The economic history of China describes the changes and developments in China's economy from the founding of the People's Republic of China (PRC) in 1949 to the present day. The speed of China's transformation in this period from one of the poorest countries to one of the world's largest economies is unmatched in history.
Since Mao Zedong's 1949 proclamation of the People's Republic of China, the country has experienced a surprising and turbulent economic development process. It has experienced revolution, socialism, Maoism, and finally the gradual economic reform and fast economic growth that has characterized the post-Maoist period. The period of the Great Leap Forward and the Great Chinese Famine negatively impacted the economy. The chaos of the Cultural Revolution also disrupted the economy. The construction of the Third Front increased China's industrial development and infrastructure in its interior regions. Since the period of Reform and Opening Up began in 1978, China has seen major improvements in average living standards and has experienced relative social stability.
Since the Reform and Opening Up period, China has evolved into a backbone of the world economy. China has been the fastest growing economy in the world since the 1980s, with an average annual growth rate of 10% from 1978 to 2005, based on government statistics. Its GDP reached trillion in 2005. Since the end of the Maoist period in 1978, China has been transitioning from a state dominated planned socialist economy to a mixed economy. This transformation required a complex number of reforms in China's fiscal, financial, enterprise, governance and legal systems and the ability for the government to be able to flexibly respond to the unintended consequences of these changes. This transformation has been accompanied by high levels of industrialization and urbanization, a process that has influenced every aspect of China's society, culture and economy.
China's government continues to have a significant role in economic development, including through various forms of state ownership and collective ownership.
Economic policies, 1949–1976 When the Chinese Communist Party (CCP) came to power in 1949, its leaders' fundamental long-range goals were to transform China into a modern, powerful, socialist nation. In economic terms these objectives meant industrialization, improvement of living standards, narrowing of income differences, and production of modern military equipment. As the years passed, the leadership continued to subscribe to these goals. But the economic policies formulated to achieve them were dramatically altered on several occasions in response to major changes in the economy, internal politics, and international political and economic developments.
Throughout the Mao era, the CCP attempted to demonetize and de-commodify the Chinese economy through top-down policy interventions, having developed institutions that bring economic life under greater state control. The CCP established "puppet-like micro-management institutions" to regulate market activity and limit spontaneous exchange between the two sectors of the economy. Leaders also attempted to withdraw currency from circulation and "return it to the cage" to combat "spontaneous capitalist tendencies" among rural consumers. However, despite these policies, Chinese citizens continued to engage in market-based transactions in an informal economy that constituted a substantial proportion of economic output throughout the Mao era. For example, some private enterprises continued to exist in south China.
In the centrally planned economy era, infrastructure developed rapidly. This was financed through government revenues, the revenues of state-owned enterprises engaged in infrastructure building, and rural resources mobilized by the people's communes.
China mostly avoided inflation during the Mao era.
Recovery from war, 1949–52 In 1949, China's economy was suffering from the debilitating effects of decades of the Chinese Civil War. Many mines and factories had been damaged or destroyed. At the end of the war with Japan in 1945, Soviet troops had dismantled about half the machinery in the major industrial areas of the northeast and shipped it to the Soviet Union. Transportation, communication, and power systems had been destroyed or had deteriorated because of lack of maintenance. Agriculture was disrupted, and food production was some 30 percent below its pre-war peak level. Further, economic ills were compounded by one of the most virulent inflation rates in world history.
As the Nationalists retreated to Taiwan during their defeat in the Chinese Civil War, they stripped China of liquid assets including gold, silver, and the country's dollar reserves. Nationalist forces also attempted to firebomb industrial sites, but workers were able to stop them at many such locations. By the time the Nationalists were defeated, commerce had been destroyed, the national currency rendered valueless, and the economy was based on barter. The economic damage of the civil war was compounded by the United States' embargo against the PRC and the Eastern Bloc countries remained China's only source of foreign economic, material, and technical support. The PRC pursued a policy of rapid industrialization relying primarily on its domestic resources. The Chinese economy recovered quickly from 1949 to 1957.
After the civil war, the CCP established a policy of balancing the budget or running a surplus. Balanced budgets or surpluses had been the norm in Chinese governance until the Qing (after defeat in the First Sino-Japanese War of 1894–1895) and the Republic of China ran yearly budget deficits and accumulated large amounts of debt.
