China’s Evolving Economic System

It is generally agreed that China’s impressive economic achievements during the last three decades are largely the result of the radical reform of its economic system. While private ownership of firms hardly existed when these reforms started, private firms today account for about 60% of total production.

Ownership, however, is only one dimension of an economic system. China’s economic system has changed just as drastically in other ways as well. Decision-making regarding consumption and production has largely been decentralized to individual households and firms, respectively; economic incentives, markets, competition, and internationalization have to a considerable extent replaced command, administrative processes, monopoly, and autarky. Generally speaking, China’s reform period has been a stark contemporary illustration of the historical lesson that unleashing individual initiative tends to boost economic development.

How, then, should today’s Chinese economy be characterized? Some observers describe China’s current economic system as “state capitalism”; others (including China’s rulers) call it “market socialism.” Both labels mislead. One reason is the domination of private firms on the production side. Another is the fact that “socialism” usually does not rely upon strong economic incentives and competition, which are the dominant economic factors in today’s China.

In fact, China is a type of mixed economy , with a number of specific features, some of which favor GDP growth, while others have not dragged down the economy to any considerable extent so far. But this situation is likely to change. So further reforms will be decisive in determining the Chinese economy’s future performance.