12 - 1 / 2 percent over the five years before gaining wto membership. china currently accounts for about 7 - 1 / 2 percent of world exports, up from 1 - 1 / 2 percent in 1985. about half of china's trade is so - called processing trade ; that is, components and materials are imported ( mostly from other asian countries ), processing or assembly is done in china, and the finished product is re - exported. much economic research has shown that openness to trade promotes growth. 14 trade supports growth not only through the classical principle of comparative advantage, but also through the effects of trade on the intensity of market competition, transfers of technology and knowledge, and other factors. china has also proved successful in attracting capital inflows, particularly foreign direct investment ( fdi ). the flow of fdi into china increased from about $ 2 billion in 1986 to $ 72 billion in 2005, making the country the third largest recipient of fdi in the world, after the united kingdom and the united states. 15 fdi benefits china's development by bringing with it new technologies, products, and business methods. 16 the flow of foreign investments in chinese securities has also increased significantly, reaching $ 22 billion in 2005. as you know, china today is running substantial trade and current account surpluses. these external surpluses are caused in part by china's remarkably high saving rate. 17 because china's national saving rate is even higher than its rate of domestic investment, the country has excess funds to lend in the global capital market ; it follows from the balance - of - payments accounts that china's net lending abroad ( or its acquisition of foreign assets ) equals the country's current account surplus. a large portion of this lending finances foreigners'purchases of chinese net exports ( the trade surplus ). high household saving and the corresponding low level of consumption in china contribute to the trade surplus by depressing the demand for imports and by forcing domestic firms to look abroad for markets. together with the large trade and current account deficits of the united states, the chinese external surpluses are contributing to the current pattern of global imbalances, which many economists and policymakers have argued are unsustainable in the long run. the chinese leadership has recognized the importance of encouraging imports and achieving greater balance in china's international trade, having recently included these objectives in the five - year plan for 2006 - 2010. in my view, not only would china's achieving smaller

oil has risen by more than 50 percent since 2000, and the international energy agency estimates that chinese oil usage has increased by about 400, 000 barrels per day in 2006, representing nearly half of this year's growth in world oil demand. this rapid expansion in energy use reflects both overall economic growth and a relatively energy - intensive pattern of development. greater use of market pricing in the energy sector, including the elimination of remaining price controls on fuels and the liberalization of electricity prices, would support cleaner, sustainable economic growth by promoting more - efficient use of energy by households and firms and by encouraging the development of new energy supplies. 9 brooks ( 2004 ) provides details of some of the labor market developments in china in recent years. calculations use current exchange rates and are based on output and employment data from the national bureau of statistics of china and the chinese state statistical office ; most data from chinese national sources are obtained from the ceic database. the adverse effects on poor households of eliminating price controls on fuels would best be dealt with through direct cash grants. significant benefits could also be obtained by allowing a larger role for market forces in guiding investment decisions. china's economic growth owes much to the extraordinary share of gdp that is devoted to investment in new capital, such as factories, equipment, and office buildings, which is partly financed by a very large amount of business saving. 10 however, the rapid pace of investment growth raises concerns about whether new capital is being deployed in the most productive ways. in particular, some analysts have questioned whether china is getting an adequate return on its investment. for example, from 1990 to 2001, fixed investment as a share of gdp in china averaged about 33 percent, and the economy grew at an annual rate of 10 percent. between 2001 and 2005, fixed investment's share of gdp rose to about 40 percent, but the economy's average growth rate remained about the same, suggesting a lower return to the more recent investment. comparisons can also be drawn to the rapid development phases of other asian countries, such as south korea and japan. average annual growth was between 9 and 10 percent in south korea during the 1982 - 91 period and in japan during the 1955 - 70 period ; but for both countries during the relevant years investment's share of gdp was about 30 percent, lower than it is in china today. in a few chinese industries, heavy investments have continued even as signs of excess capacity have begun to appear - another possible indication of capital misallocation. an example is