The world’s second-largest economy
Located in Central and East Asia, China is the third largest and most populous country worldwide, with a population of 1.41 billion. The People’s Republic of China is the second-largest economic power after the United States. In 1978 China embarked on a path of market reforms and rapid growth, averaging 9% per year. The Chinese economic model is termed “state capitalism” or “socialist market economy.” China is a socialist country, with the Chinese Communist Party exercising power.
Political bodies remain the decision maker on economic issues, although the extent of influence of state policy on business declines. Growth drivers are investment, low labor costs, and expanded exports. In 2021, GDP was $17.73 trillion ($12,556 per capita). In the GDP structure, industry accounts for 39.4%, services – 53.3%, and agriculture – 7.3%. As for the business environment, the total number of micro, small, and medium-sized enterprises (SMEs) is about 52 million. China is now a middle-income country, but economic progress has not eliminated social inequality. According to the World Bank, China should support services sector expansion and consumption growth.
In geopolitical terms, China competes with the United States. Friction with Washington occurs, among other things, over Taiwan, which Beijing considers a “breakaway province.” China is trying to strengthen its position in world politics through, among other things, the Belt and Road Initiative (BRI). This economic and political project, implemented since 2013, aims to increase the scale of Chinese expansion in Asia, Europe, and Africa. Its implementation is supported by the Asian Infrastructure Investment Bank (AIIB), established in 2016.
China is critical to the global energy transition and shifting economies to renewable energy resources. China emits 27% of carbon dioxide and one-third of greenhouse gases globally. In 2020, President Xi Jinping announced a plan for China to achieve carbon neutrality by 2060. The World Bank estimates that China needs to invest $14-17 trillion in green technologies in the energy and transportation sectors to achieve this goal.
Population of China
China’s population is 1.41 billion people. Han Chinese are the largest ethnic group (92%), and the largest minority groups include Zhuang, Manchu, Uighurs, Hui, Miao, Tibetans, and Koreans. The official language is Mandarin. Foreign communities, totaling about 2.8 million people, include Burmese, Vietnamese, Americans, Japanese, and British. China is an atheist country, but the authorities recognize four religions: Buddhism, Taoism, Christianity, and Islam. Agnostics, atheists, and followers of folk religion make up about 70%, while Buddhists account for 16.6%, Christians – 7.4%, and followers of Islam – 1.8%.
The one-child policy was in effect from 1979 to 2015. One of its consequences is the aging of the population. Currently, about 185 million people in China are 65 or older. The average life expectancy is 78 years. According to estimates, in 2040, people over 60 will make up 28% of the population. It will translate into changes in demand patterns and increased healthcare spending. There will also be a need to reform the pension system, which may otherwise become unsustainable.
The workforce numbers some 782 million people. The pace of urbanization accelerated significantly in the 1980s. Currently, 64.6% of Chinese citizens live in cities. Shanghai is the largest, with a population of about 29.2 million, while the capital, Beijing, is home to 21.8 million people. The provinces with the largest populations are Guangdong (126 million), Shandong (101.5 million), Henan (99.4 million), Jiangsu (84.7 million), and Sichuan (83.7 million).
The framework of China’s economic model
As one of the largest economies, China is a member of the G20 and the BRICS bloc, that is, a grouping including Brazil, Russia, India, and South Africa. Beijing has also cooperated with the Organization for Economic Cooperation and Development (OECD) since 1995. The Chinese yuan is now one of the official reserve currencies, widely recognized as safe and accepted for international transactions. The yuan’s exchange rate is controlled by a counter-cyclical adjustment, which boosts the competitiveness of Chinese products, investment attractiveness, and domestic consumption.
China’s economy is de facto composed of two parallel economic systems: private and state-owned. The private sector is joint ventures with foreign partners and manufacturing, service, and processing small and medium-sized enterprises (SMEs). The state sector comprises the most vibrant state-owned enterprises (SOEs). Statization is an obstacle to private business expansion, mainly regarding access to capital, as the private sector receives a small fraction of loans.
Under the “One Country, Two Systems” policy, the economies of the former British colony of Hong Kong and the former Portuguese colony of Macau are separate from China’s economy. Hong Kong and Macau have official status as Special Administrative Regions. Hong Kong is one of the world’s top trade, financial, and logistics centers. Macau’s economy is based on tourism, banking, and textiles. These regions are allowed to engage in economic negotiations with foreign countries and participate in organizations such as the World Trade Organization (WTO) and the World Customs Organization (WCO), for example.
Economy of China
Major leading industries in China’s economy include electrical machinery, automobiles, energy, electronics, chemicals, pharmaceuticals, mining, metallurgy, banking, and real estate. China also has significant reserves of oil (3.69 billion metric tons) and natural gas (6.34 trillion cubic meters). With the rapid growth of the e-commerce industry (10% per year), opportunities are growing for goods from the clothing, cosmetics, or FMCG industries. The success of the Tik Tok app, now worth $50 billion, is also illustrative of this trend. The high-tech, ICT, and biotechnology sectors are experiencing expansion. China also has the second-largest budget in the space industry ($11.9 billion in 2022).
The growth of these industries results from the larger “Made in China 2025” strategy, implemented in 2015. At its core is an emphasis on R&D, innovation, industrial modernization, and increased competitiveness. The healthcare sector is growing constantly, mainly due to an aging population. It is currently the second largest in the world. China is the largest producer of agricultural products, such as rice, wheat, barley, corn, potatoes, tea, soybeans, oranges, watermelons, peanuts, pears, grapes, strawberries, mushrooms, pork, and fish. China as well is one of the largest cotton producers.