The Common Program approved in late September 1949 by the Chinese People's Political consultative Conference prioritized ownership of the state-owned economy, although it also gave consideration to some private interests. It did not seek to eliminate capitalism as a whole, instead encouraging private enterprises viewed as beneficial to the national economy and sought to implement a mixed economy. At the founding of the PRC, the Central Finance and Economy Commission under the transitional Government Administrative Council was the single central government organ in charge of national economic planning and construction management. It was led by Chen Yun and Bo Yibo. Its major priorities were restoring national economic order, price stabilization, currency stabilization, establishing a management mechanism for the planned economy, and preparing for the First Five-Year Plan.
To bring inflation under control by 1951, the government unified the monetary system, tightened credit, restricted government budgets at all levels and put them under central control, and guaranteed the value of the currency. The CCP's success in overcoming hyperinflation and stabilizing prices became a major source of the new government's legitimacy. Price increases from the 1950s to the 1970s were generally minimal, although the periods of the Great Leap Forward and the Great Chinese Famine were notable exceptions. China ultimately had one of the most stable fiat currencies in modern history during the Mao era.
Commerce was stimulated and partially regulated by the establishment of state trading agencies (commercial departments), which competed with private traders in purchasing goods from producers and selling them to consumers or enterprises. State trading agencies served as a mechanism for re-creating and integrating markets and through this process of re-integration between urban and rural economies helped stabilize the value of money.
The early PRC government established a centralized banking system focused on a few state institutions. Early banking regulations were adopted from the Soviet Union's regulations. The People's Bank of China was the only commercial bank under this centralized system and the only provider of credit, settlement clearance, and teller services. In 1950, the Bank of China became a bureau of the People's Bank of China. Pursuant to regulations issued in 1953, only the Bank of China could handle foreign currency and international transactions.
Another of the CCP's early steps was to nationalize enterprises that the defeated Nationalists had controlled. These were turned into state-owned enterprises (SOEs). By 1952, China's SOEs accounted for more than 40% of industrial production. As the industrial means of production were transferred to the state, conditions for workers improved. The growing number of state workers were entitled to permanent employment, an eight-hour day, medical benefits, subsidized food and housing, as well as an eight-grade wage scale that was consistent across different state owned enterprises.
Under a nationwide land reform movement which had begun before the CCP victory and continued afterwards, titles to about 45 percent of the arable land were redistributed from landlords and more prosperous farmers to the 60 to 70 percent of farm families that previously owned little or no land. The success of early land reform meant that at the founding of the PRC in 1949, China could credibly claim that for the first time since the late Qing period that it had succeeded in feeding one fifth of the world's population with only 7% of the world's cultivable land. Once land reform was completed in an area, farmers were encouraged to cooperate in some phases of production through the formation of small "mutual aid teams" of six or seven households each. Thirty-eight percent of all farm households belonged to mutual aid teams in 1952. By 1952 price stability had been established, commerce had been restored, and industry and agriculture had regained their previous peak levels of production. By 1953, China had rapidly recovered its economy.
First Five-Year Plan, 1953–57 Having restored a viable economic base, the leadership under Mao Zedong, Zhou Enlai, and other revolutionary veterans was prepared to embark on an intensive program of industrial growth and socialist transformation. For this purpose the administration adopted the Soviet economic model under the slogan "Learn from the Soviet Union." The Soviet approach to economic development was manifested in the First Five-Year Plan (1953–57), which Soviet planners helped formulate. As in the Soviet economy, priority was placed on heavy industry and capital goods. Large numbers of Soviet engineers, technicians, and scientists assisted in developing and installing new heavy industrial facilities, including many entire plants and pieces of equipment purchased from the Soviet Union. Compared to the Soviet planning method, the Chinese approach had less centralized planning with regard to consumer goods and regional planning authorities had greater authority.
Government control over industry was increased during this period by applying financial pressures and inducements to convince owners of private, modern firms to sell them to the state or convert them into joint public-private enterprises under state control. Through joint-public private enterprises, the government held the majority of ownership but private owners (deemed "national capitalists," i.e., supportive of the government) retained minority ownership and had a management role. These private owners received fixed dividends based on appraised value of the enterprise at the time of its conversion to a joint public-private enterprise.
China nationalized commerce, industry, and handicrafts over the period 1953 to 1956. Its industrial outputs grew by 31% in 1955 and a further 10% in 1956. By 1956, nearly all large-scale commerce and industry had been nationalized and virtually all urban private business ownership had been ended. China had finished its efforts to complete a socialist transformation of the domestic economy. However, certain market activity persisted and remained underground.