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.
China has the world's largest banking sector, with assets of $40 trillion and the world's top 4 largest banks all being in China.
China has the highest number of rich people in the world's top 10% of wealth since 2019 and has one of the most billionaires of any country in the world.
One of the world's foremost infrastructural giants, China has the world's largest bullet train network, the most supertall skyscrapers in the world, and initiated the largest transcontinental infrastructure investment project in modern history.
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.