2009 Index of Economic Freedom

Quick Facts

Population:

• 1.3 billion

GDP (PPP):

• $6.1 trillion
• 11.1% growth
• 10.1% 5-year compound annual growth
• $4644 per capita

Unemployment:

• 4.0%

Inflation (CPI):

• 4.8%

FDI Inflow:

• $69.5 billion

China's economic freedom score is 53.2, making its economy the 132nd freest in the 2009 Index. Its overall score is essentially unchanged from last year. China is ranked 28th out of 41 countries in the Asia–Pacific region, and its overall score is slightly lower than the global and regional averages.

China scores relatively well in trade freedom, mainly because of lower tariff rates. Despite heavy non-tariff barriers, it has benefited from global trade and investment for three decades and is an emerging economic power. Rapid development of coastal cities has resulted in increasing disparities in economic freedom and wealth across the country. Efforts to embrace more market principles have been made, although progress has been limited. Along with its new labor law, China implemented an anti-monopoly law in 2008 that largely exempts state enterprises.

The state still guides and directs much economic activity, and while allowing some response to market forces by enterprises and individuals, the Communist Party still maintains ultimate authority over economic decisions. Investment freedom, financial freedom, and property rights are very weak. Foreign investment is controlled and regulated, and the judicial system is highly politicized. The state maintains tight control of the financial sector and directly or indirectly owns all banks. Urbanization and the corresponding need for more job growth have driven overall economic policy.

Background Back to the top

China is an authoritarian state that has liberalized its economy markedly since the early 1980s. However, the ruling Communist Party maintains tight control of political expression, speech, assembly, and religion. China joined the World Trade Organization in 2001. Since then, the economy has grown rapidly, and China's industrial and manufacturing sector is now second only to that of the United States. Corruption and a weak rule of law remain serious problems. The government is struggling to manage social unrest, environmental degradation, and the world's largest-ever migration from rural to urban areas.

Business Freedom 51.6 Back to the top

The overall freedom to start, operate, and close a business is constrained by China's regulatory environment. Starting a business takes about the world average of 38 days, but obtaining a business license requires more than the world average of 18 procedures and 225 days. China lacks legal and regulatory transparency.

Trade Freedom 71.4 Back to the top

China's weighted average tariff rate was 4.3 percent in 2006. Despite lower non-tariff barriers pursuant to WTO requirements, import and export bans and restrictions, import and export licensing, non-transparent tariff classifications, complex regulations and standards, subsidies, state trading in certain goods, services market restrictions, issues involving the protection of intellectual property rights, and inconsistent and corruption-prone customs administration add to the cost of trade. Twenty points were deducted from China's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 70.6 Back to the top

China has a high income tax rate and a moderate corporate tax rate. The top income tax rate is 45 percent. As of January 2008, the tax systems for foreign and domestic enterprises were merged, and the top corporate tax was reduced to 25 percent. 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 17.0 percent.

Government Size 88.9 Back to the top

Government expenditures, including consumption and transfer payments, are relatively low. In the most recent year, central government spending equaled 19.2 percent of GDP. Consolidated government spending (including local governments and social security) is estimated to be more than 30 percent of GDP.

Monetary Freedom72.9 Back to the top

Inflation is moderate, averaging 3.7 percent between 2005 and 2007. 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. Fifteen points were deducted from China's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom30.0 Back to the top

China's Foreign Investment Catalogue delineates sectors in which foreign investment is encouraged, permitted, restricted, and prohibited, as well as such specific restrictions as caps on foreign ownership and permissible types of investment. Investors face regulatory non-transparency, inconsistently enforced laws and regulations, weak IPR protection, corruption, industrial policies protecting local firms, and a legal system that cannot guarantee the sanctity of contracts. Foreign investors may access foreign exchange for current account transactions like repatriating profits, but capital account transactions are tightly regulated.

Financial Freedom30.0 Back to the top

China's complex financial system is tightly controlled by the government. The China Banking Regulatory Commission supervised roughly 8,900 financial institutions in 2007. China has two private banks, but four state-owned banks account for over 50 percent of total 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. Foreign participation in capital markets is limited. Expanding access to financial services remains a challenge.

Property Rights20.0 Back to the top

China's judicial system is weak, and many companies resort to arbitration. Even when courts try to enforce decisions, local officials can ignore them with impunity. All land is state-owned, but individuals and firms may own and transfer long-term leases, subject to many restrictions, as well as structures and personal property. The Property Law allows automatic renewal of residential property rights; commercial and industrial grants are renewed absent a conflicting public interest. Intellectual property rights are not enforced effectively. Copyrights, patents, brand-names, trademarks, and trade secrets are routinely stolen.

Freedom From Corruption35.0 Back to the top

Corruption is perceived as widespread. China ranks 72nd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption limits foreign direct investment and affects banking, finance, government procurement, and construction most severely, and there is a lack of independent investigative bodies and courts.

Labor Freedom61.8 Back to the top

China's labor regulations hinder overall 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. The ability to terminate employment varies according to the location and size of the enterprise. A new employment law aimed at providing greater protection and benefits for more workers became effective January 1, 2008.