The People's Republic of China ranks since 2010 as the world's second largest economy after the United States. It has been the world's fastest-growing major economy, with consistent growth rates of around 10% over the past 30 years. China is also the largest exporter and second largest importer of goods in the world. The country's per capita GDP (PPP) was $7,544 (International Monetary Fund, 94th in the world) in 2010. The provinces in the coastal regions of China tend to be more industrialized, while regions in the hinterland are less developed. As China's economic importance has grown, so has attention to the structure and health of that economy.
China’s population can be divided into roughly 3 parts: farmers (about 700-800 million), rural migrants (150-250 million) and urban residents (250-350 million).
Demographically and politically, China’s rural sector is the most important. The Chinese Communist Party owes its initial success to rural residents; Mao Zedong depended heavily on soldiers from rural areas in his battles against both the Chinese Nationalists (Kuomintang) and invading Japanese soldiers.

Biggest Challenges to China’s economy
Since 1978 the Chinese economy has maintained economic growth at an average of nearly 8%. By western standards this is remarkable. The UK, by contrast, has grown at an average rate of 2.5%. However, despite the impressive figures there are many serious economic problems resulting from economic growth.

1. Pollution/ Environmental Degradation/ Corruption/ Massive internal migration/ bureaucracy
The growth rate combined with a population of over 1 billion in China has caused serious environmental problems and in many industrialized cities. Some of the serious environmental problems are the worsening acid rain, water pollution (as municipalities and factories dump human and industrial waste into the nation’s rivers) and accelerating amount of loss in arable land (total farmland declined by 20%). Total air and water pollution in China costs the nation $54 billion (or about 8% of the nation’s GDP), a figure that includes health and productivity losses.
China has 5 of the world’s 10 most polluted cities (Beijing, Shanghai, Xian, Shenyang, and Guangzhou). The impact of environmental degradation will likely extend beyond China’s borders as Tran boundary pollution, environmental refugees, and climate change.
Increased car ownership has led to problems of smog and worsening air quality. Pollution also occurs from China’s vast industrial sector. Often regulation of pollution is very limited with untreated sewage often been poured directly into rivers.
In some cases, a polluting factory will spark a mass protest, especially when it is revealed that official corruption is partly to be blamed for the presence of pollution.
Despite the nation’s vast environmental challenges, China’s government has various laws that address environmental pollution, but they are either not enforced, or have too little power. For example, many factories would prefer to pay the fines associated with their pollution, rather than making the costly improvements that would reduce pollution levels. Thus, it is clear that environmental protection will likely remain a low priority for China for the foreseeable future. Roughly 300,000 Chinese citizens in urban areas annually suffer premature deaths due to outdoor or indoor pollution. If environmental standards continued to be ignored by China, the cumulative effect of deteriorating air and water quality will sharply reduce both the country’s productive capacity and the living standards of the people in China.
The impediment that bureaucracy presents is related to the local-central divide that persists in the governments. Local governments often pursue policies that circumvent national directives. Corruption makes the problem worse. China is increasingly recognized as one of the most corrupt countries in the world.

