to Chinese domestic enterprises shouldn't be neglected; it did protect the Chinese domestic industries in the earlier competition. Moreover, the competitiveness of Chinese domestic enterprises is also questionable, since their advantage is in reducing the cost in massive production, but not in the development of technology, quality, and creativity.



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