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95. China Miracle -Socialist Market Economy - How They Reached Here...!!

Updated: Oct 26, 2020

Politically Communist, Economically Capitalist - Is It Best Economic Model ?

How China has grown so fast in unprecendtal levels in the World ?

The pace and scale of China's economic transformation have no historical precedent. In 1978, China was one of the poorest countries in the world. The real per capita GDP in China was only one-fortieth of the U.S. level and one-tenth the Brazilian level. Since then, China's real per capita GDP has grown at an average rate exceeding 8 percent per year. As a result, China's real per capita GDP is now almost one-fifth the U.S. level and at the same level as Brazil. This rapid and sustained improvement in average living standard has occurred in a country with more than 20 percent of the world's population so that China is now the second-largest economy in the world.

Perhaps surprisingly, given China's well-documented sky-high rates of saving and investment,Overall, gradual and persistent institutional change and policy reforms that have reduced distortions and improved economic incentives are the main reasons for the productivity growth.

Pic : Shanghai, Financial Capital of China.

Since China began to open up and reform its economy in 1978, GDP growth has averaged almost 10 percent a year, and more than 850 million people have been lifted out of poverty.

I. Today's China and its History at Glance

China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population of around 1.4 billion in 2019. Covering approximately 9.6 million square kilometres (3.7 million mi2), it is the world's third or fourth largest country by area. As a one-party state led by the Chinese Communist Party (CCP), it exercises jurisdiction over 22 provinces, five autonomous regions, four direct-controlled municipalities (Beijing, Tianjin, Shanghai, and Chongqing), and the special administrative regions of Hong Kong and Macau.

China emerged as one of the world's first civilizations, in the fertile basin of the Yellow River in the North China Plain. For millennia, China's political system was based on absolute hereditary monarchies, or dynasties, beginning with the semi-mythical Xia dynasty in 21st century BCE. Since then, China has expanded, fractured, and re-unified numerous times. In the 3rd century BCE, the Qin reunited core China and established the first Chinese empire. The succeeding Han dynasty, which ruled from 206 BCE until 220 CE, saw some of the most advanced technology at that time, including papermaking and the compass, along with agricultural and medical improvements.

The invention of gunpowder and movable type in the Tang dynasty (618–907) and Northern Song (960–1127) completed the Four Great Inventions. Tang culture spread widely in Asia, as the new Silk Route brought traders to as far as Mesopotamia and the Horn of Africa. The Qing Empire, China's final dynasty, suffered heavy losses to foreign colonialism. The Chinese monarchy collapsed in 1912 with the Xinhai Revolution, when the Republic of China (ROC) replaced the Qing dynasty. China was invaded by Imperial Japan during World War II. The Chinese Civil War resulted in a division of territory in 1949, when the CCP led by Mao Zedong established the People's Republic of China on mainland China while the Kuomintang-led ROC government retreated to the island of Taiwan.

China is a unitary one-party socialist republic and is one of the few existing nominally socialist states. Political dissidents and human rights groups have denounced and criticized the Chinese government for widespread human rights abuses, including political repression, suppression of religious and ethnic minorities, censorship, mass surveillance, and their response to protests, notably in 1989.

Pic : China's GDP Growth

China is the largest economy in the world by PPP since 2014, the world's second-largest economy by nominal GDP since 2010, and the largest economy in Eurasia. Since the introduction of economic reforms in 1978, China's economy has been the world's fastest-growing major economy, with annual growth rates consistently above 10%.

According to the World Bank, China's GDP grew from $150 billion in 1978 to $12.24 trillion by 2017.

China recorded the fastest rise in GDP per capita in the world from 1960 to 2018. China is the world's largest exporter and second-largest importer of goods. China holds 17.7% of the world's total wealth, the second largest share held by any country.

II. Socio-Economic Scenario in China

Today, China is an upper-middle-income country and the world’s second largest economy. But its per capita income is still only about a quarter of that of high-income countries, and about 373 million Chinese are living below the upper-middle-income poverty line of US$5.50 a day. China also lags in labor productivity and human capital. Income inequality has improved over the last decade but remains relatively high.