2. Shortage of Energy
Clearly wary about the consequences of its rapid economic development on the environment, China has set a path over the next 5 years to reduce consumption of its most important resources that power its economy—coal, water, oil and natural gas. Many observers believe that energy will be one of the most serious challenges for China in the 21st century. The country plans to rein in water use and introduces new energy intensity reduction targets in pursuit of more sustainable economic growth (according to the draft proposal of the 12th Five-Year Plan, the master economic blueprint that will chart China’s development through 2015).
The growing demand of the Chinese economy has placed great demands on China’s creaking power infrastructure. This has led to the creation of projects like the Three Gorges Dam.
China’s energy demand or due to its vast coal reserve also means more reliance on coal. Currently, China relies heavily on fossil fuels for its energy supplies, with coal serving a primary role. Despite its possession of vast energy supplies, China is expected to experience energy shortfalls in the next few decades. The gap between energy demand and supply may be as large as 140 million tons of coal. For China, the most obvious solution is to rely even more extensively on coal. However, in the long term, questions are arising about whether such a strategy is sustainable. Coal contributes substantially to China’s air pollution. It also contributes to acid rain, a problem that is regional and not simply limited to China. Massive use of coal will ensure that China will be responsible for a greater proportion of the world’s carbon emissions, a factor linked to global warming and climate change.
Another alternative might be greater reliance on natural gas which is a much cleaner form of alternative energy. China has about 33 trillion cubic meters of natural gas of which only 3 trillion cubic meters have been prospected thus far.
Another possible clean energy alternative for China is nuclear energy. China’s nuclear industry relies on both indigenously-developed technology as well as imported technology from France, Canada and Russia. In 1991, China first produced electricity from nuclear energy; today China has more than 3 nuclear power reactors in operation. China is currently building 8 new reactors in 4 stations. Although nuclear energy in China is promising, there are a number of limitations. First, it is not realistic that enough nuclear power plants could be constructed to substantially lessen China’s reliance on other forms of energy. Secondly, there is the long-term problem of nuclear waste, a problem that would only worsen as more plants are constructed.
Oil will be another major source of energy. As oil imports increase, China is likely to develop greater political ties with Middle Eastern countries in order to secure its energy supplies. Reliance on coal, water and oil will have significantly negative environmental consequences, including acid rain and global warming. Environmentalists fear that the dam will severely impact on the natural habitats of many species. The plan to build dams has therefore been criticized for creating environmental and social problems.
China’s energy needs have at least 2 implications for regional security. First, as China seeks to develop nuclear energy, there is an opportunity for further U.S.-Chinese cooperation in this area (including on the issue of nuclear safety). Nuclear energy in China is a ‘win-win-win’ victory for US-China engagement policy (i.e. it mitigates China’s environmental problems, promotes American business and advances nuclear non-proliferation). Secondly, to the extent that China must turn to external energy sources, its foreign policy will have to be adjusted to reflect this reality. The Middle-East will continue to be China’s key oil supplier well into the foreseeable future. China is fully cognizant of this reality and will cultivate relations with major powers in this region, even to the extent that it contravenes the interests of other Asian countries, Europe and the United States. China will also seek to maintain stability in Tibet and Xinjiang to ensure access to oil.
The plan, China’s greenest to date, vows to slow down the rate of economic growth and sets targets for energy-saving, emission-reduction, and water conservation. These targets are also coming as China as vastly scaling up renewable industries—wind, solar, nuclear, and hydropower—and engaging in the largest road, high-speed rail, and residential construction programs in the world. One of China’s most serious challenges in the 21st century will be securing enough energy resources to meet its growing energy demands.
One way that China could meet its growing energy demand is by emphasizing efficient use of energy. Although efficiency has improved in the past several decades, it lags behind advanced industrialized countries substantially and thus the margin for improvement is substantial.

3. Growing Income Inequality
China’s economic growth has benefited the south and eastern regions more than anywhere else. Environmental degradation however, has contributed to mass internal migration in China. People migrated to other parts of the region in search of scarce water supplies and also due to sparking environmental pollution. This has created a growing disparity between north and south. The agricultural north has, by contrast, been left behind. Many farmers struggle to make a living. Therefore, this has encouraged a migration of workers from north to south. China has struggled to deal with this regional inequality.

4. Property Boom
There are fears that China has been caught up in its own speculative property bubble. Especially in Beijing and the south East, house prices have increased significantly. There are concerns that this property bubble could burst, creating negative equity.

5. Inefficient Banking Sector.
In particular the Chinese banking sector has a bad reputation for making bad loans. Many loans are not repaid back. This is a legacy of the Communist intervention in industry. Banks often made loans to large government business’ with little regard for free market principles. As a consequence it is difficult for genuine new starts to get sufficient capital funding. But, much investment is squandered.

