Lecture 1

Overview of the Chinese Economy

1
“How do you deal with the government?”
“Be in love with them, but don’t marry them”
- Jack Ma (2014)

2
 Outline
• Overview of the economy
• End of the miracle? yes, no way to come back, new era is coming

• Reform strategies there tend to be no regress only if no war is there

• Why reform?
– Public ownership and central planning
• Timeline of major reforms
– Three stages (1978-present)

3
 0
2
4
6
8
10
12
14
16
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

and National Bureau of Statistics.

1990
1991
1992
1993
1994
1995
1996

Source: World Bank World Development Indicators

1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
GDP Growth Rate (1978-2023)

2020
2021
2022
2023
4
 Is China a Superpower?
milltary power, cultural power(like hollywood), need for science advance

GDP (current billion U.S. dollars)

30000

25000

20000

15000

10000

5000

0
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
China United States
Source: World Bank World Development Indicators

5
 Shenzhen’s Catching up with Hong Kong

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Source: internet pictures.
 Hong Kong and Shenzhen GDP

GDP (current billion U.S. dollars)

600

500

400

300

200

100

0
1980 1985 1990 1995 2000 2005 2010 2015 2020 2023

Shenzhen Hong Kong

Source: World Bank World Development Indicators and China Statistical Yearbook.

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 China’s Economy Since Reform
• Fastest growing economy in the world since
1979 (over 8% annual growth rate)
• Largest economy in the world since 2014 if
measured by purchasing power parity (PPP)
• Second largest economy in the world if
measured by exchange rate
• Largest exporter in the world
US importer and exporter are together larger

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 China’s Economy Since Reform
• More than ten-fold increase in GDP per capita
• Over 40 years of uninterrupted economic
growth (unprecedented in Chinese history
since 1840)
• Over 800 million population was lifted out of
poverty (unprecedented in world history)
• But the economy has been significantly
slowing down after the 2008 “great recession”
9
Discussion: How Reliable Are China’s
Statistics?
• Li Keqiang (then the Chinese Communist Party
Committee Secretary of Liaoning) told a US
ambassador in 2007 that the GDP figures in Liaoning
were unreliable and that he himself used three other
which is easily adjusted by the officials, which also means deviations firms may over announce the export to
indicators. avoid tax, and undereport their production

• Keqiang index:
– railway cargo volume
– electricity consumption
– loans disbursed by banks

10
 How Reliable Are China’s Statistics?

• Satellite data: http://www.nber.org/papers/w23323

– “We see that our methodology predicts Chinese [gross
domestic product] growth to have been lower than official
estimates before the crisis of 2008, to have experienced a
shallower decline in 2008 and a stronger recovery in 2009
and 2010, and to have stabilized at a higher level after
2011”
• A recent paper examining the “true” economic
growth in China: https://www.brookings.edu/wp-
content/uploads/2019/03/bpea-2019-forensic-analysis-
china.pdf.
11
 China’s Economy in the Global
Perspective
• Not just another successful story because China is not
a “typical” country
• China is the most populous country in the world (1.4
billion people)
• China has matched the growth record of all high-
performing East Asian economies with a population
three times larger

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 China’s Economy in the Global
Perspective
• A Transition Economy
Compare to Russia, Poland, Vietnam, etc.
• A Developing Economy
Compare to Brazil, Nigeria, Mexico, etc.
• A Large Economy
Compare to US, Japan, EU, etc.
• An Asian Economy
Compare to South Korea, Taiwan, Thailand, etc.

13
 China’s Economy – Three Grand
Themes
• Development （发展）
from poor to rich
• Reform （改革）
from a planned economy to a market economy
• Opening Up to the World （开放）
integration into the world economy

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 Explaining the Success Story
• Enabling conditions (Naughton, 2018)
– Extraordinary human resources
– Global division of labor
– Enormous catch-up potential
– A government with the capacity to learn

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 A Framework to Analyze Chinese
Reforms – Institutional Change
the founder of institution economics inclusive growth: like good institution
needs to benefit all people
• Douglas North: “Institutions are rules of game in a society;
humanly devised constraints that shape human interactions.”
– Formal versus informal institutions
• Why do inefficient institutions persist?
– Benefit selfish rather public interest
– Efficiency versus political constraints
• What determine institutional change?
– Path dependence
– Complementary institutions
互补的
– Information and incentives

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 Outline
• Overview of the economy
• End of the miracle
• Reform strategies
• Why reform?
– Public ownership and central planning
• Timeline of major reforms
– Three stages (1978-present)

17
 End of China’s Economic Miracle?

• Post-pandemic, China faced unprecedented

economic challenges:
– Lower growth rate
– Higher unemployment rate
– Weak domestic consumption
– Depressed corporate profitability and low investment

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End of China’s Economic Miracle?

