Economy of China Explained: A Socialist Market Economy

Economy of China Explained: A Socialist Market Economy

Following the failure of its centrally planned economy based on communism and the specific economic system used in the former Soviet Union, including the disastrous outcomes of the Great Leap Forward during the early years of communism in the country, the economy of China underwent a series of reforms until it transitioned to a market economy.

China is now the fastest-growing major economy in the world. It has become the second-largest economy in the world in terms of nominal GDP since 2010 and the largest in terms of purchasing power parity since 2014. China is also a manufacturing hub. It is the largest exporter among other global economies and an important player in international trade.

Facts About The Economy of China: One of the Foremost Economic Powers in the World

Historical Background and Overview

China has been an economic powerhouse for most of the past two thousand years. It accounted for one-quarter of the global GDP during the 1700s and about one-third of the global GDP in 1820. Its GDP during the 1820s was six times larger than Britain and almost twenty times larger than the United States. Of course, it has experienced cycles of growth and decline.

Modern economic developments transpired during and after the 1940s. After recovering from the Second World War and decades of internal warfare, including the conflict between the Chinese Communist Party or CCP and Kuomintang or KMT that culminated in the long-standing China-Taiwan conflict, the economy of China under the governance of the CPP adopted an economic system that borrowed elements from socialism and communism.

The CPP managed to restore a feasible economic base. Under the leadership of Mao Zedong and Zhou Enlai, the government adopted the Soviet economic model in the 1950s to drive growth. This model revolved around state ownership in major sectors and industries, the organization of agriculture in large collective units, and centralized economic planning.

Planners from the Soviet Union helped the Chinese government develop the First Five-Year Plan that spanned from 1953 to 1957. The plan resulted in the government owning about 67.5 percent of industrial enterprises. The remaining 32.5 percent remained under public-private ownership. Private ownership was dropped. China managed to develop its heavy industries. Manufacturing gained grounds. Agricultural output increased about 4 percent each year.

However, there was an imbalance between industrial and agricultural growth. The situation compelled the government to shift decision-making from the central authority to provincials and local administrations beginning in 1957. The Second Five-Year Plan was abandoned and replaced by the Great Leap Forward in 1958.

The Great Leap Forward was a flagship social and economic campaign launched by Mao. The goal was to promote industrialization further while attending to the needs of the agricultural sector. However, the entire duration of the campaign that began in 1958 and lasted until 1961 was catastrophic. Agricultural output declined. There was a shortage in the food supply. The Great Chinese Famine followed suit. Millions of people died.

Transition to Socialist Market Economy

China faced the possibility of an economic collapse during the 1960s. There were several attempts made to reverse the situation or recover from the decline. One was the immediate revision of goals and objectives and the development of a new set of economic policies that revolved around reduced centralized planning and economic coordination.

Increasing the output of agriculture was the top priority. The country needed to grow its output at a rate that would meet the demands of its growing population. Fiscal policies were rolled out to support the sector. For example, government resources were mobilized to modernize agriculture using technology. Agricultural taxes were also reduced. Decision-making in production and income distribution to farmers were decentralized.

Mao spearheaded the Cultural Revolution in 1966 in an attempt to reposition himself at the center of power following the failure of the Great Leap Forward. However, it failed to achieve this goal. The sociopolitical movement marked another period of disastrous internal conflicts. But its influence had a significant effect on the modern economy of China.

The death of Mao on 9 September 1976 paved the way for Deng Xiaoping to become the de facto leader of China. He led a group of reformists within the CPP who focused on implementing gradual but fundamental economic reform. These individuals concluded that the centrally planned economy was inefficient for economic growth and had caused China to lag behind the West and emerging economic powerhouses in Asia.

Furthermore, the CPP started rejecting the Maoist notion that cultural and political agencies are the main driving force behind economic progress. They embraced the idea that China needed to adopt market reforms and that material productive forces are the fundamental requirements to build an advanced socialist society attuned to the traditional Marxist perspective.

The reforms were collectively termed “Socialism With Chinese Characteristics.” Furthermore, it upheld some elements of socialism and communism but also used elements of a market economy. China also began integrating itself into the global market economy to take maximize the benefits of globalization. The series of reforms resulted in the creation of a new brand of socialism unique to China: a socialist market economy.

Characteristics of a Socialist Market Economy

Deng Xiaoping has been credited as the architect of the modern Chinese economy. However, note that the term “socialist market economy” only surfaced in 1992 when it was officially introduced during the 14th National Congress of the Chinese Communist Party by Jiang Zemin, the former Party General Secretary who later became the President of China.

But what exactly is a socialist market economy? How did it shape the modern economy of China?  To explain further, the Chinese Communist Party considers this economic system as an early stage in the development of socialism. It aligns the Chinese economy with a traditional Marxist notion that a full socialist planned economy will only emerge after a market economy fulfilled its historical role and through the use of technological advances.