6. Rising unemployment in rural and urban areas
It sounds a paradox that the Chinese economy can grow at 8% and yet unemployment is still a problem. The reason is that there are still many state owned enterprises which are grossly inefficient. Therefore, in the process of privatization and modernization many surplus workers are being made redundant. There is also a lot of unemployment (and disguised unemployment) in the agricultural sector. In order to keep the lid on the pot of China’s boiling economy, China needs at least 8% growth rate to outpace population growth and ensure positive per capita growth. China’s real GDP growth is showing a reducing trend in recent years. One of the reason for this reduction in growth is the shortfall in aggregate demand. Consumers are reluctant to spend due to fear of losing their jobs and are saving money to offset the reduction in state subsidies. In order to deal with these looming problems, China has increased government spending to offset consumer demand shortfalls. This short-term fix is probably not sustainable. It is uncertain how long the government can invest in its ‘make work’ programs when money is also required to service the debt, re-capitalize insolvent state banks and establish a new pension system to replace the one that is dissolving. Consequently the pressure for devaluation is increasing. China will likely determine that preventing excessive or disruptive unemployment is its highest priority. Social stability and availability of jobs are far more critical to China’s hold on power than any other factors.
If Government raises taxes in order to solve this problem, aggregate demand would be worsen. Perhaps China’s best course of action is to scrap Central Bank control of capital markets and opt for a Western style long- term bond market. Moreover, entry to the WTO may boost aggregate demand, foster free competition, pave the way for further economic reforms, and reduce capital flight.

7. Undervaluation of Yuan.
The Chinese Yuan has been tied to the dollar. As the dollar had devalued the Yuan has also devalued. However, it is argued by many (especially in the US) that the Yuan is undervalued against the US dollar by up to 40%. The impact of an undervaluation of the Yuan is that:
• Increase inflationary pressure in the Chinese economy.
• Make it expensive for Chinese to buy foreign goods.
• Give an artificial advantage to Chinese manufacturers.

8. Overheating Economy.
Because the Chinese economy is growing so quickly there are concerns that this could easily lead to inflationary pressures. This is particularly a problem because of:
• relatively loose monetary policy
• undervalued exchange rate
• Property Boom.
• Inflation is currently 3.8%, but, there are upward pressures.

9. Huge Balance of Payments Surplus.
Maybe not such a serious problem for China. But, the US sees it as creating a great disequilibrium. The US, if not anyone else, would like to see the China use its balance of payments surplus elsewhere.

16. One-Child Policy
The labor shortage was partially driven by the demographic trends, as the proportion of people of working age fell as the result of strict family planning. Many young people were attending college rather than opting for minimum-wage factory work. The demographic shift resulting from the one-child policy continued to reduce the supply of young entry-level workers.
The demographic of an aging population leave a smaller manpower pool available for military service, a problem exacerbated by the one-child policy. If the government cannot provide the expected social and health safety net for the elderly, leaving the burden on families, the incentive for a young person to serve in the military is lower. Military pay is barely sufficient to sustain the soldier, let alone a family, and military service takes the child away from the family. Because pay is so low in the security organs of China, whether it be the PLA, People’s Armed Police (PAP), or the Public Security Bureau, the incentive to engage in corruption is quite high. In short the leadership cannot isolate the members of its security organs from some of the same problems caused by economic re-structuring that members of the population at large are facing. If any of the difficulties mentioned earlier grow to the point where the intervention of any of China’s security branches is required, the loyalty of those branches in a crisis may be suspect. Low pay and outside opportunities have created both recruiting and retention problems for the PAP and the PLA. If a family member leaves the farm, he or she tends to migrate to the urban labor market and thereby avoids military or paramilitary service. The disincentives to join the military and the incentives to avoid conscription are higher now than they ever have been in China for reasons like, sending a son or daughter into military service is a poor economic choice.

