Outlook for 2011-15

• There is little likelihood of significant political reforms in the forecast period, as China's rulers will concentrate on maintaining stability during the transition to a younger generation of political leaders in 2012-13.
• Strained relations between China's majority Han ethnic group and Tibetan and Uighur minorities are unlikely to improve. The government will maintain a hard line against separatism, thereby stoking wider ethnic grievances.
• The economy performed unexpectedly strongly in 2010, with real GDP expanding by 10.3%. Growth will slow to an average of 8.4% a year in 2011-15.
• Wage inflation will remain rapid in the forecast period, helping to support private consumption. But growth in investment, notably in the property sector, will decelerate from its 2010 rate.
• China will continue to come under strong pressure to allow a more significant increase in the value of the renminbi. However, the currency is likely to appreciate only slowly against the US dollar in 2011-15.
• Consumer price inflation is expected to remain a major policy issue in 2011 as the government struggles to contain strongly rising food prices. Inflation is forecast to average a manageable 4.1% in 2011­15.

Monthly review

• In February it was revealed that the long-serving head of China's Ministry of Railways, Liu Zhijun, had been removed from his post in a suspected corruption probe.
• China raised policy interest rates and bank reserve requirement ratios again in February as the People's Bank of China (PBC, the central bank) sought to head off potential inflationary pressures.
• Year-on-year consumer price inflation accelerated to 4.9% in January, from 4.6% in December. Food remains the main driver of inflation, but the rate of increase in housing costs is also picking up pace.
• Producer price inflation jumped sharply in January, to 6.6% year on year, from 5.9% in December.
• Water resource issues replaced agriculture as the focus of the first policy document published by the State Council (China's cabinet) in 2011-a document sometimes seen as highlighting the government's main priority for the year.
• China's imports surged by 51.2% year on year in January, reaching US$144.3bn. Exports in the month rose by 37.6% year on year, to US$150.7bn. This caused the monthly trade surplus to fall to US$6.5bn.

The Chinese Communist Party (CCP) will continue to dominate the political scene in the forecast period. Although recent events in the Middle East and North Africa have once again raised questions about the sustainability of long-lived authoritarian regimes, China's circumstances are fundamentally different from those of the troubled states in that region. Despite many grumbles among the public over corruption and the privileges of the CCP elite, there is little appetite in the country for regime change. Most Chinese citizens have seen their standards of living rise sharply in recent years and expect further improvements in 2011-15. The CCP also retains the strong support of the military.

Importantly, the transition of power to new generations of leaders, which occurs roughly once per decade, means that China lacks a figure like Egypt's recently ousted president, Hosni Mubarak, who personally embodied public disenchantment with that country's government. The next transfer of power in China will begin in late 2012 at the CCP party congress. However, factional rivalry within the upper echelons of the party may intensify in a disruptive fashion in the run-up to the congress, as recently highlighted by the dismissal of the head of China's Ministry of Railways, Liu Zhijun, against the backdrop of a corruption investigation.

Although regime change looks unlikely, social tensions will continue to be generated by a number of issues, including unemployment, poor working conditions, environmental pollution, late payment of wages and benefits, illegal eviction from homes and land, official corruption and abuse of power. The majority of protests take place in the countryside, where illegal land seizures from farmers are a major problem. However, the rural population tends to be poorly organised and easily controlled by the state security organs, and such protests therefore pose little threat to national political stability. Social spending, especially in rural areas, has increased in the past few years, and further rises are likely. This will help to reduce tensions.

Unrest in urban areas could pose a greater threat, but the CCP suppresses non-governmental organisations that might co-ordinate or channel social discontent. The government's strategy of punishing those who lead protests while trying to alleviate the underlying causes of social unrest has also proved highly effective. Yet in an economic or political crisis it is possible that anti-government forces could suddenly coalesce in a way that would be hard to control without bloodshed. The nascent force of labour activism, especially in skilled industries such as vehicle production, could also prove troublesome.

