Global Connections Edition
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Labor Article

Socialist Market Economy - How China Got Here

Today, China describes itself as a “Socialist Market Economy” or as practicing “socialism with Chinese characteristics”, which means a transition economy combining a mix of expanding market forces, private enterprise, and significant but gradually declining government control. Major industries are still owned by the state, but compete with each other using a market pricing system. Today, China’s “Socialist Market Economy” is considered largely successful because of the high rates of growth China has sustained for the last quarter of a century, with GDP averaging 9% per annum. China’s trade activity (including both imports and exports) has grown an average of 15% a year since 1979,[1] and 400 million people have been lifted out of poverty.[2]

Despite all the impressive figures, however, some experts caution that China’s economy should not be viewed as a monolithic national economy, but rather as a “series of loosely coupled regional economies”[3] with great disparities in growth and income between the more prosperous coastal areas and the interior provinces.

How big is China’s economy today?

Top Three: Depending on how it’s measured, the economy of China is either the second largest in the world (after the U.S.) with a 2007 GDP of $6.991 trillion[4] when measured on a purchasing power parity (PPP) basis – volume of goods and services people can buy for the same amount of money across several economies[5] - or the third largest[6] (after the U.S., and Japan) with a 2007 GDP of U.S.$3.25 trillion[7] when measured in exchange-rate terms. The PPP method of comparison is favored by economists, but the exchange-rate figures are most commonly used in general discussion and is the reference that will be used in the rest of this site. In 2007, China’s economy expanded 11.4%, the fastest growth in 13 years.

Economies of China and the United States – (2007)[8]

China U.S.
GDP (PPP) $6.99 trillion (est) $13.84 trillion
GDP (Exchange Rate) $3.25 trillion (est) $13.84 trillion
GDP Real Growth Rate $11.4% 2.2%
Average Annual Income $4,091 $41,000
GDP per capita $5,300 $45,800
Inflation 4.8% 2.7%

At present growth rates, experts like Albert Keidel of the Carnegie Endowment for International Peace are predicting that China’s economy will match the United States’ by 2035 and double it by 2050.[9] Price Waterhouse Coopers LLP predicts an even earlier date – 2025 – for China’s economy to surpass the United States’.[10]

How has China’s “socialist market economy” managed to grow so fast?

From 1949 to 1978, China followed a policy of communist economic development, which revolved around state control of production, exchange and distribution. It was largely closed to international trade, except with other Communist countries. When Deng Xiaoping set China on the road to economic reform in 1978, he lifted the lid off a severely repressed economy, albeit in a gradual and controlled way. In the 1980s, reform coalesced around giving land and animals to farmers and creating special economic zones along the coast to attract foreign investment and commerce. The 1990s saw a more concentrated effort to privatize and reform many of the state-owned enterprises.

Generally, three components have propelled China’s economy in the last thirty years: exports, investment, and domestic consumption, with each having a different degree of impact as China has developed:

Exports: In the early days of economic reform, China’s large and inexpensive labor pool (See "Labor") started to produce labor-intensive goods such as clothing, furniture, shoes, and other consumer goods on such a large scale and at such comparative low costs as to spark an export boom. Today, China has become the world’s manufacturing center, which has led many to believe that exports are that which has been driving China's growth. However, Albert Keidel of the Carnegie Endowment and other experts now believe that China’s growth over the last 30 years has been driven not by exports, but primarily by domestic investment and consumption.[11]

Investment: The single biggest change in the Chinese economy has probably been the amount of capital that is now available.[12] In 1994, China had less than $25 billion in foreign currency reserves. Since then it has become the largest recipient of foreign direct investment and become a major export economy. As a result capital has flowed in that has largely been directed towards capital-intensive industries such as automotives, steel, industrial machinery and infrastructure. Compared to the post-industrialized U.S. and the European Union (where service sectors count for more than 70% of GDP), still industrializing China derives almost half of its GDP from its industrial sector.[13] In recent years, the influx of capital has also led to an active and highly speculative stock market, while a booming property market in the last few years has boosted fixed-asset investment. In 2007, investment accounted for over 40% of GDP.[14]

Domestic Consumption: In the early days of economic reform, domestic consumption was not a big contributor to China’s growth as the bulk of its population was still living at or below the poverty level. As the Chinese living standards and wages have risen, however, domestic consumption has increasingly become a bigger part of China’s growth. In 2007, domestic consumption grew 16.8% from the previous year.[15]

What this all means is that the growth of China’s economy is not as dependent on exports, and hence, world market influences, as some might think. Therefore, China’s growth can continue at this rate for a significant time and China as an independent source of global growth can help to sustain others if and when America’s economy falters.[16]

1 Eswar Prasad, edit, “China’s Growth and Integration into the World Economy: Prospects and Challenges,” International Monetary Fund, Occasional Paper N 232, Washington DC, 2004, p. 1, http://www.imf.org/external/pubs/ft/op/232/op232.pdf (accessed 7/18/08).

2 The World Bank, “Fighting Poverty: Findings and Lessons from China’s Success,” The World Bank Research, http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:20634060~pagePK:64165401~piPK:64165026~theSitePK:469382,00.html (accessed 7/26/08).

3 Michael J. Enright and Sun Hung Kai, “China’s Economy Into the Future,” China Into The Future: Making Sense of the World’s Most Dynamic Economy, John Wiley & Sons, Hoboken, New Jersey, 2008, p. 42.

4 CIA World Fact Book: China, https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html (accessed 7/18/08).

5 For example if a can of Coke costs one dollar in the US and 3RMB in China, then the (PPP) exchange rate is $1=3RMB, and not the official exchange rate of $1=6.8RMB.

6 Measured according to individual countries’ economies. As a bloc, the European Union counts itself as the biggest economy in the world, but the United States still has the largest economy of any country, followed by Japan, and China.

7 CIA World Fact Book: China, https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html (accessed 7/18/08).

8 CIA World Fact Book: China, https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html, (accessed 7/18/08); CIA World Fact Book: United States, https://www.cia.gov/library/publications/the-world-factbook/geos/us.html (accessed 7/18/08).

9Albert Keidel, “China’s Economic Rise – Fact and Fiction,” Carnegie Endowment for International Peace, Policy Brief 61, July 2008, p. 11, http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=20279&prog=zch (accessed 7/18/08).

10“China to be world’s largest economy in 2025,” China Daily, March 5, 2008, http://www.chinadaily.com.cn/china/2008-03/05/content_6510506.htm (accessed 7/18/08).

11Keidel, “China’s Rise.”

12Jack Perkowski, blog post on “Managing the Dragon, the Book (Update 2),” The Managing the Dragon Blog, February 9, 2008, http://managingthedragon.com/?s=china+foreign+currency+reserves+1994 (accessed 7/25/08).

13Jianxiong Zhang, “Acknowledging China,” The Globalist, February 28, 2008, http://www.theglobalist.com/storyid.aspx?StoryId=6657 (accessed 3/8/08).

14“Economic Focus: An old Chinese myth,” The Economist, January 3, 2008, http://www.economist.com/finance/displaystory.cfm?story_id=9861591 (accessed 1/10/08).

15“Domestic consumption drives GDP for the 1st time,” Xinhua, January 31, 2008, http://news.xinhuanet.com/english/2008-01/31/content_7530491.htm (accessed 2/14/08).

16“China’s Economy: How fit is the panda?,” The Economist, September 27, 2007, http://www.economist.com/finance/displaystory.cfm?story_id=9861591 (accessed 7/18/08).