China’s high growth based on resource-intensive manufacturing, exports, and low-paid labor has largely reached its limits and has led to economic, social, and environmental imbalances. Reducing these imbalances requires shifts in the structure of the economy from low-end manufacturing to higher-end manufacturing and services, and from investment to consumption.

Over the past few years, growth has moderated in the face of structural constraints, including declining labor force growth, diminishing returns to investment, and slowing productivity.

Pic : Beijing, Political Capital of China.

The challenge going forward is to find new drivers of growth while addressing the social and environmental legacies of China’s previous development path.

China’s rapid economic growth exceeded the pace of institutional development, and there are important institutional and reform gaps that China needs to address to ensure a high-quality and sustainable growth path. The role of the state needs to evolve and focus on providing stable market expectations and a clear and fair business environment, as well as strengthening the regulatory system and the rule of law to further support the market system.

Given its size, China is central to important regional and global development issues. China is the largest emitter of greenhouse gases, and its air and water pollution affects other countries. Global environmental problems cannot be solved without China’s engagement. Moreover, maintaining economic growth at reasonable levels has important spillovers for the growth of the rest of the world economy.

Pic : Major Cities and Borders of China.

Many of the complex development challenges that China faces are relevant to other countries, including transitioning to a new growth model, rapid aging, building a cost-effective health system, and promoting a lower carbon energy path. China is a growing influence on other developing economies through trade, investment, and ideas.

Like everywhere in the World, China’s most immediate challenge is related to the economic, social and public health impacts of the COVID-19 pandemic. The outbreak led to an unprecedented economic shock that brought economic activity to a sudden halt in the first quarter. Growth is expected to rebound in the remainder of the year as supply side constraints ease and pent-up demand is released amid a roll back of prevention measures.

However, job losses, shortfalls in corporate revenue and uncertainty will slow the return to previous levels of consumption, investment and trade. While additional fiscal support and monetary easing is expected to help lift domestic demand, the impending global recession is also expected to restraint the pace of recovery. Beyond the immediate impacts, the current outbreak has uncovered vulnerabilities. This calls for resolute policy actions that enhance resilience against similar health shocks, including enhanced food safety, health surveillance and response systems.

III. How China grown so Fast ?

Prior to the initiation of economic reforms and trade liberalization nearly 40 years ago, China maintained policies that kept the economy very poor, stagnant, centrally controlled, vastly inefficient, and relatively isolated from the global economy. Since opening up to foreign trade and investment and implementing free-market reforms in 1979, China has been among the world’s fastest-growing economies, with real annual gross domestic product (GDP) growth averaging 9.5% through 2018, a pace described by the World Bank as “the fastest sustained expansion by a major economy in history.” Such growth has enabled China, on average, to double its GDP every eight years and helped raise an estimated 800 million people out of poverty.

China has become the world’s largest economy (on a purchasing power parity basis), manufacturer, merchandise trader, and holder of foreign exchange reserves. This in turn has made China a major commercial partner of the United States. China is the largest U.S. merchandise trading partner, biggest source of imports, and third-largest U.S. export market. China is also the largest foreign holder of U.S. Treasury securities, which help fund the federal debt and keep U.S. interest rates low.

Pic : Highrises in Central part of Tianjin, China.

As China’s economy has matured, its real GDP growth has slowed significantly, from 14.2% in 2007 to 6.6% in 2018, and that growth is projected by the International Monetary Fund (IMF) to fall to 5.5% by 2024. The Chinese government has embraced slower economic growth, referring to it as the “new normal” and acknowledging the need for China to embrace a new growth model that relies less on fixed investment and exporting, and more on private consumption, services, and innovation to drive economic growth. Such reforms are needed in order for China to avoid hitting the “middle-income trap,”

when countries achieve a certain economic level but begin to experience sharply diminishing economic growth rates because they are unable to adopt new sources of economic growth, such as innovation.

Pic : Chongqing Llight Rail

The Chinese government has made innovation a top priority in its economic planning through a number of high-profile initiatives, such as “Made in China 2025,” a plan announced in 2015 to upgrade and modernize China’s manufacturing in 10 key sectors through extensive government assistance in order to make China a major global player in these sectors. However, such measures have increasingly raised concerns that China intends to use industrial policies to decrease the country’s reliance on foreign technology (including by locking out foreign firms in China) and eventually dominate global markets.

