The New Shape of China’s Economy

BEIJING – China’s leadership transition attracted global attention in 2012, and deservedly so, given the country’s global significance. But, more important, strategic transformations now underway seem certain to influence its future pattern of growth.

For three decades, the dividends from Deng Xiaoping’s initial decision to open China’s economy to market forces, and to the world, have fueled rapid growth. Until recently, the key was China’s vast supply of low-cost labor, which provided the foundation for the country’s export-oriented model.

Concentrated in coastal China, this model produced an uneven distribution of output and established a unique pattern of high savings and low consumption. Indeed, China’s savings rate of rose steadily following the onset of market reforms, from 38% of GDP in 1978 to 51% in 2007.

Economic growth is determined not only by factors of production such as labor, capital, and technology, but also by institutional arrangements. Through 30 years of reform, China has successfully completed the institutional transition from a highly centralized planned economy to a dynamic market-based system. Beginning from rural tiered management based on the household contract system, Chinese reformers supplemented public ownership with various other forms, with the market increasingly playing its fundamental role in allocating resources under the macro control of the state.