Separatist movements will remain weak, but ethnic unrest will probably erupt occasionally in the ethnic-minority regions of Tibet and Xinjiang, and related incidents of terrorist violence elsewhere in China are possible. Violence by Tibetans in early 2008 was followed in mid-2009 by race riots in Xinjiang in which nearly 200 people were killed. Separatism in Xinjiang poses a greater risk of escalating into a full-blown insurgency than unrest in Tibet, given the proximity of Xinjiang to separatist and Islamist groups in Central Asia. But a new generation of Tibetans is less receptive to calls from their own leaders (including the Tibetan spiritual head, the Dalai Lama) for a peaceful approach, and this increases the potential for violence. Both regions are likely to see further protests. The Dalai Lama is growing old, and the Chinese authorities will worry that his eventual death could be a catalyst for further Tibetan instability. The government continues to take a harsh approach, including the use of the death penalty, to curbing separatist and ethnic unrest. It is also increasing development spending in Xinjiang and Tibet in an attempt to pacify these regions by boosting economic opportunities, although this tactic has failed in these areas of China in the past.

Since the current leadership, headed by the president, Hu Jintao, and the premier, Wen Jiabao, came to power a collective-style government has emerged. New figures were "elected" to both the CCP's and the government's leadership line-ups in 2007-08. The next reconfiguration will begin in late 2012, when the CCP's 18th congress will select a new party leadership. This will be followed by the installation of a new state leadership in early 2013. In October 2010 the vice-president, Xi Jinping, was appointed to the position of vice-chairman of the powerful Central Military Commission (which oversees the armed forces), confirming his status as heir-apparent to Mr Hu. The current executive vice-premier, Li Keqiang, who is regarded as being Mr Hu's favourite among the rising generation of cadres, looks set to succeed Mr Wen. However, the top tier of the future leadership does not appear as ideologically cohesive as the current government. Factional struggles are likely to be intense in 2012-15 as the new leaders seek to establish their independence from their predecessors and compete among themselves for control of the political agenda.

Neither Mr Hu nor his successor is likely to countenance a meaningful opening up of the electoral process. Editorials in a leading CCP newspaper, the People's Daily, in October and November 2010 indicated that the government would continue to reject multiparty elections and the constitutional separation of powers in 2011-15.

The 2008-09 international economic downturn, which China weathered more successfully than many other nations, has boosted the country's self-confidence on the international stage. China has adopted a more forceful stance on a range of issues, such as global warming, Taiwan, Tibet, exchange-rate policies and global liquidity levels. China's greater assertiveness means that further confrontation is likely in 2011-15. The country's clashes with its neighbours will encourage them to look more often to the US for political support. China will be a crucial participant in global negotiations, but it is highly sensitive to perceived slights, interference in its internal affairs and what it views as efforts to curb its rise. This, coupled with the weak influence within China of the Ministry of Foreign Affairs, will complicate attempts to improve international relations.

China's claim on Taiwan will remain a crucial foreign policy issue for the government. But military escalation of the dispute looks unlikely, as economic ties with Taiwan have deepened and China has adopted a less aggressive posture towards the island. Even if pro-independence forces take power in Taiwan, the status quo looks set to endure. China's ties with Japan will remain problematic, owing to lingering tensions over the Japanese occupation of China during the second world war and disputes over maritime territory. However, both governments will try to improve relations in the longer term. China's expanding international interests have been highlighted by increased activity in fields such as peacekeeping and anti-piracy patrols. This trend is likely to continue, but the greatest source of the country's influence on the global stage will come from the desire of foreign governments and companies to tap China's vast market and to attract Chinese investment.

In response to a rise in activity in the housing market and an acceleration in inflation during the second half of 2010, the government started to tighten policy. Further tightening is likely in 2011, as the authorities try to maintain steady economic growth while keeping inflationary pressures in check. Fiscal policy will continue to exert a drag on growth, as the central government's traditionally conservative fiscal instincts reassert themselves amid an effort to address the risks associated with the recent surge in local-government debt.

Distortions in the economy will remain a major policy challenge in 2011-15. Growth will continue to rely on unsustainably high rates of investment, despite policies designed to boost consumption. The government will look to moderate increasing social inequality; an important CCP policy meeting in October 2010 stressed the need to raise incomes and "reasonably adjust income distribution". Officials may support workers' efforts to secure pay rises, and could seek to use the tax system more effectively to redistribute wealth. But state welfare services will remain underdeveloped, and efforts to increase expenditure in this area will make slow progress. The strong policy support provided to the state sector during the 2008-09 economic slowdown will diminish in the next couple of years, but the public sector will continue to enjoy preferential treatment, for example in terms of access to credit.

