CHINA

China's economy is 52.8 per cent free, according to our 2008 assessment, which makes it the world's 126th freest economy. Its overall score is 1 percentage point higher than last year. China is ranked 23rd out of 30 countries in the Asia–Pacific region, and its overall score is slightly lower than the regional average.

China scores well in government expenditures and equals the world average in trade freedom, monetary freedom, and labor freedom. Formal central government expenditures equal less than 20 per cent of GDP, which is low compared to other major economies.

China severely restricts many areas of its economy and consequently scores lower than average in seven of the 10 economic freedoms. Investment freedom, financial freedom, and property rights are very weak. Foreign investment is highly controlled and regulated, and the judicial system is highly politicised. The state maintains tight control of the financial sector and directly or indirectly owns all banks.

Background

China is a one-party state ruled by the Chinese Communist Party. Despite rhetoric about democratic development, the party maintains strict control of political expression, speech, assembly, and religion. Since opening up to foreign trade in the early 1980s, China's economy has expanded rapidly. It is now the world's second-largest economy in absolute terms, although per capita income remains low. Most workers are employed in the agricultural sector. The financial sector is largely opaque and state-controlled, raising concerns about lending practices. Since joining the World Trade Organisation in 2002, China has liberalised many sectors of its economy, but it still suffers from the lack of a rule of law, poor protection of intellectual property rights, and corruption, among other hurdles.

Business freedom - 50%

The overall freedom to start, operate, and close a business is constrained by China's national regulatory environment. Starting a business takes an average of 35 days, compared to the world average of 43 days. Obtaining a business license requires more than the world average of 19 procedures and 234 days. China lacks legal and regulatory transparency.

Trade freedom - 70.2%

China's weighted average tariff rate was 4.9 per cent in 2005. The government has reduced its non-tariff barriers pursuant to WTO accession, but severe import bans and restrictions, inconsistent customs valuation, non-transparent tariff classification, inefficient and corruption-prone customs administration, and issues involving the protection of intellectual property rights add to the cost of trade. An additional 20 percentage points is deducted from China's trade freedom score to account for these non-tariff barriers.

Fiscal freedom - 66.4%

China has a high income tax rate and a moderate corporate tax rate. The top income tax rate is 45 per cent, and the top corporate tax rate is 33 per cent. Other taxes include a value-added tax (VAT) and a real estate tax. In the most recent year, overall tax revenue as a percentage of GDP was 15.8 per cent.

Freedom from Government - 89.7%

Government expenditures, including consumption and transfer payments, are relatively low. In the most recent year, central government spending equaled 18.5 per cent of GDP. Consolidated government spending (including local government spending and other expenditures on social security) is estimated to be more than 30 per cent of GDP. The state still guides and directs much economic activity.

Monetary freedom - 76.5%

Inflation is relatively low, averaging 1.8 per cent between 2004 and 2006. Relatively stable prices explain most of the monetary freedom score. The market determines the prices of most traded products, but the government maintains prices for petroleum, electricity, pharmaceuticals, coal, agricultural products, and other "essential" goods. Subsidies allow state-owned enterprises to produce and sell goods to wholesalers and retailers at artificially low prices. An additional 15 percentage points is deducted from China's monetary freedom score to adjust for measures that distort domestic prices.

Investment freedom - 30%

Weak rule of law, lack of transparency, domestic favoritism, and a complex approval process remain major obstacles. Legally, foreign investment is allowed only in specific sectors. Government "encouragement" of foreign investment in certain geographic and high-value-added areas constitutes state action that could violate WTO rules. The central bank regulates foreign exchange, and the government controls investment in the stock market. There are extensive controls on foreign exchange, current transfers, and capital transactions.

Financial freedom - 30%

China's complex financial system is tightly controlled by the government. Roughly 35,000 financial institutions were operating in early 2006. The banking sector is the largest part of the system and is almost entirely state-owned. Four state-owned banks account for over 53 per cent of assets. The state directs the allocation of credit, and the big four state-owned banks lend primarily to state-owned enterprises. Numerous foreign banks have opened branches but face burdensome regulations, though progress has accelerated since China joined the WTO. Foreign participation in capital markets is limited. A weak social security net has encouraged a competitive, market-driven insurance sector to emerge from a state-run monopoly.

Property rights - 20%

China's judicial system is weak, and many companies resort to arbitration. Even when courts try to enforce decisions, local officials often ignore them with impunity. All land is state-owned, but individuals and firms, including foreigners, can own and transfer long-term leases for land use (subject to many restrictions), as well as structures and personal property. Under a new Property Law, residential property rights will be renewed automatically, and commercial and industrial grants should be renewed absent a conflicting public interest. Intellectual property rights are not enforced effectively. Copyrights, patents for inventions, brands and trademarks, and trade secrets are routinely stolen.

Freedom from corruption - 33%

Corruption is perceived as significant. China ranks 70th out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. Corruption limits foreign direct investment but affects banking, finance, government procurement, and construction most severely. China ratified the U.N. Anti-Corruption Convention in 2005 but still lacks independent investigative bodies and courts.

Labour freedom - 62.4%

Restrictive employment regulations hinder employment and productivity growth. The non-salary cost of employing a worker is high. Dismissing a redundant employee can be relatively costly and may require prior consultation with the local labor bureau and labor union. In general, the capacity to end employment varies according to the location and size of the enterprise.

— Courtesy: The Heritage Foundation

Quick Facts

*        Population      1.3 billion

*        GDP (PPP)     $8.8 trillion

                   10.4% growth in 2005

                   9.9% 5-yr. comp. ann. growth

                   $6,757 per capita

*        Unemployment         9.0%

*        Inflation (CPI) 1.8%

*        FDI (net inflow)        $61.1 billion

*        Off. Dev. Assist.       $2.8 billion

                   (0.7% from the U.S.)

*        External Debt $281.6 billion

*        Exports         $836.9 billion

          Primarily machinery and equipment, plastics, optical and medical equipment, iron and steel

*        Imports         $712.1 billion

          Primarily machinery and equipment, oil and mineral fuels, plastics, optical and medical equipment, organic chemicals, iron and steel