The Third Plenary Session of the 20th Central Committee of the Communist Party of China was held in Beijing from July 15 to 18, 2024. The session highlighted the importance of fully implementing Xi Jinping’s thought on ‘Socialism with Chinese Characteristics’ to deepen reform and modernize the state’s governance system.
In this context, this paper seeks to explore the theoretical evolution of “socialism with Chinese characteristics,” delving into its role in China’s rise as the world’s second-largest economy, while also assessing China’s current economic and social indicators and highlighting the main challenges Beijing faces today.
I. Understanding ‘Socialism with Chinese Characteristics’
Since the establishment of the People’s Republic of China in 1949, the Chinese economy has operated under the firm control of the Communist Party, which advocated for a centrally planned system—where the state dictates production, quantities, and prices—as the optimal approach for Chinese society during that period.
The Mao Zedong era, which lasted until his death in 1976, was marked by a strict communist economy that prohibited private ownership. However, this began to shift under Deng Xiaoping’s leadership from 1978 to 1989, as he gradually liberalized prices and introduced the concept of “socialism with Chinese characteristics.” Deng sought to blend Marxist-Leninist principles with China’s contemporary social and economic realities, aiming to redefine the relationship between socialism and the planned economy, as well as capitalism and the market. During this period, China maintained socialist values and state-owned enterprises while drawing on Western market management practices. In 1977, Deng Xiaoping unveiled his vision to modernize the industrial, agricultural, military, and science and technology sectors, establishing these areas as key pillars of China’s reform and opening-up policy.
In pursuit of this objective, the Chinese Communist Party implemented a strategy to mobilize and enhance societal productive forces, creating a network of state-owned enterprises to foster economic development, advance reform and opening-up, and secure the Party’s authority over both state and society. By 1980, special economic zones were established in Shenzhen, Zhuhai, Shantou, and Xiamen, receiving preferential incentives to bolster their growth.
In 1989, Jiang Zemin assumed power following the Tiananmen Square protests, which had jeopardized the continuity of economic reform by deepening internal rifts, particularly between moderates who supported increased trade openness and foreign investment and conservatives who feared that such reforms could undermine the Chinese government’s control over the economy. Zemin, however, managed to steer China towards becoming a global powerhouse by rebuilding trust with foreign investors and stimulating foreign trade. He also introduced initiatives to manage population growth and supported policies to advance science and technology development.
Following this, Hu Jintao led the Chinese Communist Party from 2002 to 2012, reinstating state control over certain economic sectors. His tenure was marked by sustained economic growth that bolstered China’s status as a significant global power. Hu emphasized soft power in foreign relations, which enhanced China’s influence across Africa, Latin America, and beyond.
Since 2012, Xi Jinping has assumed leadership, directing his attention to analyzing the causes behind the Soviet Union’s failure and how China can avoid similar pitfalls. He believed that the Soviet Union’s downfall stemmed from its rigid adherence to an inflexible doctrine that it failed to evolve. As such, during his tenure, Xi Jinping has built on the principles of “socialism with Chinese characteristics” for the modern era, following the path set by his predecessors in the Communist Party. His approach emphasizes deepening comprehensive reforms, particularly in the economic and administrative sectors, while also prioritizing scientific advancements for technological innovation and promoting environmental sustainability.
In 2013, Xi Jinping introduced his vision for a China-led global order through the Belt and Road Initiative. This ambitious project encompasses the construction of infrastructure such as roads, seaports, airports, telecommunications networks, hospitals, and energy and mineral extraction facilities. Funding for these ventures is sourced from a mix of Chinese commercial bank loans and investments from Chinese companies.
From the above, it is clear that China has developed its own distinct socialist model, adhering to socialist theory while tailoring it to its specific conditions and interests. The Chinese economy is strategically guided by five-year plans that establish annual growth targets and identify priority sectors. The Chinese Communist Party maintains control over state-owned enterprises, which dominate key industries such as mineral extraction, energy, banking, and even hospitality. The Party appoints the directors and supervisors of these enterprises and plays a central role in shaping their decision-making processes.
In return, these enterprises enjoy several advantages, including government subsidies, preferential access to capital from state-owned banks, and a steady supply of raw materials from mining companies. State-owned enterprises also benefit from political backing, tax incentives, and a favorable regulatory environment. Additionally, the Chinese Communist Party enforces restrictions on foreign investment in certain sectors or mandates the involvement of a Chinese partner. Chinese society is further distinguished by the absence of independent labour unions, as all unions are unified under the All-China Federation of Trade Unions, which is affiliated with the Communist Party.