11. Shifting of economic structure
The biggest problem in China is not inflation, but shifting its economic structure to a more balanced way that will provide or maintain a sustainable growth. Residents' incomes in China remain at a low level which is only 42% of the GDP, whereas in the US the rate is 86%. Therefore, government should raise the income of the citizens, especially when China wants to stimulate domestic private consumption.

12. Shrinking foreign direct investment (FDI)
Throughout the mid 80s to the early 90s, China’s GDP growth reflected in double digits besides being successful in reducing poverty (between 1978 and 1988). Over that 10 years period, China reduced the number of people living below the official poverty line from 570 million to 220 million. However, China’s economy did not perform as well as it did throughout the early stages. 1 major factor may be that foreign-direct investment (FDI) over this period in China amounted to 261 billion dollars. China’s accumulated FDI in 1998 represented 25% of GDP. However, FDI is currently shrinking and not expanding in China.
During the early 80s, China opened up its economy to FDI and promoted export led growth. In more recent years however, Beijing has been forced to deal with the more difficult challenges posed by price deflation, a troubled banking system, falling corporate profits, shrinking export growth and declining FDI.
Since 1980, foreign investment in China has grown at a rate of 35% a year; in 1995, moreover, foreign direct investment totaled about $35 billion. However, current evidence suggests that this trend is reversing. Investors are realizing that China is not as profitable as they once believed. Moreover, continued FDI at past rates is not realistic: With 35% annual growth, China’s receipts of foreign capital will exceed all of Japan’s foreign investment in 2 years and in 10 years China would have to receive all of the international capital invested in the whole world.

7. State Owned Enterprises (SOE) divestiture
For years China has tried to ignore market forces and command economic growth through Soviet-style central planning. It urges State Owned Enterprises (SOE) to produce goods without regard to whether they were marketable or not (often they were not). In Feb 1999 China announced that 2/3 of its key manufactured foods were oversupplied.
The reform of SOEs represents a significant portion of the Chinese economy and directly result in solving some of China’s other significant problems such as corruption, rising unemployment and collapse of the old social security net. SOE employed 43.8% of the total of employed persons in China. SOEs have been responsible for the housing, medical insurance, pension, and child education of their employees and their families.
Despite the key position that SOEs occupy in the economy and the important social welfare functions they perform, SOEs have been producing at below 50% of their capacity. Most SOEs are confronted with capital shortage, debt, overstaffing, and outdated technology. The government has therefore made some progress in SOE reform. The total number of SOEs has been lowered to 30%. As the government divests itself of unprofitable SOEs, the number of unemployed has grown
Government hopes to continue the reform of SOEs at a slower pace by using debt-to-equity swaps with state banks along with the help of financial asset management firms by introducing modern corporate management systems and shareholding system.

Future prospects for China’s economy
In 2010, China's GDP was valued at $5.87 trillion, surpassed Japan's $5.47 trillion, and became the world's second largest economy after the U.S.
China could become the world's largest economy (by nominal GDP) sometime as early as 2020. Economic policy has also moved across from "Made in China" to "Innovated in China". China, the world's second largest economy in 2010, may become the world's largest economy in 2030, overtaking the United States, if current trends continue.
China may also become the world's largest economy in 2020 if using purchasing power parity conversions, then China will overtake the United States in 2015.
James Wolfensohn, former World Bank president, estimated in 2010 that by 2030 two-thirds of the world's middle class will live in China.
Besides that, China would also probably experience a slowdown over the next 2 decades, which in turn will cause a loss of legitimacy for the CCP and. The high-growth scenario that is often touted in the popular press of China is also probably not realistic and may lead to disorder and the economic stagnation in China.
The global economy will continue to grow, but very slowly this year, though it may grow faster than the past two years. Second, the global inflation situation may further deteriorate as a result of the expansionary monetary policy adopted by the United States. Third, the world is facing a high risk of debt crises.