Chinese Financial System - Economic Reform

Economic Reform

The ongoing development of China's financial system will play a critical role in the country’s effort to narrow social disparities and pursue balanced growth. Reforming the financial system would increase the rate of GDP growth and help spread China’s new wealth more evenly. If the reforms directed additional funds to private companies — China's new growth engine — the economy would generate significantly higher returns for the same level of investment and GDP would rise. Such a shift will stimulate mass job creation in the strongest areas of China's economy and increase tax revenues to finance social programs.

After more than a quarter century of reform and opening to the outside world, by 2005 China’s economy had become the second largest in the world after the United States when measured on a purchasing power parity (PPP) basis. The government has a goal of quadrupling the gross domestic product (GDP) by 2020 and more than doubling the per capita GDP. Central planning has been curtailed, and widespread market mechanisms and a reduced government role have prevailed since 1978. The government fosters a dual economic structure that has evolved from a socialist, centrally planned economy to a socialist market economic system, or a "socialist market economy with Chinese characteristics". Industry is marked by increasing technological advancements and productivity. People’s communes were eliminated by 1984 — after more than 25 years — and the system of township-collective-household production was introduced to the agricultural sector. Private ownership of production assets is legal, although some nonagricultural and industrial facilities are still state-owned and centrally planned. Restraints on international trade were relaxed when China acceded to the World Trade Organization in 2001. Joint ventures are encouraged, especially in the coastal Special Economic Zones and open coastal cities. A sign of the affluence that the reformed economy has brought to China might be seen in the number of its millionaires (measured in U.S. dollars): a reported 236,000 millionaires in 2004, an increase of 12 percent over two years earlier.

Chinese officials cite two major trends that have an effect on China’s market economy and future development: world multipolarization and regional integration. In relation to these trends, they foresee the roles of China and the United States in world affairs and with one another as very important. Despite successes, China’s leaders face a variety of challenges to the nation’s future economic development. They have to maintain a high growth rate, deal effectively with the rural workforce, improve the financial system, continue to reform the state-owned enterprises, foster the productive private sector, establish a social security system, improve scientific and educational development, promote better international cooperation, and some believe, change the role of the government in the economic system. Despite constraints the international market has placed on China, it nevertheless became the world’s third largest trading nation in 2004 after only the United States and Germany.

The Fifth Plenum of the Sixteenth CPC Central Committee took place in October 2005. The Fifth Plenum approved the new Eleventh Five-Year Plan (2006–10), which emphasizes a shift from extensive to intensive growth in order to meet demands for improved economic returns; the conservation of resources to include a 20% reduction in energy consumption by 2010; and an effort to raise profitability. Better coordination of urban and rural development and of development between nearby provincial regions also is emphasized in the new plan.