Special economic zones have been established since the 1980s. There are now seven: Shenzhen, Zhuhai, Shantou, Xiamen, Hainan, Kashgar, and Khorgas. The zones attract foreign capital through an attractive business environment (tax breaks and exemptions). In addition, the authorities have established 21 free trade zones and 14 open coastal cities. The government also supports foreign investment by companies under the so-called “going out” policy. Its manifestation was the establishment of special economic zones in 11 African and Middle Eastern countries between 1990 and 2018.
International trade
China is the world’s second-largest economy by GDP, the first-largest exporter, and the second-largest importer. Chinese exports are $3.362 trillion, and imports are $2.684 trillion. Beijing’s main trading partners are the United States, Hong Kong, Japan, South Korea, Vietnam, Germany, the Netherlands, India, the United Kingdom, Malaysia, Thailand, and Russia.
The group of most imported goods includes electrical machinery (24.9%), oil and mineral fuels (15%), ores (10.2%), industrial machinery (8.61%), precision instruments (4.07%), motor vehicles and parts (3.22%), plastics (3.09%), precious stones and metals (2.88%), copper (2.46%) and organic chemicals (2.24%). In addition, imports include oilseeds, iron and steel, medicines, meat, wood, chemical products, cereals, rubber, fats and oils, inorganic chemicals, and seafood.
Among the most exported goods are electrical machinery (26.7%), industrial machinery (16.3%), furniture (4.15%), plastics (3.9%), motor vehicles and parts (3.57%), toys and sports equipment (3.03%), precision instruments (2.9%), iron and steel articles (2.84%), clothing (2.57%), and organic chemicals (2.46%). Other goods include iron, steel, footwear, oil and mineral fuels, textiles, medicines, aluminum, rubber, leather, ceramics, and precious stones and metals.
Trade agreements
China has an extensive network of economic relations, as evidenced by bilateral investment agreements with more than 100 countries, covering arbitration and most-favored-nation provisions, among others. Beijing has concluded such agreements with, among others, Spain, France, Germany, Italy, the United Kingdom, Canada, Japan, South Korea, and Thailand.
China has signed free trade agreements with the following countries:
Australia
Cambodia
Chile
Costa Rica
Ecuador
Georgia
Hong Kong
Iceland
Macau
Maldives
Mauritius
New Zealand
Nicaragua
Pakistan
Peru
Singapore
South Korea
Switzerland
Agreements with associations of countries:
Association of Southeast Asian Nations (ASEAN)
Regional Comprehensive Economic Partnership (RCEP)
China-European Union relations
The European Union and China are the largest trading partners in goods trade (after including trade in services, the U.S. remains the EU’s largest partner). In goods trade, the EU has a trade deficit that constantly grows. In 2022, the EU’s imports from China amounted to 626.3 billion euros, and exports to 230.3 billion euros. Trade between the two sides mainly includes electrical machinery, industrial machinery, motor vehicles and parts, and electronics. On the other hand, in services trade, the European Union has a surplus. In 2022 the EU’s service exports were $59.1 billion, while imports were €38.6 billion.
The European Union has consistently demanded that China abide by World Trade Organization (WTO) rules, adhere to fair trade practices, and respect intellectual property rights. In December 2020, the EU and China concluded 7-year negotiations on the “Comprehensive Agreement on Investment” (CAI), which will provide EU investors greater access to the Chinese market. It includes provisions on subsidy transparency, technology transfer, sustainable development, and the abolition of forced labor. The agreement is pending ratification.
In an April 2022 factsheet, the European External Action Service (EEAS) assessed that EU-China relations had deteriorated. According to the paper, China is both a partner and a competitor. China’s human rights record, trade measures against the single market, and its stance on the war in Ukraine were identified as factors that negatively affect relations. However, the diplomats noted that the European Union is committed to cooperation, given China’s role in addressing global and regional challenges.
Opportunities and challenges
The development challenges facing China create potential for foreign entrepreneurs. These include shifting the economy to a new growth model, the aging population process, and lowering carbon emissions. However, the economy has to become more firmly rooted in the service sector and innovation to maintain stable growth. Supportive factors are the growth of the middle class and increased demand for foreign goods. The economic targets identified by the government are also an important indicator. Agrifood, machinery, medical, energy, and high-tech industries are vital in this perspective.
Following accession to the World Trade Organization, China has lowered tariffs and reduced non-tariff barriers. The average level of tariffs has been reduced to 7.6%. More detailed information can be found on the General Administration of Customs (GAC) website. The tax system in the People’s Republic of China comprises nationwide taxes, as well as provincial and local taxes. There are 26 different taxes in China, but typically large companies are subject to 8-10 types of taxes.
Business cooperation with China may bring tangible benefits, but the peculiarities of the Chinese market require adequate knowledge. There are differences already at the business etiquette level. Western cooperation model does not involve as much face-to-face contact, and building relationships is time-consuming. Challenges for entrepreneurs include a different legal system, frequently changing regulations, bureaucracy, business establishment procedures, shortcomings in logistics infrastructure, and intellectual property law violations.
Cooperation is also complicated by detailed requirements such as import licenses and certifications, including CCC certification for electrical, electronic, and automotive products. Getting this certification requires inspections at the exporter’s plant, which are at the exporter’s expense. It is also necessary to be mindful of entry procedures related to proper labeling (in Chinese) and product packaging requirements.
In the larger picture, China represents a vast market and promising growth prospects. The changing preferences of Chinese consumers, focused on better quality products, present an opportunity for foreign entrepreneurs. It provides further opportunities for industries focused on innovative products. Incentives and tax breaks granted in special economic zones are also vital factors for expansion in China.