Therefore, China’s status as the world’s largest trading country doesn’t signify a departure from socialism. Rather, it highlights how China has leveraged certain free-market mechanisms to generate national wealth, enhance its industries’ global competitiveness, and attract outside capital and expertise—all under state-determined terms.
Despite its economic advancements, there remain significant and fundamental differences between China’s governance approach and Western capitalist systems. The Chinese state continues to dominate the economic landscape through its ownership of major companies, which channel their revenues and profits into the state treasury, as well as through its control over the means of production and natural resources.
II. Economic and Social Dynamics under ‘Socialism with Chinese Characteristics’
Over the past thirty years, China has achieved extraordinary economic growth, elevating its gross domestic product (GDP) from low-income levels to upper-middle-income status and establishing itself as the world’s second-largest economy. Dubbed the “world’s factory,” China benefits from its extensive and cost-effective labour market and its ability to attract foreign direct investment, creating a synergy of human capital and technological know-how. This has enabled China’s economy to surpass many others in terms of growth. However, the journey is not without its hurdles, as amidst this remarkable period of economic and social evolution, significant obstacles and challenges persist. In this section, we review key indicators of China’s economic development since the 1978 reform and opening-up.
1. Macroeconomic Indicators
GDP Growth Rate: Since initiating its economic reforms and opening up in 1978, China has enjoyed an average annual GDP growth exceeding 9%. However, the Covid-19 pandemic led to a dramatic slowdown, with growth plummeting to just 2.2% in 2020. In response, Beijing is shifting its strategy to boost domestic consumption and lessen export dependency, with the goal of driving domestic demand and supporting economic expansion.
Figure 1: China’s GDP growth rate (%), 1979–2023
Source: World Bank, GDP Growth
Although labour income, which makes up the largest share of household disposable income, rose to approximately 56% in 2023 from around 48% in 2007, household consumer spending remains relatively low at about 38% of GDP. This contrasts sharply with the 60%–70% range seen in most developed countries. Conversely, China leads globally in private savings, with a rate of roughly 46% of GDP.
Inflation Rate: The period from 1985 to 1987 saw the onset of inflationary pressures in China, coinciding with President Deng Xiaoping’s move to shift pricing from government control to market forces. This shift led to inflation rates soaring above 18% in 1988–1989, coupled with an average money supply growth of 23.2%.
In response, the government decided to delay price liberalisation until the market was better prepared, aiming to ease inflationary concerns and stabilize the macroeconomy. By 1992, China had revisited price liberalization, freeing up the prices of 648 types of production inputs, transportation, and communication services, along with 50 agricultural products. It also deregulated food grain prices and those of light industrial goods, though medicines remained controlled. By 1993, Beijing had liberalized the prices of 95% of retail items, 90% of agricultural products, and 85% of production inputs.
Figure 2: China’s Inflation rate (%), 1987–2023
Source: World Bank, inflation, consumer prices (annual %)
As illustrated in Figure 2, China’s inflation rate steadily decreased from 2000, reaching just 0.2% by 2023. This persistent slowdown in inflation throughout early 2023 led policymakers to lower interest rates in an effort to stimulate economic growth and generate new employment opportunities.
Exchange Rate: Prior to 1994, China maintained a fixed exchange rate regime followed by a dual exchange rate system. Under this system, the government established an official exchange rate of CNY 1.49 to the US dollar while concurrently permitting a separate exchange rate of CNY 2.28 for transactions involving exporters and investors. In early 1994, the People’s Bank of China (PBoC) transitioned to a market-based exchange rate system. The unified exchange rate was set at CNY 8.7 per dollar. During the Asian financial crisis in 1997, the PBoC intervened by tightening the exchange rate’s fluctuation range to stabilize it at CNY 8.28 per dollar, as depicted in figure 3.
Figure 3: Chinese yuan-US dollar exchange rate, 1979–2023
Source: World Bank, Official Exchange Rate (LCU per US$, period average)
In the wake of the Asian financial crisis, China upgraded its managed exchange rate system, completing the overhaul in 2005. The PBoC then established a daily exchange rate, allowing the yuan to fluctuate by 2% up or down based on daily economic fluctuations.