China recorded a budget deficit equivalent to 1.6% of GDP in 2010. The deficit will remain below 2% of GDP in 2011­15. Spending on stimulus-related infrastructure projects (which rose sharply in 2009-10 as the government attempted to support economic growth during the global downturn) will come to an end. However, this will be offset by a substantial rise in expenditure on education, healthcare and pensions, in line with the government's "harmonious society" programme. Revenue growth will remain strong as the economy continues to expand rapidly.

The government's fiscal position is not as healthy as the headline figures suggest, and concerns persist about the transparency of official data on the public finances. The extent of off-budget expenditure is difficult to quantify, and the quality of data relating to local governments in particular is in doubt. Local-government finances are likely to have deteriorated as a result of recent stimulus spending, and the debt burden of the investment platforms that local authorities created to channel this expenditure will become heavier in 2011-15 as interest rates rise. An even greater problem is the government's many contingent liabilities, which include the cost of pension provision and potential future losses by the state-owned banking sector.

In December, amid growing concern about rising inflationary pressures, the government altered its monetary policy stance from "appropriately loose" to "prudent". In addition, the People's Bank of China (PBC, the central bank) has begun to raise interest rates, most recently in February, when it lifted the benchmark one-year lending rate from 5.81% to 6.06%. As worries grow about inflation, interest rates are likely to be increased steadily during 2011-12. However, the government's ability to control credit expansion through the state-owned banking sector means that quantitative controls on monetary and credit expansion are more important in policy terms than interest rates. The government will thus implement further increases in bank reserve requirements early in the forecast period to contain inflation. In addition, banks will be subject to monthly and quarterly credit quotas. The use of such quantitative means of controlling bank lending is not ideal, as credit quotas penalise small and medium-sized enterprises in the private sector that lack political connections. It also looks increasingly ineffective, given that credit targets were exceeded considerably in 2010. The PBC will seek to move gradually towards a system that relies more heavily on interest rates in 2011-15.

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Real GDP growth hit 10.3% in 2010, according to the National Bureau of Statistics, up from 9.2% in 2009. Stronger growth was driven by rising activity in most parts of the economy, thanks to loose credit conditions and a government-backed stimulus package that boosted investment. Economic expansion will slow to 9% in 2011 as stimulus spending comes to an end and policy tightening leads to a slowdown in growth in property investment. Weakening demand in major OECD markets will also serve to damp down export growth. However, strong income growth will support consumption, despite the fact that higher inflation will erode purchasing power. Low or negative real interest rates and relatively loose credit conditions will also encourage consumer purchases of high-value items.

During 2012-15 economic growth will slow to an average of 8.3% a year. The deceleration will largely reflect slower investment growth as more cities in China reach the stage at which mass redevelopment becomes economically costly. The contribution to GDP growth from net exports will also weaken as a strengthening renminbi, anaemic growth in many developed economies and declining Chinese competitiveness cause export growth to slow relative to import expansion. However, a rapid rate of job creation and rising wages should ensure sustained strong growth in consumption. The ongoing expansion of social services (and in particular healthcare, education and pension provision) will support growth in state spending, although a return to fiscal conservatism will act as a brake on public expenditure growth. There remains the risk that China could suffer a sharp economic correction in 2011-15. The frothy housing market and continuing massive overinvestment are the most likely sources of potential problems. The government's capacity to counteract economic crises is strong, as it proved in 2008-09, but its ability to do so without aggravating the imbalances that already threaten the economy is less certain.

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Keeping inflation under control is now the government's main policy challenge. Year-on-year consumer price inflation hit 4.9% in January and is expected to average 5% in 2011. Strong liquidity growth and booming demand have contributed to the acceleration in price increases, but rising input costs are the main threat in 2011-15. The large pay rises that firms are having to offer in order to keep workers may put upward pressure on consumer prices, as well as raising manufacturing costs; this mechanism has a particularly strong impact on prices for labour-intensive agricultural products. Rising global commodity price pressures are a further concern.