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 What Happened?
• Insufficient demand –cyclical
can not offer even lower interest rate--liqudity trap
– Balance sheet problems
– Exports and the property sector
government are reliable on land selling ths the local gov is lack of money after the falling of property bubble

• Lack of confidence –structural

means how the gov serve the economy
– Geopolitics like the private property protection
like the afterschool tutoring industry in China

– Regulatory actions

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 Deflation Risk
Inflation Rate (%)

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
-1

-2

Source: World Bank World Development Indicators

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 Property Sector
• Housing sales reached the peak at the end of 2020
and have since been on the way down
• Property developers, especially the private ones, face
major funding difficulties
• New policy thinking about the property sector
– Houses are for people to live in, not for speculation
– The heavily leveraged business model of property
development is unsustainable
• A drag on economic growth and household wealth
and a systemic financial risk
22
 Economic De-coupling
• US.-China trade war started in 2018
• Both governments emphasize national security
concerns
– China: reduce the dependance on foreign supply of key
block on neck tech

technologies
– US: reduce the dependance on supply chains in China
• From a full-blown trade war to tech war, financial
war

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 Economic De-coupling
• The so-called de-risking, not de-coupling, policy of
the US
• “Small yards, high fence”
– The Chips and Science Act, CFIUS and reverse CFIUS
– Tariffs on imports from China
– Supply chain: “China + 1”

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 Policy Mix
• The government is more worried about
national security and political stability and is
willing to incur some costs for these
• The national security concerns are global
phenomenon, but they impose new restrictions
on business activities

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 The Third Plenum
• The third plenum of the 20th Party Congress
held in July 2024 discussed the long-term
reforms.
– place reform in a more prominent position
– actively expand domestic demand
– give better play to the role of the market
mechanism
• But these pronouncements may not be enough
to boost people’s confidence.
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 Discussion
• Lawrence Summers:
– “People are going to look back at some of the
economic forecasts about China in 2020 in the
same way they looked back at economic forecasts
for Russia that were made in 1960 or for Japan that
were made in 1990”, interview with Bloomberg,
August 18, 2023 Do u agree? Japan’s example can be modified

• In what ways does China’s current economic

situation resemble the historical economic
situations of the Soviet Union in the 1960s and
Japan in the 1990s? 27
 Outline
• Overview of the economy
• End of the miracle
• Reform strategies
• Why reform?
– Public ownership and central planning
• Timeline of major reforms
– Three stages (1978-present)

28
Reform Strategy – Gradualist Approach

• “Cross the river by touching the stones” – Deng Xiaoping

• Leaders adopted a very pragmatic attitude.
• Proceeded by trial and error.
• Early reforms were bottom up rather than top down.
• Contrast with former Soviet Union and Eastern European
countries
• “摸着⽯头过河”——邓⼩平
– Shock therapy • 领导⼈采取了⾮常务实的态度。
• 通过反复试验取得进展。
• 早期改⾰是⾃下⽽上的，⽽不是⾃上⽽下的。
– Big bang from the farmer, thorugh policy trial (40% fail)
• 与前苏联和东欧国家形成对⽐
– 休克疗法
– ⼤爆炸

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Comparative Advantage and Development
Strategy

• Economic development must follow a country’s

comparative strategy
• Key to China’s success after reform is
it’s change of development strategy
from heavy industry priority to light
industry priority
• Lin, Cai and Li’s book
“The China Miracle”

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Big Push Strategy (1949-1978) –– Against
China’s Comparative Advantage

• Socialist heavy industry priority development

strategy a la the Soviet Union
– High investment rate (investment/GDP): > 30%
– Most in heavy industry (producer goods): > 80%
heavy industry: steel machine etc capital intensive
light industry: labor intensive

• Result: Rapid structural change (% of GDP)

1952 1978
Agriculture 51% 28%
Industry + construction 18%+2% 44%+4%
Service 29% 24%
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Comparing Pre-Reform China with Taiwan
and Hong Kong

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Revisit a Debate More Than 20 Years Ago
• Backward advantage or backward disadvantage?
– a debate between two prominent economists: Justin Yifu
Lin and Xiaokai Yang in early 2000s

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 Backward Advantage or Backward
Disadvantage?