IV .International Relations of China

In 2017, the Trump Administration launched a Section 301 investigation of China’s innovation and intellectual property policies deemed harmful to U.S. economic interests. It subsequently raised tariffs by 25% on $250 billion worth of imports from China, while China increased tariffs (ranging from 5% to 25%) on $110 billion worth of imports from the United States. Such measures have sharply decreased bilateral trade in 2019.

On May 10, 2019, President Trump announced he was considering raising tariffs on nearly all remaining products from China. A protracted and escalating trade conflict between the United States and China could have negative consequences for the Chinese economy.

Pic : Shenzhen, Another Major Financial City, China

China’s growing global economic influence and the economic and trade policies it maintains have significant implications for the United States and hence are of major interest to Congress. While China is a large and growing market for U.S. firms, its incomplete transition to a free-market economy has resulted in economic policies deemed harmful to U.S. economic interests, such as industrial policies and theft of U.S. intellectual property. This report provides background on China’s economic rise; describes its current economic structure; identifies the challenges China faces to maintain economic growth; and discusses the challenges, opportunities, and implications of China’s economic rise for the United States.

V. Chinese Economy and World

China’s emergence as a leading world economy is not a complete surprise. Economists like Angus Maddison had predicted its resurgence some time ago. The most remarkable aspect of this transformation has been the role of the private sector in achieving such a high rate of growth. Nonetheless, as can be expected following such a substantial re-orientation of what was once a state dominated economy, there are challenges ahead.

Pic : Pandas in Chengdu City

The pace of economic change in China has been extremely rapid since the start of economic reforms just over 25 years ago. According to official statistics, economic growth has averaged 9.5% over the past two decades and seems likely to continue at that pace for some time. National income has been doubling every eight years. Such an increase in output represents one of the most sustained and rapid economic transformations seen in the world economy in the past 50 years.

The size of the economy, when adjusted for differences in purchasing power, is already larger than all but one or two OECD ( Organization for Economic Cooperation and Development ) economies, depending on the purchasing power parity used for comparison. While average incomes are still below those in other middle income countries, there are large parts of the country that resemble developed East Asian countries just one generation ago and are proceeding along a similar rapid catch-up path. Many industries have become completely integrated into the world supply chain and, based on current trends, China could become the largest exporter in the world by the beginning of the next decade, with as much as 10% of global trade compared with 6% at present.

China’s rapid path to economic development is well documented and even though growth rates appear to be slowing, there is no doubt as to the pivotal role China’s economy is playing in the global economy.

VI. Factors Lead to Economic Success in China

China initially pursued an export-oriented path to industrialisation – similar to the Asian Tigers before them – but has begun to diversify into other sectors of the economy in the last ten years. It has done this with an unwavering determination to accelerate growth rates and expand its economic reach.

These are some of the factors responsible for China’s economic success.

1. Labour supply - There is a plentiful supply of workers in China with a steady stream of rural-urban migrants in search of work. This is due to the mechanisation of agriculture leading to unemployment and under-employment in rural areas and concurrent growth in industrial work in urban areas. It is estimated that 500,000 million people will leave the Chinese countryside in search of work over the next two decades. Voluntary migration of the rural population has been accompanied by aggressive re-planning schemes in which rural villages are demolished and new manufacturing settlements built at rapid pace for former agricultural families to move in to.

Pic : Nanjing Road , Shanghai.

2. Wages and unemployment - The unemployment rate has fallen in recent years to just over 4%, but high rates in the past drove down wages. If workers demand higher wages, there are many more who will take the jobs available. Wages in other East Asian countries earn up to 10 times more than Chinese workers. This has increased profit margins and attracted inward FDI (Foreign Direct Investment) as American, European and Japanese companies open factories under licence in China.

3. Female participation in the workforce - China’s workforce is characterised by a higher than average female participation in manufacturing industry. Western cultural analyses of gender divisions in the workforce have little relevance in Chinese economic growth. This, along with the One-Child Policy which has meant women were involved in child-raising for a much shorter period than in many other countries, has made a much larger workforce available.