The risks to the Economist Intelligence Unit's inflation forecast remain largely on the upside. The main danger concerns the volatility of food prices, which account for a large share of the consumer price index basket in China. Local agricultural prices are vulnerable to the vagaries of the weather, particularly in China, but also internationally. Food prices are in any case on a long-term upward trend as agricultural land becomes scarcer and the cost of other farming inputs increases.

Producer prices will be subject to strong upward forces in 2011-15 as a result of booming domestic demand and policy-driven increases in state-mandated prices for fuel and utilities. Producer price inflation should nevertheless cool from 2012 onwards as the rising global supply of raw materials and food reins in international commodity prices. There is a danger that speculative asset-price bubbles, notably in property or equity markets, could emerge in the forecast period. The risk is aggravated by negative real deposit interest rates, which encourage savers to put their money into other saving and investment vehicles.

China is under intense pressure from its trading partners, most notably the US, to allow the renminbi to appreciate more rapidly. As evidence that the Chinese government manipulates the exchange rate to support exports, critics of China's policies cite the country's rapid accumulation of foreign-exchange reserves owing to its persistently large current- and capital account surpluses. (China's reserves rose further in 2010, to reach nearly US$2.9trn.) The Chinese government is likely to remain highly cautious in the area of exchange-rate policy, and is not expected to bow to foreign pressure for a substantial revaluation. However, it will allow the renminbi to strengthen gradually during the forecast period, and in real terms the currency's appreciation will be faster. Despite the problems that this will cause for exporters, renminbi appreciation is desirable, as it should help to reduce the surpluses on China's capital and current accounts, which are contributing significantly to domestic and global economic imbalances. The average exchange rate in 2011 is forecast at Rmb6.48:US$1, and the renminbi is expected to appreciate against the US dollar by an average of 3.8% a year in 2011-15.

China's current-account surplus rose to US$306bn in 2010, but as a proportion of GDP it has been falling since 2008 and stood at 5.2% in 2010. The surplus is forecast to continue to shrink relative to GDP in the forecast period, and we expect it to fall to the equivalent of 2% of GDP by 2015. Although merchandise exports are forecast to expand by 12.5% a year on average in the forecast period, this will be well below the supercharged pace of export growth recorded in the period preceding the 2008-09 global financial and economic crisis. A large proportion of China's imports consists of components that are assembled in the country before being shipped abroad again, and its imports and exports therefore tend to expand at similar rates. However, a growing proportion of imports will be consumed domestically in 2011-15, and, at an average of 15.2% a year, import growth will outpace export expansion. The trade surplus will therefore fall, but at US$150.2bn in 2015 it will remain substantial.

The services deficit will widen considerably in 2011-15, largely reflecting a surge in overseas travel by Chinese tourists. In addition, the economy's growing sophistication will see demand for imports of professional services increase rapidly, although exports of services will also grow, reflecting the rising earnings of Chinese companies working on infrastructure projects overseas. The income account will post a huge surplus in the forecast period as a result of the income earned on China's enormous stock of foreign-exchange reserves, which will continue to rise. These inflows will dwarf the income debits associated with the country's large stock of inward foreign direct investment. However, such outflows will grow as the number of foreign firms operating in China expands rapidly and their revenue rises strongly. The current transfers account will remain in surplus in 2011-15, reflecting the high level of remittances from overseas Chinese.

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In February it was revealed that Liu Zhijun, the head of China's Ministry of Railways, had been placed under investigation for "severe disciplinary violations", the usual official terminology for corruption. He becomes the most senior official to be removed from office on graft grounds since 2006. Over Rmb2.5trn (US$370bn) has been invested in railways since he was appointed in 2003, and there is speculation that the latest investigation may have been prompted by misuse of funds associated with the ongoing roll-out of China's high-speed rail lines.