• Backward advantage: a developing

country can take advantage of the
technology/industry gap with
developed country by adopting a new
technology at a relatively low cost. linyifu

主张中国⼤陆应继续实施⽐较优势发展战略，[利⽤较低成本引⼊先进技术，快速积累资本，再实
现产业升级。他也认为国有企业改⾰是继续保持经济⾼速发展的关键，改⾰国有企业才能够给⺠营
经济提供更公平的竞争环境。林毅夫⼀直以来都对中国⼤陆经济保持乐观，认为中国⼤陆能够在
2030年左右成为世界最⼤经济体。

34
 Backward Advantage or Backward
Disadvantage?
• Backward disadvantage: when
developing countries reach a higher
stage of development, institutional
changes are necessary to cope with the
rise. Otherwise, these countries will
fall into the middle income trap. yangxiaolei

• In order to overcome the "backward disadvantages",

the backward countries must complete the reform of
the republican constitutional system, and in order to
obtain the "backward advantage".
中国虽然能借引进先发国家先进技术，辅以国内廉价劳动⼒进⾏快速发展，靠模仿技术轻易取得的
发展会增强模仿制度的惰性，进⽽影响⻓期经济发展，所以后发国家最重要的是宪政改⾰。 35
 Outline
• Overview of the economy
• End of the miracle
• Reform strategies 1949 ⼟地改⾰，⼟地从地主那⾥分给了农⺠
collective ownership 集体所有制
• Why Reform?
– Public ownership and central planning
• Timeline of major reforms
– Three stages (1978-present)

36
 Marxist Economic Theory
• Labor theory of value
– Capitalists exploit workers through “surplus
value” workers are underpaid and cannot
earn the value they produce
• Alienation
– Work becomes unsuitable for free and creative
people. People themselves become objects—
robotlike machines that have lost touch with
human nature
• Scientific socialism
– The entire capitalist system must be abolished,
thought Marx, and replaced with a fully planned
economic system

37
 Why Reforms?
• China’s pre-reform system is a copy of soviet
model, which was built based on Marxist
theory
• Two fundamental problems of the socialist
economic system
- public ownership
- central planning
• These features are common in all centrally
planned economies such as Eastern Europe,
the Soviet Union, China, Vietnam, North
Korea, Cuba, etc. 38
 Public Ownership in China
• Public ownership: state ownership and
collective ownership
• In pre-reform China:
- The government owned all large factories,
transportation and communication enterprises.
- In the countryside, agricultural collectives
were organized everywhere which took over
ownership of the land and control of the farm
economy.
39
 Public Ownership in China
• State ownership
- Highest form of public ownership
- Nominally, ownership belongs to the “whole
people”
- The government exercises all the rights
o Incomes go to the state budget
o Government bureaucrats decide how to use property
o Government bureaucrats decide how to
transfer property

40
 Public Ownership in China
• Collective ownership
- Lower form of public ownership
- Nominally ownership belongs to a group of
people
- In reality, government control and intervention
• Most economists believe that public ownership
is inefficient, compared to private ownership

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 Problems with Public Ownership
• Lack of incentives
– Firms don’t have incentive to innovate
– Farmers don’t have incentive to work hard
• Political interference
– Non-economic objectives
– Soft budge constraint
• Corruption
• Soft budget constraint

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 Planned Economy vs. Market Economy

