China's economy grew faster than expected in the first quarter of 2003, with gross domestic product (GDP) rising nearly ten percent in real terms according to official figures. The outbreak of the Severe Acute Respiratory Syndrome (SARS) virus and its negative economic effects, particularly on service industries, however, led to forecasts that annual growth would remain in the 7-8 percent range seen over the past six years. Price deflation and growing unemployment remained key economic concerns, exacerbated by the SARS outbreak. Nevertheless, most observers believed that China's GDP growth for 2003 would still exceed the government's target rate of seven percent. According to Chinese government statistics, China's gross domestic product in 2002 officially achieved real growth of 8.0 percent, above the government's declared target of 7 percent, one of the best results since the 1997-98 Asian Financial Crisis. (It must be stressed, though, that many Chinese economic statistics, particularly those announced by provincial and local governments, are seriously flawed. For example, all of China's provinces reported GDP growth rates higher than the national rate of 8.0 percent in 2002.)

Many analysts credit China for achieving a "soft landing" for its economy during the mid-1990s, bringing about stable growth with low inflation after earlier bouts of inflationary excess. Stringent monetary policies, however, caused consumer price levels to decline in 1998 and 1999. Although government-mandated service price increases kept China's consumer price index (CPI) marginally positive in 2000 and 2001, the CPI declined again in 2002, falling 0.8 percent from the 2002 level. Retail prices, which have declined every year since 1997, fell 1.3 percent. Some economists worry that China may not be able to create the high levels of investment and consumption, particularly from the private sector, needed to resolve the structural problems that beset the nation's economy. China has effectively pegged the exchange rate for its currency (the renminbi or RMB) at RMB 8.3 to USD 1.00 since 1997. The Chinese currency, however, floats against other currencies in line with changes in the value of the U.S. dollar. With the fall in interest rates overseas, particularly the United States, and continued strong performance in the current account, China maintained a good position in its balance of payments. The country's foreign currency reserves totaled nearly USD 300 billion at the end of 2002 and continued to show strong growth in the first half of 2003. Although some foreign observers believe the RMB is undervalued vis-a-vis the U.S. dollar, the Chinese authorities have clearly indicated their belief that preserving stability in the exchange rate with the dollar serves China's interests. Nonetheless, the authorities acknowledge that China will eventually need to move toward a more market-based exchange rate mechanism and have committed themselves to doing so, albeit with no definite timeframe for the change.

The central government acknowledges that unemployment and income inequality are growing problems. In 2002, the average annual per capita disposable income of urban residents was equivalent to USD 928 while rural per capita income averaged about USD 298. Only seven of China's provincial-level jurisdictions reported per-capita rural income levels in 2002 above USD 365 per year (i.e., the World Bank's USD 1 per day standard for absolute poverty).

China's chronic and growing labor surplus is not reflected in the government's announced unemployment rate for 2002 of 4.0 percent. According to estimates made by China's Ministry of Labor and Social Security, urban job seekers in 2003 are likely to exceed available openings by about 14 million, or 5.6 percent of the total urban workforce. These estimates, moreover, do not account for the approximately 150 million surplus rural workers who make up the "floating population" that migrates between agriculture and urban jobs. The outbreak of the SARS virus, which disproportionately affected the commercial and service sectors, will inevitably exacerbate employment pressures in 2003. For example, data for 2002 show that wholesale and retail commerce, catering, and services, all of which suffered serious losses of business due to the SARS outbreak in April and May 2003, contributed over 16 percent to total urban employment.