Political factors are also likely to have been at play. Liu Zhijun managed to keep his position until recently despite the fact that his brother, Liu Zhixiang, a senior railway official in the city of Wuhan, was convicted in 2006 of charges that included corruption and hiring an assassin. In 2008 he also saw off efforts led by China's vice-premier, Li Keqiang, to incorporate the railway ministry into a broader Ministry of Transport. It is possible that his removal reflects manoeuvring by senior leaders ahead of the 2012-13 handover of power to a new generation of politicians.

The handling of the Tibetan campaign for autonomy has long been a challenge for China's leadership. Yet the Tibetan diaspora faces its own struggles in terms of maintaining unity-an issue that is receiving increasing attention owing to the fact that, at 75, Tibet's spiritual leader, the Dalai Lama, is getting old. The Dalai Lama recently announced his intention to step down as head of the Tibetan government-in-exile in March, or at least to discuss the option with the parliament-in-exile. Rival successors to the Dalai Lama may well emerge. The new Dalai Lama will in any case be a child, potentially leaving Tibetans without a viable leader. One possibility is that leadership of the exile movement could pass to the third-ranking lama, the Karmapa, who is only 25 years old. However, allegations (so far unproved) have been circulating recently in India that the Karmapa could be a Chinese spy. Some have implied that his flight from Tibet in 2000 may have been aided by Chinese border guards. The discovery of large sums of money, including Chinese currency, in a monastery run by the Karmapa in India fuelled the allegations. However, the Indian government accepted in February that the money had come from donations from followers. Although a less unified Tibetan exile movement would seem likely to benefit China, it could also present risks if some factions pursue more violent resistance to Chinese rule.

After a long wait, the border between China and Tajikistan (a country in which China is the largest foreign investor) was finally ratified by the Tajik legislature in January, with China being handed more than 1,000 sq km of territory, a mere 3% of the 28,500 sq km that it had originally claimed. The mountainous territory concerned is likely to be inhabited sparsely, if at all. China has long played up its willingness to concede territory in order to resolve border disputes, pointing to its 1996 agreement with Kyrgyzstan and its 1998 agreement with Kazakhstan, in both of which China gave up disputed territory.

Nevertheless, some observers, notably in India, have analysed China's negotiating style as one of initially overclaiming territory in order to appear to be making concessions later when it settles for less-a consideration that could be relevant to China's territorial claims in India. China's willingness to negotiate witih the Central Asian states also reflects its desire to work closely with them to counter radical Islamic movements in the region and control separatist tendencies in the province of Xinjiang. Arguably, its willingness to agree on borders with the Central Asian states also reflects the fact that it does not see them as potential rivals. Territorial disputes, land and maritime, with India and Japan seem intractable because China is reluctant to concede to strategic rivals.

China's policy of non-interference in the domestic affairs of African countries has come under growing strain as its economic interests in the continent have multiplied. Its approach, which has drawn criticism from many in the West who see it as having a negative impact on efforts to improve governance in Africa, has faced a particular challenge in Sudan, an important supplier of oil to China, where tensions between the north and south of the country culminated in January with the south voting overwhelmingly for independence in a referendum. China has indicated that it will respect the will of the region's people. However, the issue is likely to create complications for China, as many of the oil resources that it helps to exploit in Sudan are in the south of the country.

Elsewhere on the continent, rumblings of opposition to China continue. In Zambia, around a dozen workers were injured when fired on by two Chinese mine managers in October, leading to the jailing of the managers in January pending trial on 12 counts of attempted murder. The Chinese government said that the shootings were a "mistake". In neighbouring Zimbabwe, government ministers have indicated that the Chinese are set to invest up to US$10bn, although many doubt whether such a large sum will actually materialise. There have been complaints in the Zimbabwean media recently complained over a deal whereby China would secure platinum reserves in the country for US$3bn. The reports claimed that the reserves were worth US$40bn, although the value of mineral reserves can often be hard to determine. Zimbabwe's finance minister, Tendai Biti, recently indicated his opposition to the deal.

In February, as the lunar new year festivities were drawing to a close, China announced another interest rate rise, the second in two months and the third since the country began tightening monetary policy in October 2010. The latest 25-basis-point increase brought the one-year deposit rate to 3% and the one-year lending rate to 6.06%. Once again, longer-term deposit interest rates were raised by more than short-term rates in an effort to encourage people to put their savings into less volatile deposit accounts. In addition, the People's Bank of China (PBC, the central bank) raised reserve requirement ratios for banks by an another 50 basis points with effect from February 24th. This marked the second rise in reserve requirements in 2011, and took the minimum for the largest banks to a record 19.5%.