2. Social Indicators
GDP per Capita: In recent years, China has evolved from an agriculture-dependent economy into the world’s second-largest economy, trailing only behind the United States. Despite this impressive growth, China remains in the middle-income bracket, with GDP per capita reaching just over $12,000 by 2020, compared to $64,000 in the United States, as depicted in figure 4.
Figure 4: China’s GDP per capita (US dollars), 1979–2023
Source: World Bank, GDP per capita
Poverty and Inequality: Since the onset of its economic reforms in the late 1970s, China has lifted 800 million people out of poverty, reducing the poverty rate from 88.3% in 1981 to just 0.3% in 2018. Rural poverty also saw a significant decline, with the number of impoverished individuals dropping from 98.99 million in late 2012 to 30.46 million by the end of 2017. Additionally, 2016 marked a milestone as 28 counties were removed from the list of poor counties for the first time.
Despite a decline in China’s Gini coefficient—a measure of income inequality ranging from 0 to 100, where lower values reflect more equality—since 2010, the figure remains relatively high at 38.6, according to the World Bank. This is significantly higher than 40 years ago, highlighting that inequality remains a persistent challenge in contemporary China.
3. Global Economic Interactions
Foreign Direct Investment: In China, most investment remains focused on the public sector due to stringent restrictions on foreign direct investment compared to the European Union and the United States. Beijing also presents less favorable terms for foreign direct investment. Despite efforts to open up to international markets, foreign companies encounter complex barriers, including market access difficulties and inadequate intellectual property protections. Figure 5 illustrates the trends in foreign direct investment in the country.
Figure 5: Foreign direct investment (% of GDP), 1979–2023
Source: World Bank, foreign direct investment, net inflows (% of GDP)
Notably, in 2023, foreign direct investment in China fell by 8% year-on-year to $163.253 billion, while the United States attracted approximately $310.947 billion. This downturn reflects the impact of persistent geopolitical tensions and a slow global economic rebound. To address the decline, the Chinese government has introduced new initiatives to boost foreign investment, such as broadening market access and easing some regulatory constraints.
Foreign Trade: China holds a leading position in global foreign trade, being the world’s largest in trade volume, top exporter, and second-largest importer. This prominence stems from the Chinese leadership’s commitment to expanding global openness, advancing the Belt and Road Initiative with high-quality collaborations, and strengthening bilateral, multilateral, and regional economic partnerships. Figure 6 provides an overview of the trade openness ratio, reflecting the relationship between foreign trade and GDP. Figure 6 offers an overview of the evolution of the trade openness ratio in China, which measures the proportion of foreign trade relative to GDP.
Figure 6: Trade Openness in China (%), 1979–2023
Source: World Bank, Trade Openness
In 2023, China’s trade with its key partners experienced a notable downturn, with annual exports declining for the first time in seven years. This drop was driven by reduced demand for Chinese goods amid slowing global growth. In July 2023, exports hit a five-month low, plunging by 14.5%, a steeper decline than the anticipated 12.5%, highlighting the sharp deterioration in Chinese exports.
Imports also fell by 12.4% year-on-year, totalling $201.16 billion in July 2023, down from $214.70 billion in June 2023. This marks the steepest decline since January 2023, driven by weakening domestic demand.
The European Union is China’s leading trading partner, and conversely, China is the EU’s second-largest. Bilateral trade between the two reached approximately $600 billion. Additionally, ASEAN countries were crucial import partners for China, with imports totalling around CNY 2.55 billion in 2021.
III. Existing Challenges
Despite being the world’s second-largest economy, China continues to grapple with various internal and external challenges that hinder its ability to achieve high and sustainable growth, as detailed below.
1. China-United States Trade Tensions: China’s economic model has been a persistent source of tension with the United States. In response, Washington raised tariffs on Chinese exports from 3.1% in early 2018 to 19.3% by 2020, affecting 66.4% of total Chinese exports. Additionally, unprecedented export controls were imposed to restrict China’s access to advanced technology, and tariffs on Chinese-made electric vehicles were doubled, further dampening China’s economic growth and trade prospects.
If Donald Trump wins the upcoming US elections, trade tensions with China are expected to intensify. His economic agenda includes a 60% tariff on all US imports from China, aiming to phase out Chinese imports of essential goods over the next four years.