4. Political system - The non-democratic and authoritarian political regime in China has meant that it has been possible to embrace western-style free market economics while maintaining control over the political system. In many ways, the planned economy of China (where the state controls economic activity rather than private business) has accelerated economic growth because the government has controlled all decision-making. Since Mao in 1953, the government has followed a series of Five Year Plans (or Guidelines, as they are now called, to reflect China’s transition towards a ‘socialist market economy’) which have enabled the government to enact any reforms it feels is necessary. The country is now in its 12th Five Year Plan (2011-2016) and policies include spending 2.2% of GDP on R&D (Research and Development) and moving coastal regions from being ‘the world’s factory’ to being hubs of R&D, top-end specialist manufacturing and services.

5. Strong leadership - Chinese politicians are said to feel a greater responsibility to the nation than to themselves. Strong leadership from the head of state has been a major factor contributing to economic success.

6. Free market economics - China first began moving away from a centrally planned economy towards a market-oriented system in 1978. Deng Xiaoping was Mao’s successor and he sought to bring an end to China’s relative economic isolation.

7. Export-led growth - This is the strategy which China initially pursued. The strategy is beginning to become phased out in favour of Import Substitution Industrialisation by which consumer products imported for China’s growing middle-class are increasingly being made in China, such as cars, domestic white goods and house- and office-furniture.

8. Special Economic Zones and FDI - Foreign investment was encouraged in the initial phase of economic growth. They tended to locate in one of 6 SEZs (Special Economic Zones) or 14 Open Cities in which a relaxation of regulation and government control created a more attractive business environment.These are designated zones where TNCs (Trans National Corporations) are offered incentives such as reduced tax rates to set up manufacturing operations. An example is a Taiwanese TNC, EUPA, which manufactures coffee machines in Xiamen (an Open City) and employs 25,000 workers.

9. Private enterprise - For many years all manufacturing in China was state owned and operated. This has gradually been relaxed as the economy has been restructured and now up to 50% of businesses are privately owned.

10. Energy supply - Since the 1990s China has been developing its energy base, with new hydroelectric and nuclear power plants. China is also embarking upon a massive coal-fired power-station opening programme based on its own substantial coal reserves plus imports from Australia and Indonesia. However, serious urban air pollution together with a commitment to limiting carbon emissions after 2030 is leading to a less rigorous expansion of this electricity source.

.11. Investment in infrastructure - The government has built many new roads, improved the rail system and made China’s major rivers navigable all year round. China has five of the ten largest container ports in the world (including Shanghai and Shenzhen). Urbanisation has also been encouraged. with a robust urban-construction programme.

12. Economic diversification - China has recently started to diversify into Research and Development, specialist manufacturing and hi-tech industry. It is investing labour and capital in innovation so that it can sustain its economic growth and reduce the risk involved in having a narrow economic base.

13. Education - Literacy levels of China have risen dramatically over the past 20 years and now stand at 95%. This has underpinned the economic development of the country. As a result, China has both large numbers of unskilled workers and a growing number of highly skilled workers. For instance, China trains 600,000 new engineers every year.

14. ‘Going global’ - China has started to globalise economically by buying up foreign companies in North America and Europe particularly. In fact, in 2010 China invested $56bn in in outward Foreign Direct Investment. With inward FDI averaging some $60bn per year, China had, by 2015, converted from a net recipient to a net investor in FDI, a marker of its economic maturity in many respects.

15. Location - China’s geographical location has geopolitical significance because of its proximity to consumer markets and trading partners. South Korea, Taiwan, Japan and Hong Kong are on major trade routes. It is no coincidence that the first SEZs were concentrated on the east coast facing Taiwan and the Pacific, particularly around Hong Kong.

16. Raw materials - China has a great wealth of natural resources, having vast reserves of coal, oil and natural gas. These are being used to fuel the industrial development of the country. However, so large is the country’s requirement for raw materials to feed its manufacturing industries, that it is a major importer of oil, gas, coal, iron-ore, copper and other key commodities in world trade.

17. Confucian values - State and society are emphasized above the individual. There is a long history of submitting personal ambition to that of the community and state through Confucianism. The degree of control and authoritarian structures are more accepted in China than in most western cultures with their emphasis on individualism.