The adjustments came against a background of continued rapid growth in bank lending. Local-currency lending increased by Rmb1.04trn in January, less than the year-earlier figure of Rmb1.4trn, but the outstanding stock of renminbi lending was still up by 16.9% year on year. The extent of the tightening in credit availability is hard to gauge. Lending is traditionally high in January as some loan approvals are carried over into the new year when the previous year's credit quota is filled. In addition, this year banks are being asked to bring back on to their books loans that had previously been pushed off their balance sheets by means of sales to trust companies-a process that may push up total outstanding lending. A rise in interbank interest rates from an average 1.76% in November 2010 to 3.7% in January 2011 suggests that the impact on banks has been significant.

Lending to households for non-business purposes ("consumption", in the government's terminology) is accounting for a rising proportion of outstanding lending, reaching 15.7% at the end of 2010, up from 13.8% at end-2009. Short-term loans are also accounting for a higher proportion of these household consumption loans, at 12.7% at the end of last year, up from 11.5% at end-2009. This may represent a shift towards consumer financing and away from mortgage lending, which has traditionally dominated medium- and long-term household "consumption" lending.

In February revisions were announced to both the consumer price index (CPI) and the national house price index that will affect all 2011 data. Although these changes may have been designed with the goal of improving the quality of China's statistics rather than obscuring current price trends, they will nevertheless complicate the task of analysing such trends.

Year-on-year consumer price inflation rose to 4.9% in January under the new measure, from 4.6% in December. Prices in the food category of the CPI rose fastest, increasing by 10.3% year on year. Although the weighting of food in the consumer basket was reduced by 2.2 percentage points, the National Bureau of Statistics paradoxically insisted that inflation would actually have been marginally lower in January using the previous measuring method. The weighting for residence costs was raised by 4.2 percentage points, while the weightings for a number of other elements of the index, including the clothing, transport and communications category and the tobacco and alcohol category, were slightly reduced.

Given the crucial role of food prices in dictating China's inflation trends, there has been rising concern over the lack of rain in the country's "wheat belt". In early February the UN Food and Agriculture Organisation (FAO) issued an alert, noting the "severe winter drought" affecting the northern China plain. The vital agricultural provinces of Shandong and Henan, as well as Hebei, Anhui, Shanxi, Shaanxi, Gansu and Jiangsu, are among the areas affected. Drought is not unusual at this time of year, and emergency irrigation systems are well developed. If rain falls in April and May the winter wheat harvest may yet be only slightly reduced, and China is in any case believed to have wheat reserves that are more than sufficient to cover any shortfall without the need to resort to substantial imports. However, the drought has highlighted the risk that shocks to agricultural production could push inflation up even further, and prices for wheat price futures traded on the Zhengzhou commodity exchange rose sharply between January 21st and mid-February. China imported 1.2m tonnes of wheat in 2010 and 904,131 tonnes in 2009.

At least the consumer price inflation series is still being published. The national house price index looks set to be scrapped, although price data for individual cities will still be compiled under revised guidelines. House prices in 70 large Chinese cities were up by 6.4% year on year in December, according to the final data release in the old series. In late January the State Council (China's cabinet) announced yet another list of measures aimed at curbing housing prices by restricting speculative investment. The minimum down payment for purchases of second homes was raised from 50% to 60%, and local governments are to raise punitive tax rates for those reselling houses after less than five years.

Producer prices have been rising rapidly, increasing by 6.6% year on year in January, compared with 5.9% in December. Rising costs have made some manufacturers to consider changing their sourcing patterns. A Hong Kong-based clothing retailer, Esprit, is switching its textile-sourcing business from China to Bangladesh, even though its retail sales in China are rising, while a US footwear group, Collective Brands, has unveiled plans to shift a portion of its production from China to Indonesia. For firms targeting the domestic market, rising costs are encouraging a tougher approach to poorly performing stores. A French hypermarket chain, Carrefour, has closed stores in Dalian, Xi'an, Jiaozuo and Foshan, for example.