2. Downturn in China’s Tech Sector Market Valuation: Leading Chinese tech giants, including Alibaba and Tencent, have experienced a dramatic drop in market value, plummeting up to 75% from their peaks three years ago. This sharp decline is attributed to a comprehensive regulatory campaign launched by the Chinese government at the end of 2020, which lasted 18 months. The campaign involved the introduction of rigorous anti-monopoly and data regulation laws and included fines for companies involved in monopolistic behaviors.
Moreover, between 2021 and 2022, capital investment in China’s internet sector saw a dramatic 80% decline, falling from $49 billion to a mere $10 billion. At the same time, the market value of Chinese internet firms diminished from $2.5 trillion in 2020 to $1.4 trillion in 2022.
3. Sluggish Consumption Driven by Covid-19: The Chinese economy has faced significant setbacks due to the stringent “zero-Covid” policy, involving lockdowns, quarantines, rigorous testing, and tight travel and movement restrictions. As of May 2022, China mandated that travelers undergo polymerase chain reaction (PCR) tests within 24-48 hours before flight, along with antibody testing. Additionally, travelers must receive a vaccine within 14 days of arrival, present proof of negative test results and vaccination records, and complete a mandatory 14-day quarantine. Moreover, businesses, except for those dealing in essential goods and food, have been forced to close temporarily until local authorities verify the absence of new infections.
4. Employment Slowdown: The unemployment rate for young adults aged 20 to 24 with higher education has surged past 20%, roughly four times the overall urban unemployment rate of 5.2% for the same period, according to the National Bureau of Statistics of China. This high rate reflects a disconnect between the fields of study pursued by educated youth and the demands of the job market.
5. Real Estate Crisis: Real estate assets are a vital economic pillar of the Chinese economy and are regarded as a secure investment by the middle class. This perception fueled a rapid surge in property prices driven by high demand and encouraged developers to expand with the help of bank loans. However, by 2020, unprecedented levels of debt and rising defaults have prompted government intervention to temper the sector’s growth. The resulting reduction in loans for developers made it challenging for weaker players to finish their projects, causing a crisis of confidence among customers and a subsequent drop in property prices.
6. Ageing Population Challenge: In 2023, China’s population decreased for the second consecutive year to 1.409 billion, a drop of 2.08 million from the previous year, according to the National Bureau of Statistics of China. The decline in the working-age demographic is expected to accelerate in the future, with a notable increase in the elderly population this year, adding nearly 17 million individuals aged 60 or older. This age group already represents over 20% of the population, a proportion projected to rise to nearly one-third by 2035.
China’s ageing demographic may jeopardize Beijing’s major policy objectives for the next decade, including stimulating domestic consumption and controlling rising debt levels, presenting a significant challenge to long-term economic growth prospects.
IV. Concluding Remarks
- Since 1948, the Chinese economy has undergone two primary phases. The first phase, under Mao Zedong, was characterized by socialist policies and Marxist principles. The second phase, which began in 1978 and continues to the present day, focuses on economic reform and increased openness to global trade.
- China’s approach, rooted in the principles of ‘socialism with Chinese characteristics,’ has proven successful in fulfilling its objectives, propelling the country to become the world’s second-largest economy and a leading industrial and commercial powerhouse. Moreover, China’s contribution to global economic growth now stands at an impressive 30%.
- Since 1979, China has been ranked among the world’s fastest-growing economies, boasting an average annual real GDP growth rate of 9% up until 2023—apace the World Bank has hailed as “the fastest sustained expansion in history.”
- China’s economic reforms have centered on boosting agricultural and industrial output, prioritizing the technology and artificial intelligence sectors, advancing rural and urban infrastructure, and building a modern corporate governance framework—creating strong foundations for sustainable economic growth.
- Despite the achievements of China’s economic model, it has faced its share of challenges over the decades, including mounting corporate debt, ongoing trade tensions with the United States, sluggish domestic consumption, and escalating issues in the technology sector.
- In recent years, China has sought to expand the role of the private sector, yet state-owned enterprises continue to dominate key sectors of the national economy, particularly in strategic industries like defense, energy, chemicals, telecommunications, aviation, and coal. Meanwhile, the private and joint sectors take the lead in other industries.
- State-owned enterprises enjoy preferential treatment, from expedited approvals to low-cost bank loans, providing them with an unequal competitive advantage in the market.
