China's economy is 54 percent free, according to our 2007 assessment, which makes it the world's 119th freest economy. Its overall score is 1.4 percentage points lower than last year, partially reflecting new methodological detail. China is ranked 22nd out of 30 countries in the AsiañPacific region, and its overall score is slightly lower than the regional average.

China scores well in the factors measuring government expenditures and freedom from government, and moderately well in monetary freedom and trade freedom. Total government expenditures equal less than 20 percent of GDP.

As an autocratic state, China imposes severe restrictions on many areas of its economy. Investment freedom, financial freedom, property rights, and corruption are particularly egregious. Foreign investment is highly controlled and regulated, the judicial system enforcing these regulations is highly politicised, and corruption is rampant. The state maintains a tight control over the financial sector, where the government owns all the banks directly or indirectly. Fiscally, the top income and corporate tax rates are fairly high at 45 percent and 33 percent, respectively.

Background

China is the world's second largest economy in absolute terms but rather poor in terms of average income per person. Despite the government's efforts to cool double-digit economic growth through cutbacks of fixed asset investment and controls on bank lending, investment and a trade surplus continue to surge. Political repression persists with tight restraints on speech and expression, particularly via the Internet, and unrelenting persecution of religious and ethnic minorities. Violations of intellectual property rights also remain hurdles to improved trade relations with the United States. Industry makes up the vast majority of China's economic output, but rural areas have the highest population, driving a large urban migration.

Business freedom - 54.9 per cent

Starting a business takes an average of 35 days, compared to the world average of 48 days. Entrepreneurship should be easier for maximum job creation. Obtaining a business license can be difficult, and closing a business is difficult. China lacks legal and regulatory transparency, and its inconsistent enforcement of regulations is a barrier to entrepreneurial activities. The overall freedom to start, operate, and close a business is constrained by the national regulatory environment.

Trade freedom - 68.0 per cent

China's weighted average tariff rate was 6 percent in 2004. China has reduced its non-tariff barriers as a result of implementing its WTO protocol of accession, but the government continues to use quotas, import bans, burdensome licensing and regulatory rules, export taxes, and sanitary and phytosanitary restrictions to protect its economy. Issues involving the enforcement and protection of intellectual property rights also add to the cost of trade. Consequently, an additional 20 percent is deducted from China's trade freedom score to account for these non-tariff barriers.

Fiscal freedom - 77.7 per cent

China has a high income tax rate and a moderate corporate tax rate. The top income tax rate is 45 percent, and the top corporate tax rate is 33 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 15.1 percent.

Freedom from Government - 88.6 per cent

Total government expenditures in China, including consumption and transfer payments, are low. In the most recent year, government spending equaled 20.8 percent of GDP, and the government received 3.1 percent of its total revenues from state-owned enterprises and government ownership of property.

Monetary freedom - 75.5 per cent

Inflation in China is relatively low, averaging 2.3 percent between 2003 and 2005. Relatively low and stable prices explain most of the monetary freedom score. Roughly 90 percent of traded product prices are determined in the market, 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. Consequently, an additional 15 percent is deducted from China's monetary freedom score to adjust for price controls.

Investment freedom - 30.0 per cent

China's accession to the World Trade Organisation has improved its operating environment, but weak rule of law, lack of transparency, and a complex approval process are major obstacles to foreign investors. The government allows foreign investment only in specific sectors. The central bank regulates the flow of foreign exchange into and out of the country, and the government controls investment in the stock market. There are extensive controls, government approval requirements, and quantitative limits on foreign exchange, current transfers, and capital transactions. Real estate transactions are subject to government approval.

Financial freedom - 30.0 per cent

China's financial system is complex and tightly controlled by the government. Over 30,000 financial institutions were operating in 2005. The banking sector is the largest part of the financial system and is almost entirely state-owned. Four large state-owned banks account for over 53 percent of banking assets. Non-performing loans are estimated to be much higher than the official figure of 25 percent. 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. Capital markets are limited and plagued by poor governance and weak regulatory oversight. Foreign participation in capital markets is limited. The number of foreign insurers, who face looser restrictions, has grown rapidly.

Property rights - 20.0 per cent

China's judicial system is weak. Many companies resort to arbitration because of concerns about the speed and impartiality of the courts. The implementation of court rulings is inconsistent. Even when courts do attempt to enforce decisions, local officials often ignore them with impunity. Corruption is prevalent. New property legislation is on hold because of a strong ideological debate.

Freedom from corruption - 32.0 per cent

Corruption is perceived as significant. China ranks 78th out of 158 countries in Transparency International's Corruption Perceptions Index for 2005.

Labour freedom - 63.5 per cent

The labor market operates under restrictive employment regulations that hinder employment and productivity growth. The non-salary cost of employing a worker is very high, and dismissing a redundant employee can be relatively costly. In general, the capacity to end employment varies widely according to the location and the size of the enterprise. The labor code mandates retraining or replacement before firing a worker.

— Courtesy: The Heritage Foundation

Quick Facts

* Population: 1.3 billion

* GDP (PPP): $7.6 trillion

10.1% growth in 2004

9.2% 5-yr. comp. ann. growth

$5,896 per capita

* Unemployment: 9.9% (2004 estimate)

* Inflation (CPI): 3.9%

* FDI (net inflow): $58.8 billion

* Official Development Assistance: $2.7 billion (0.8% from the U.S.)

* External Debt: $248.9 billion

* Exports: $655.8 billion

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

* Imports: $606.5 billion