Pricing issues have hit Carrefour in other ways: together with a US retailer, Wal-Mart, Carrefour was involved in a scandal when the prices that it charged for goods failed to match those on labels. As supermarkets try to keep down costs, their suppliers are feeling increased pressure. A Taiwan-based food conglomerate, Tingyi Holdings, suspended shipments of its popular Master Kong noodle brand to Carrefour in December in a row over the commissions charged by the retailer. In February the Ministry of Commerce announced that it was drafting new regulations governing the way retailers charge fees to their suppliers. Its comment that excessive charges could raise the cost of goods for consumers suggests that it may lean in favour of suppliers.

At least retailers can take comfort from the fact that incomes are outstripping price rises, ensuring strengthening consumer purchasing power. Urban per-head disposable incomes rose by 11.3% in 2010, to an average of Rmb19,109 (around US$2,900), while rural per-head net incomes rose by 14.9%, to Rmb5,919. Although growth in rural net incomes outpaced that in urban incomes (by the widest margin on record), the gap between urban and rural incomes continue to widen.

Mindful of the growing disparity between rural and urban incomes and the need to raise agricultural production to rein in inflation, in late January the government announced a ten-point plan to assist farming households through an allocation of Rmb98.6bn (US$15bn). Of this, Rmb83.5bn will be for buying farm machinery, while the balance will consist of transfer payments to support the production of staple crops through irrigation, planting and treatment of plant disease. Farmers will also be paid more: the State Council has approved an increase in minimum state purchase prices for rice-the most expensive type, japonica, had its price increased by 21.9% year on year, while other kinds of rice saw increments close to 10%.

Surprisingly, given the emphasis on food prices, water resource issues replaced agriculture as the focus of the first policy document published by the State Council in 2011; the first such document of the year is sometimes seen as highlighting the government's main priority for the coming period. The two issues are linked, as the recent drought has shown, but the prioritisation of water emphasises the importance of the resource in terms of sustaining China's urbanisation and industrial growth. The government announced plans to invest Rmb4trn over the next decade to protect and improve access to water.

Investment in resources and commodities has also continued at a rapid pace. China Resources Power Holdings has announced that it will invest in railways in Inner Mongolia and Shanxi to reduce coal delivery times and facilitate the expansion of its coal output from 11.4m tonnes in 2010 to a forecast 50m tonnes in 2015. Road-based coal transportation has been blamed for massive traffic jams in Inner Mongolia.

China's imports surged by 51.2% year on year in January, reaching US$144.3bn. Many manufacturers will have been cramming production into January ahead of the disruption of the Chinese New Year holiday period in February, but this still constituted a strong performance. China's import bill in 2010 was up by 38.6% at US$1.39trn-more than double Japan's US$692bn of imports in 2010. In 2010 exports reached US$1.58trn, up by 31.4%, and this buoyant performance has continued, as exports in January were up by 37.6% year on year, at US$150.7bn. This caused the monthly trade surplus to fall to US$6.5bn, its lowest level since April 2010.

Despite the fall in China's overall trade surplus, trade frictions persist, especially with the US, whose trade deficit with China is widening and reached a record US$273bn in 2010, according to US government figures. The US filed two new cases against China at the World Trade Organisation in February 2011. One involves electronic-payment services, with the US accusing China of preserving the domestic monopoly of state-owned China UnionPay at the expense of US credit- and debit-card firms. The other involves anti-dumping duties and countervailing duties that China has levied on some imports of steel from the US.

The two countries were at least able to sign a raft of deals during the visit by China's president, Hu Jintao, to the US in January. These included many energy projects, such as a US$7.5bn agreement with a US aluminium producer, Alcoa, to develop smelters and clean-energy projects in China. The state-owned Industrial and Commercial Bank of China also acquired 80% of the Hong Kong-based Bank of East Asia's US unit in January, although the deal still has to be approved by US regulators.

