The reasons for China’s economic success

Back in 1976, China was an underdeveloped rural country under the leadership of Chairman Mao Zedong. 30% of the population was poor at that time mainly because 3⁄4 of the production was centrally organized and controlled by the state-owned enterprises. The state set the quantities and prices of production and allocated the resources throughout most of the economy. The main goal of the Chinese government was to transform itself into a self-sufficient economy. Foreign trade was very limited, the only trade partner was the Soviet Union and trades would be things that they truly could not make in China. This system created economic distortions and did not provide motivation for firms, workers, and farmers to be more productive as they would not receive more for it or improve their living standards. The economic system had stagnated a long time ago, individuals were getting less and less motivated, their productiveness was decreasing, and their faith was disappearing. In 1978, after Mao Zedong died, of Deng Xiaoping became the leader and decided to restore China’s economy and faith on the communist party with the goal this time, of increasing economic growth and raise living standards. As the strict state control was not working, he decided to put in place a series of reforms that seemed to work for neighbor countries and regions (Taiwan, South Korea and Hong Kong). His idea was to create its own economic model through an economic reform. In one hand, it took some ideas from Western countries such as opening itself to the free market to allow private companies into china and receive foreign investments/trades as well. It encouraged the creation of rural enterprises and private businesses by giving more freedom to its workers and controlling them less. It invested in industrial production and education of its workforce.On another hand, it kept things in line and protected its country.

So, in the beginning of 1979, launched several economic reforms. At first, there were price and ownership incentives for farmers which gave them more freedom regarding the prices and clients. There were also incentives to start their own businesses. Other reforms focused on trade policies. In 1980, the government created four special economic zones along the coast (Shantou, Zhuhai, Shenzhen, Xiamen) in order to attract foreign investments, more exports and imports (of high technologies). 14 coastal cities including shanghai were designated as open cities and development zones to increase investments, offering tax and trade incentives.

Progressively, China became a more globalized country, creating bonds with other countries by joining the World Bank, the International Monetary Fund and the World Trade Organization.

With this method, China went from a low-income economy to a major economic power in about four decades. It went from having 2% of the world’s gross domestic product and being one of the poorest countries in the world in 1980, to having 18% nowadays. It went from having a gross domestic product of 300 billion dollars in 1980, to having 11 trillion dollars nowadays. This was a once in a lifetime event, it had never seen before. In these past 40 years, there was the most rapid poverty decrease, counting more 800 million people. Many other now earn enough now to spend on more than just than simple survival. This led to an enormous shift from the countryside to the cities.

Such growth has led China to double its growth domestic product every eight years. China ended up catching up on what Europe had done in 150 years (during the Industrial Revolution) in only 30 years. China then became the world’s biggest exporter and one of the most important pieces in trade.

We know that China was able to detach itself from the economic isolation it was in, we know that it was through multiple reforms imposed by the government. We know that at the end, China came out better than ever but what were the factors that led to China’s economic success may we ask? Well, there are multiple different factors for it, and we will see them now.

First of all, the political system and strong leadership was a very important factor. It was Deng Xiaoping who presented the solution at the time and that decided to follow a western-style free market economics while maintaining control over the political system. At the time, it was a risky move as the government was used to controlling every single bit of the economic life of the country. The reforms he decided to put in place are the ones that led to these wonderful results we can see today and have seen for the past 40 years.

Free market economics: Deng Xiaoping decided to remove trade barriers in order to encourage greater competition and attracted FDI inflows. This also allowed the increase of trade. China had then access to products it needed to produce better and faster. And it could export more as well.

Raw materials: China has a great wealth of natural resources, having vast reserves of coal, oil and natural gas. These are being used to fuel the industrial development of the country. These ones are very much looked for all over the world, so once China started to trade. All the countries wanted to trade this and much more with China.

Energy supply: Since the 1990s China has been developing its energy base, with new hydroelectric and nuclear power plants. China is also embarking upon a massive coal-fired power-station opening programme based on its own substantial coal reserves plus imports from Australia and Indonesia.

Location: China’s geographical location has geopolitical significance because of its proximity to consumer markets and trading partners. South Korea, Taiwan, Japan and Hong Kong are on major trade routes. It is no coincidence that the first special economic zone were concentrated on the east coast facing Taiwan and the Pacific, particularly around Hong Kong.

Population growth: Rapid population growth in China, despite the One Child Policy, has resulted in very large numbers in the economically active population, leading to rapid urbanisation. This has fuelled further industrialisation, allowing for further population growth.

Labor supply: There is a plentiful supply of workers in China with a steady stream of rural-urban migrants in search of work. Usually focused on manufacturing, China’s low-cost labor along the coastline and assemble things for export. As economy opened to the world, companies went to open their factories and take advantage of cheap labor. An extraordinary export-led economy matched by a demographic dividend of very low young age moving to middle-aged working population.

Wages and unemployment: The unemployment rate has fallen in recent years to just over 4%, but high rates in the past drove down wages. If workers demand higher wages, there are many more who will take the jobs available.

Productivity: China's recent productivity performance is remarkable. Production and consumption growing rapidly. The improvements to productivity were caused largely by a reallocation of resources to more productive uses, especially in sectors that were formerly heavily controlled by the central government, such as agriculture, trade, and services.

Foreign investment: in addition to its dominance in trade, China has also grown over the years to become a major player in global investment flows. From 2015 to 2017, it was the world’s the second-largest source of outbound foreign direct investment and the second-largest recipient of inbound investment.

Investment in infrastructure: The government has built many new roads, improved the rail system and made China’s major rivers navigable all year round. China has five of the ten largest container ports in the world (including Shanghai and Shenzhen). Urbanisation has also been encouraged. with a robust urban-construction programme.

Going global: China has started to globalise economically by buying up foreign companies in North America and Europe particularly. And to do that is investing more in education, research and development and innovation.

Education: Literacy levels of China have risen dramatically over the past 20 years and now stand at 95%. This has underpinned the economic development of the country. As a result, China has both large numbers of unskilled workers and a growing number of highly skilled workers. For instance, China trains 600,000 new engineers every year.

Economic diversification: China has recently started to diversify into Research and Development, specialist manufacturing and hi-tech industry. It is investing labour and capital in innovation so that it can sustain its economic growth and reduce the risk involved in having a narrow economic base. Policies include spending 2.2% of GDP on R&D (Research and Development) and moving coastal regions from being ‘the world’s factory’ to being hubs of R&D, top-end specialist manufacturing and services.

Tech and innovation: Chinese tech companies quickly became market leaders. Huawei is the world's top telecommunications-equipment maker. It is quickly becoming a world leader in developing 5G technology. . Lenovo is a world-class maker of personal computers. Xiaomi is one of China's top smartphone brands. 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 modernise China’s manufacturing.

To conclude, all of this participated in the economic growth of China and turned it the nation, ahead of the United States and Germany. Above all, never before in history have so many people escaped poverty in such a short time as in the past decades in China. Its initial goal has been completed. China was able to have an extraordinary economic growth through the opening of its market and frontiers to the outside world and its consistent participation in trades. Its success was due to that and to the fact that China is very hard-working in everything world's leading export it does and it offered very good and different products for very good price. China’s new goal is to keep having an heterogenous economy, keep on creating the unexpected while reducing the pollution emitted. This goal seems harder to reach, as its intensive production is hardly compatible with the reduction of pollution.