The theoretical foundations of this system are traceable to the model of liberal socialism devised and proposed by British economist James Meade. His model considers a state as a residual claimant of the profits made by state-owned enterprises. These enterprises exist through the state but operate independently of government management.

A socialist market economy is different from market socialism. Market socialism frames the public ownership of the means of production within a market economy. It argues that market forces are an essential part of socialism because planned economies are either unattainable or inefficient. However, in a social market economy, the presence of markets is only a transient condition necessary for the full transition to a planned economy.

Of course, a socialist market economy is also different from a capitalist market economy. China is not a capitalist country. The CPP retains control of the direction of its economy. However, similar to a market economy, price signals created by the forces of supply and demand influence decisions regarding investments, production, and distribution.

Remember that the economic system of a particular country defines its mechanism for production, distribution, and allocation of goods, services, and resources, as well as the role of the government in managing the economy and providing government services. Nevertheless, to understand further the characteristics of a socialist market economy, as well as how the economy of China works, take note of the following:

• Economic Planning: Price signals from the forces of supply and demand influence economic planning in China. The country observes compulsory planning across selected state-owned enterprises operating in strategic sectors and contractual planning in key target sectors. Indicative planning sits at the lowest level of economic planning and it involves the government outlining its goals and using fiscal and monetary policies to stimulate or encourage enterprises in target industries and sectors.

• Industries and Sectors: A significant portion of the industries and sectors in China is populated by state-owned enterprises. Some fall under the more specific state-holding and public-private enterprise categories. However, the government has allowed private ownership. These privately-owned enterprises have emerged since the Company Law in 1994 and now contribute to about 60 percent of the GDP of the country.

• Privately-Owned Enterprises: The line between state-owned enterprises and privately-owned enterprises has blurred. Many publicly-listed companies are under mixed ownership by state entities and private entities. The government also gives enterprises operating in targeted industries and sectors preferential treatment. Private owners and investors can take profits but within the controls of the government.

• Government services: Note that the elements of the market economy used in its socialist market economy only serve as a collective mechanism for China to achieve specific socialist goals. The country still used elements of a planned economy to allocate resources. Furthermore, it still adheres to the principles of socialism centered on the distribution of wealth. For example, it has three public insurance programs that cover the health care expenses of 95 percent of its population.

The Economy of China Today: An Economic Superpower and a Major Global Player

Remember that the economy of China is the second-largest in the world in terms of nominal GDP since 2010 and the largest in terms of purchasing power parity since 2014. The transition from a centrally planned economic model based on elements of socialism and communism to a socialist market economy that merges the notable elements of socialism and market economy has contributed to this rapid and remarkable economic growth and accomplishments.

China is also a premier manufacturing hub. The country has strong steel, automotive, consumer electronics, and consumer goods industries. It has built a comparative advantage from technical advances and inexpensive labor that has allowed it not only to export China-made end-use products but also to become a hub for production outsourcing.

Some of the largest and most recognized multinational companies in the world outsource their manufacturing capabilities in China. Apple uses Chinese manufacturers to produce devices and parts or components. Part of the business strategies of Nike and Adidas is to maximize the advantages of outsourcing by contracting Chinese clothing and apparel makers. The inexpensive production and labor costs increase the profitability of these companies.

The agricultural sector of the country has improved through the years. It has become a source of living for about 300 million Chinese farmers. The country has also become the largest producer of rice and the principal source of important agricultural and livestock products such as wheat, corn, soybeans, potatoes, tea, peanuts, pork, and fish.

Note that about 10 to 15 percent of the total land area of China is suitable for farming. More than half of these lands are even unirrigated. However, data from the World Food Program of the United Nations in 2003 showed that the country fed 20 percent of the total population of the world using only 7 percent of the total global arable land. Its agricultural sector remains productive because 60 percent of the total Chinese population lives in rural areas.

China is also the largest export of products among other economies in the world. It is also one of the biggest consumers. It is also the wealthiest nation. Data from 2018 showed that it had 658 billionaires and 3.5 million millionaires. Furthermore, data from 2021 indicated that it is home to the largest companies in the Fortune Global 500.

Of course, the country still has notable economic issues it needs to resolve. For starters, it has been a net importer of oil and it remains dependent on coal. It plans to transition to cleaner alternative sources of energy. However, it is facing an energy crisis due to increasing demand. The rapid industrialization has also compelled the country to import metals from Australia and the United States, and operate mines in Central African countries.

The growing economy of China has also strained its environment. It needs to confront issues concerning sustainability and in consideration of the ongoing climate emergency. The pollution from industrial activities and modern transportation has become a public health concern. There is also a need to ensure a sufficient and sustainable water supply.


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  • The World Bank. 2022. “The World Bank in China.” The World Bank. The World Bank. Available online
  • World Food Program. 2004. “World Hunger—China.” Where We Work. The World Food Program, United Nations.