Why is China’s economy so successful?

Rewind back to 1950. China’s economy lies in tatters, with the nation emerging out of a brutal civil war which has decimated the country for 20 years, coupled with Japanese invasion. The country lags far behind it’s industrialised Western counterparts and is isolated from the global economy. How did this country go from a backwater to an economic superpower? What lessons can we learn from its rise? This article will attempt to answer those questions.

After the death of Mao in 1976, China started reforming its command economy, introducing market elements under the leadership of Deng Xiaoping. The introduction of entrepreneurship, foreign investment and the private sector did wonders for the country, with the Chinese economy growing at a yearly average of nearly 10% since 1978, vindicating the economic reforms undertaken. However, the state still retained a large amount of control over the economy, particularly in the banking and petroleum sectors. This system has come to be known as a ‘Socialist Market Economy’, and has been adopted by many countries in the developing world. The astonishing economic development has lifted 800 million people out of extreme poverty. Indeed, the World Bank described China’s growth as “the fastest sustained expansion by a major economy in history.”

Causes of China’s Economic Success

Free-Market Economics

Allowing foreign firms to invest in China meant that the country could become the world’s factory, producing everything from smartphones to T-shirts. As a result, China’s economy skyrocketed, as its potential was unleashed. The introduction of private enterprise further contributed to economic growth, as they could more efficiently allocate resources than the state, which was stiflingly bureaucratic. ​​​​​​​

Government Intervention

Ironically, continued state control over many aspects of the economy has contributed to China’s miraculous growth. Government control of decision-making means that funds can be directed more quickly to where they are needed — the government publishes a series of Five-Year Plans, detailing very specific aims that it wants to meet. The authoritarian nature of the Chinese government means that they can compel businesses to innovate. State control of banks means that credit can be easily supplied to projects that, whilst expensive, have the potential for long-term gains.

Large Workforce

China, a country of 1.4 billion people, has a ready supply of labour. Workers from rural areas continue to migrate to cities in search of work, and this trend is expected to continue. There is a higher rate of female participation in the workforce than in many Western countries, and Chinese women spend less time looking after children compared to elsewhere. This is due to a combination of government restrictions and cultural reasons. The plentiful labour supply also means that wages are low for Chinese workers compared to other East Asian countries. This means that profit margins for firms are higher, attracting FDI (foreign direct investment) from American and European companies.

High Exports

The Chinese government has engaged in protectionism, allowing domestic firms to dominate the Chinese market. Low wages for Chinese workers also lead to cheaper products, as costs of production are lower. Furthermore, the government heavily subsidises many strategic industries, such as steel, solar panels, shipbuilding, and oil. These factors all cause supply to increase, resulting in more exports. The People’s Bank of China allows the yuan to fall in value against the dollar, making Chinese exports to America cheaper, boosting competitiveness. This has led to accusations that China is a currency manipulator. It is important to note that this strategy, while still important, will no longer form the bulk of China’s growth. A shift to high-tech industries is already underway.

Consumerism

As the Chinese middle-class grows, there is greater demand for high-quality products. This has caused a shift from export-led manufacturing to consumption-based growth. Rising wages have meant that disposable incomes are increasing — from 2009, real wages have more than doubled. This has led to an explosion in demand, reflecting the shifts in the Chinese economy. Retail giants like Alibaba continue to post staggering profits, and tech companies like Huawei and Lenovo are becoming more prominent.

Natural Resources

China is blessed with raw materials like coal, oil and natural gas, which can be used to boost development in the country’s manufacturing sector. Despite this abundance, China is still a net importer of coal, oil and gas.

Infrastructure Investment

The government has poured money into building roads, bridges and has an astonishing high-speed railway system, with a total length of 37,900km. For context, the US has only a few hundred kilometres of high-speed rail, on one operator. 1.1m km of roads have been built in the past decade, and there has been a flurry of new airports built. China is home to five of the world’s ten largest ports and was one of the first countries to test 5G for commercial networks. This investment boosts productivity, as commuters spend less time travelling and access to far parts of the country is easier. This will lead to a more efficient economy.

The Future For China

China’s recent history is one of immense economic success, evolving from a stagnant agricultural economy to an advanced superpower, with economic clout rivalling the United States. However, a series of challenges will soon come China’s way. The first of these is an aging population. The Chinese population is growing at a much slower rate, leading to a shrinking workforce. On top of that, an aging population will result in a greater burden on the state in the form of increased welfare. This could lead to an economic stagnation like the one seen in Japan in the 1990s. Another danger comes from widespread corruption and a weak judicial system, which discourages firms from investing in the country. The Chinese government, which recently has decided to crack down on some of its largest firms like Alibaba and Tencent, should make sure that it doesn’t stifle innovation through its censorship. Many economists speak of a ‘middle-income trap’, in which countries cannot progress into prosperity as they lose their previous advantages such as cheap labour. To avoid this, China needs to become a high-tech economy, a feat easier said than done.

Despite these obstacles, there is no doubt that China’s economic prospects are bright. It maintains a huge workforce, whose human capital (skills) are higher than ever before. It is a world leader in green energy and telecommunications, and the world’s top producer of aluminium and steel. The government has generally proved to be a competent moulder of the economy, and real incomes are rising steadily.

China’s economic future will shape the future of the entire planet. For us in the West, it poses questions about the merit of our liberal democratic systems, and the strength of authoritarianism.

Is the China model the future of capitalism? Are we living in the Chinese century? Or will China’s story mirror that of Japan’s, a period of extreme promise followed by decades of drift? How sustainable is China’s growth, for the economy and the environment?

All these important questions will be answered in due course, but one thing is for certain. China is back.