• Fundamental questions in any economy: what to

produce and how to produce
• In a market economy, production is coordinated by
the market: driven by the profit incentives, firms
make production decisions based on market
information (prices, demand, etc.) more efficient
• In a planned economy, decisions are made by central
planning authority (State Planning Commission in the
case of China). Firms’ production is based on the
commands and instructions from the government
⻢克思：no surplus no shortage thus fair to everyone

its hard to predict the economy, also no way to collect information

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 Advantages of Market Economy
it’s ok to be selfish
• The magic of “invisible hands:”
“… he intends only his own gain, and he
is in this, as in many other cases, led by
an invisible hand to promote an end
which was no part of his intention. Nor is
it always the worse for the society that it
was no part of it. By pursuing his own
interest he frequently promotes that of the
society more effectually than when he
really intends to promote it.”
- Adam Smith: The Wealth of
Nations (1776)
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 Disadvantages of Market Economy
• Disadvantages of market economy:
– Market failures: monopoly, externality, public goods,
incomplete information
– Coordination failure: demand and supply do not always
match, resulting in waste of resources
– Macroeconomic problems: fluctuations in aggregate
demand create business cycle, inflation, and unemployment.
– What about income inequality, social justice, etc.?
• Solution: mixed economy – market economy with
some government interventions.
45
 Planned Economy

• Production plan: “material balance”

- Input plan and output target for each firm
- A supply plan that transfer resources between
producers
- A schedule of usage coefficients linking inputs and
outputs

46
 Problems with the Planned Economy
• Difficulties with the planned economy: input-
out problem
- How to disaggregate the plan
- The problem of information (in contrast,
prices can reveal information in market
economy)
- A huge number of bureaucrats involved
- Feasible plan is possible, but not efficient
plan 47
 Discussion

• Why did China start the reform in 1978, not earlier or

later? mao died at 1976
• Compare North Korea and Vietnam. Why did
Vietnam start a successful reform while North Korea
didn’t?
1. The change of leadership

48
 Outline
• Overview of the economy
• End of the miracle
• Reform strategies
• Why reform?
– Public ownership and central planning
• Timeline of major reforms
– Three stages (1978-present)

49
 Reform Era: Three Stages
• 1979-1993: reforming the planning system
• 1993-2013: building the market system
• 2013-present: “new normal” growth

50
 The First Stage (1979-1993)
Phase I (1979-1984): The start of reform
• December of 1978: the 3rd Plenum of the 11th
Chinese Communist Party Congress
• Economic development as the Party’s “key task”
• Two key phrases: “reform” and “opening up”
• The framework: “planning as a principal part and
market as a supplementary part”
Reforms: agriculture, fiscal contracting, foreign
investment, special economic zones, profit incentives,
etc.

51
 Early Special Economic Zones
• 1979: Guangdong and Fujian provinces “one
step ahead”
• 1979: Joint venture laws (no limit on foreign
shares)
• 1980: four special economic zones (SEZs):
Shenzhen, Zhuhai, Shandou, and Xiamen
• FDI was allowed in SEZs 珠海和厦⻔有⼩型成功

52
 The First Stage (1979-1993)
Phase II (1984-1989): High wave of reform
• Agriculture success: grain production increased from
319 kg to 400 kg (per capita) between 1978 and 1984,
rural income (per capita) increased by more than 50%
• Boost of reformers’ confidence and popular support
• October 1984: major decisions on urban reform
• The framework: “planned commodity economy”
• Reforms: Market price liberalization, managerial
incentives in state-owned enterprises (SOEs), entry of
non-state firms, coastal open cities and development
zones, financial reform

53
Price Reform: Dual Track Price (1980s)
• Open free market while planned supply
unchanged at set planned price
• Adjust planned price up toward free price and
lower the planned supply quantity
• Meanwhile market supply is growing, so the
planned supply gets smaller as proportion of
total supply
• Final elimination of planned price when
planned supply becomes almost irrelevant
双轨制是⼀种经济体制，政府控制经济的关键部⻔，同时允许私营企业对其他部⻔进⾏有限的控制。
在中国，政府⼀直实⾏双轨定价。国家控制（计划）价格较低，市场价格较⾼。这样做是为了确保市场稳
54
定和逐步开放（⽽不是像东欧和俄罗斯那样采⽤突然转变为资本主义的“⼤爆炸”战略）。然⽽，为了激励
国有企业，政府允许在达到计划⽬标后以市场价格出售产品。
 Further Opening Up
• 1984: Shenzhen was proclaimed as a successful
experiment after Deng Xiaoping’s visit
• 1984: 14 coastal “open cities”
– They set up “development zones” to offer similar
terms as in special economic zones
• Coastal development strategy:
The Pearl River Delta in Guangdong, the Yangtze
River Delta around Shanghai, and a swath of coastal
Fujian near the Xiamen SEZ were opened to
investment
• 1988: Hainan Island, in its entirety, was designated a
SEZ 55
 The First Stage (1979-1993)
Phase III (1989-1993): Retreat and revival of reform
• Problems of inflation and corruption
• June 4, 1989: Tiananmen Square Event
• Central government retreat of reform
• Some local governments continued reform, especially
in coastal provinces
• January and February of 1992: Deng Xiaoping’s
famous “southern tour”