18. Population growth - Rapid population growth in China, despite the One Child Policy, has resulted in very large numbers in the economically active population, leading to rapid urbanisation. This has fuelled further industrialisation, allowing for further population growth, which have enabled China to pursue an accelerated path to economic development.

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VII. What the future holds for China ?

China’s Economic Outlook in Six Charts

China’s economy continues to perform strongly—with growth projected at 6.6 percent for 2018. Four decades of reform have transformed China from one of the poorest countries in the world to the second largest economy, said the IMF in its latest annual assessment of the economy.

Here are six charts you need to know about this report.

1. China’s strong GDP growth continues. The country now accounts for one-third of global growth. Over 800 million people have been lifted out of poverty and the country has achieved upper middle-income status. China’s per capita GDP continues to converge to that of the United States, albeit at a more moderate pace in the last few years.

2. A focus on high-quality growth. China is at an historic juncture. After decades of high-speed growth, the government is now focusing on high-quality growth. The authorities will need to build on the existing reform agenda and take advantage of the current growth momentum to “fix the roof while the sun is shining.” Key elements are: continuing to rein in credit growth, accelerating rebalancing efforts, increasing the role of market forces, fostering openness, and modernizing policy frameworks. Even with a gradual slowdown in growth, China could become the world’s largest economy by 2030.

3. Credit growth has slowed but remains too fast. Despite the sharp rebound in nominal GDP and industrial profits, total nonfinancial sector debt still rose significantly faster than nominal GDP growth in 2017. While the corporate debt to GDP ratio has stabilized, government and especially household debt is rising, driven by continued strong off-budget investment spending and a rapid increase in mortgage and consumer loans. It may take determined actions over an extended period of time to address underlying vulnerabilities.

4. China, a global digital leader. China has around 700 million internet users and 282 million digital natives (internet users less than 25 years old) eager to adopt new technology. The massive scale of the Chinese market and a supportive regulatory and supervisory environment in the early years of digitalization made China a global leader in frontier industries such as e-commerce and fintech. Digitalization will continue to reshape the Chinese economy by improving efficiency, softening—but not reversing—slowing growth as the economy matures.

5. Rebalancing efforts should be accelerated.

Increases in health, education, and social transfers—financed by taxes on income, property and carbon emissions—would support consumption, and reduce income inequality and pollution. A more comprehensive approach to structural reforms, such as increasing transfers to the regions most affected by overcapacity reduction or pollution control, could help address the tensions across rebalancing dimensions.

6. The benefits of faster reform. In the baseline, real GDP growth is projected at 6.6 in 2018, reflecting the lagged effect of regulatory tightening and softer external demand. Risks are tilted to the downside, with tightening global financial market conditions and rising trade tensions. If the authorities move more decisively to resolve the policy tensions now and focus on higher-quality growth and a greater role for the market, near-term growth would be weaker but longer-term growth would be stronger and more sustainable. An illustrative “proactive” scenario features faster reform progress, particularly state-owned enterprises (SOE) reform and resolving zombie firms, which also accelerates rebalancing from investment to consumption. If there is a risk of a too sharp slowdown, a temporary fiscal stimulus package with resources to support rebalancing could help cushion the near-term adverse impact.


China’s meteoric rise over the past half century is one of the most striking examples of the impact of opening an economy up to global markets.

Over that period the country has undergone a shift from a largely agrarian society to an industrial powerhouse. In the process it has seen sharp increases in productivity and wages that have allowed China to become the world’s second-largest economy.

While the pace of growth over recent decades has been remarkable, it is also important to look at what the future might hold now that a large chunk of the gains from urbanization have been exhausted.

In Summary, China's Economic Progress and Rise had happened in unprecendented levels and also much needed for today's world.

China must Address the Human Rights, Freedom of Speech and Economic Disparity Issues as it progresses in the 21st Century.

Probably, It may become Largest World Economy and Economic Power House by 2030s in 21st Century.

Its Curious to know how it evolves and develops into a Responsible and Powerful Nation in 21st Century. Its a Chinese Miracle, how a Country with Politically Communist and Economically Capitalist Agendas developed so rapidly and robustly.

In Totality, Its a Chinese Model....!!

MM Rao

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