On the whole, however, China's outbound investments continue to focus on resource acquisition. In January state-owned Wuhan Iron and Steel announced that it was forming a joint venture with a Canadian firm, Adriana Resources, to operate an iron ore mine in Canada. In early February a state-owned oil major, PetroChina, struck a US$5.4bn deal with Canada's Encana for a 50% share in its Canadian shale-gas projects. Yet there has also been some precedent-setting diversification.

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Please see graphic below

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Please see graphic below

Land area

9,561,000 sq km

Population

1.32bn (end-2007; official estimate)

Main towns

Population (millions) of main urban areas

Shanghai: 15.6 Chongqing: 5.1

Beijing (capital): 13.1 Wuhan: 4.9

Guangzhou: 11.0 Harbin: 4.8

Shenzhen: 8.5 Shenyang: 4.4

Dongguan: 6.5 Chengdu: 3.8

Tianjin: 5.2 Zhengzhou: 3.5

Climate

Continental, with extremes of temperature; subtropical in the south-east

Weather in Shanghai (altitude 4 metres)

Hottest months, July and August, 23-33°C (average daily minimum and maximum); coldest month, January, -1 to 9°C; driest month, September, less than 5 mm average rainfall; wettest month, June, 160-165 mm average rainfall

Language

Mainly putonghua, or Standard Chinese, based on northern Chinese (the Beijing dialect known as Mandarin); local dialects and languages are also used

Measures

The metric system is used alongside certain standard Chinese weights and measures, of which the most common are:

1 jin = 0.5 kg 2,000 jin = 1 tonne

1 dan = 50 kg 20 dan = 1 tonne

1 mu = 0.0667 ha 15 mu = 1 shang = 1 ha

Currency

Renminbi (Rmb), or yuan. Rmb1 = 10 jiao = 100 fen. Average exchange rate in 2010: Rmb6.77:US$1

Fiscal year

January-December

Time

8 hours ahead of GMT

Public holidays

New Year, January 1st-3rd; Chinese New Year, February 2nd-8th; Qingming Festival, April 3rd-5th; Labour Day, May 1st; Dragon Boat Festival, June 4th-6th; Mid-Autumn Day, September 10th-12th; National Day, October 1st-7th. All public holidays are technically one day long except for Chinese New Year and National Day, which are three days. When the holiday covers weekdays in excess of this figure, they are compensated for by working weekends around the holiday

Official name

People's Republic of China

Form of government

One-party rule by the Chinese Communist Party (CCP)

The executive

The state council, approved by the legislature; state council members, including the premier, may serve no more than two consecutive five-year terms

Head of state

A president and a vice-president are approved by the legislature for a maximum of two consecutive five-year terms

National legislature

Unicameral National People's Congress (NPC): 2,989 delegates are selected by provinces, municipalities, autonomous regions and the armed forces. The NPC approves the president and members of the state council, as well as the membership of the standing committee of the NPC, which meets when the NPC is not in session. All arms of the legislature and the executive sit for five-year terms

Regional assemblies and administrations

There are 22 provinces, four municipalities directly under central government control and five autonomous regions. These elect local people's congresses, and are administered by people's governments

National elections

The current government line-up was approved at the NPC meeting in March 2008. A new party leadership will be announced at the 18th national congress of the CCP in late 2012. The new government line-up will be announced in March 2013 at the NPC, when Xi Jinping and Li Keqiang are expected to take over from Hu Jintao and Wen Jiabao as president and premier respectively

National government

The politburo (political bureau) of the CCP sets policy and controls all administrative, legal and executive appointments; the nine-member politburo standing committee is the focus of power

Main political organisation

The CCP, of which Hu Jintao is the general secretary

Politburo standing committee members

Hu Jintao

Wu Bangguo

Wen Jiabao

Jia Qinglin

Li Changchun

Xi Jinping

Li Keqiang

He Guoqiang

Zhou Yongkang

Heads of selected state ministries and commissions

President: Hu Jintao

Vice-president: Xi Jinping

Premier: Wen Jiabao

Vice-premiers:

;Li Keqiang

;Hui Liangyu

;Zhang Dejiang

;Wang Qishan

Commerce: Chen Deming

Finance: Xie Xuren

Foreign affairs: Yang Jiechi

National Development & Reform Commission: Zhang Ping

Central bank governor

Zhou Xiaochuan