56
 The Second Stage (1993-2013)
Phase I (1993-2001): Building market institutions
• September 1992: “socialist market economy”
• November 1993: a blueprint for building a market
system
• January 1, 1994: a serial of major reforms
• 1997-1998: Asian financial crisis

57
 The Second Stage (1993-2013)
• Reforms:
- Market reunification
- Foreign exchange reform
- Tax and fiscal system reform
- Monetary and financial reform
- Social security reform
- Privatization of small SOEs

58
 Pudong and Shanghai
• 1992: Pudong Special Zone in Shanghai
– Most important among all special economics zones
– Shanghai did not have much change between 1980
and 1991 1980 上海远不及⼴东
– But Shanghai completely changed since 1992
• SEZ like preferential policies apply to many other
areas
• More development zones were established
• Competition among regions to attract foreign capital
59
 The Second Stage (1993-2013)
Phase II (2001-2012): integrating into the global
economy
• December 11, 2001: China entered the WTO
– 2002-2006: a five-year window period for transition
– Many previous predictions have not come true
• Accelerated growth between 2002 and 2005
• Privatization of SOEs

60
 The Second Stage (1993-2013)
Phase II (2001-2012): integrating to the global economy
• November 2002: 16th Congress of the Chinese
Community Party
– Capitalists/entrepreneurs can join the Party
– Leadership change peacefully, for the first time
• March 2004: Constitutional amendment on
private property rights
– “The lawful private property of citizens is not
to be violated”
• The Great Recession 2008-2009

61
 WTO Stimulus
• FDI picked up again since 2001
• WTO was an important factor
• WTO entry is more than a trade agreement; it has
profound impacts on all aspects of the economy
• China became the largest exporter in the world since
2009

62
 Third Stage (2013-Present)
• President Xi talked about “New Normal” (新常态)
for the first time in 2014
• But economists believe Chinese economy entered the
“new normal” stage in around 2013
• Massive anti-corruption campaign
• Economy slowed down

63
 Third Stage (2013-Present)
• Xi Jinping administration
– Supply-side structural reform
– Hukou restriction significantly relaxed
– One-child policy abolished
– Poverty reduction
– Trade war
– Common prosperity (共同富裕)
– Dual circulation (双循环)
– Regulatory crackdown not mean by productivity, cause cannot be measured

– New quality production forces (新质生产力)

• Broad agenda centered around the “China dream”
64
 New Normal Growth
• Speed change: from “high” growth to “medium-high”
growth (e.g., from double digit to around 5-7%)
• Structural optimization:
• consumption vs. investment
• high-tech manufacturing vs. traditional
manufacturing
• service sector vs. manufacturing sector
• Engine shifting:
• from input driven growth to innovation driven
growth
65
 Dual Circulation
• Domestic (internal) circulation and international
(external) circulation.
• Economic policy of dual circulation was put forward
in 2020.
• Key points:
– expand domestic demand
– reduce dependence on foreign markets
– but remain open to the outside world

66
 New Quality Productive Forces
• President Xi Jinping called on the nation to mobilize
“new quality productive forces” to drive economic
growth.
– Scientific and technological innovation is the core
– These forces can include new technologies, processes, or
methods that impact how goods and services are produced
– Related to “high quality development”

67
 Advanced Reading
• Fang, Hanming (2023) “Where Is China’s Economy
Headed?” Book chapter in Building a More Resilient
US Economy, Aspen Economic Strategy Group.

68