From Rags to Riches: The Story of China’s “Miracle” Economic Growth
In the 1960s, constrained by scarce resources, rationed provisions, and the omnipresent scrutiny of the CCP, the people of China led lives marked by simplicity and routine. However, in the coming years, China embarked on an extraordinary economic transformation, propelling itself from a state of impoverishment to unprecedented wealth and prosperity. Fast forward several years, the country now holds its status as the 2nd biggest economy, characterized by the World Bank as “one of the fastest sustained expansions by a major economy in history.” Renowned for its low-cost manufacturing capabilities, China has positioned itself as a prominent player in the global market. Many overseas companies have recognized its potential, choosing to establish their supply chains within the country, furthering China's influential role within international markets. In this editorial piece, QBR Editor, Chanelle Cai, looks to explore China’s formidable economic evolution by diving into the country’s history of hardships and triumphs. By tracing its journey through time, a clearer understanding is obtained on the vital role that China holds both presently and in the foreseeable future, as it continues to shape and influence the global economic landscape.
The Past
Chairman Mao Zedong
In the years leading up to its economical transition, China held its reputation as one of the world's poorest nations. Under the leadership of Chairman Mao Zedong, the head of the Chinese Communist Party (CCP) who assumed power in 1949, the country operated under a centrally-controlled economy. Led by him, the country’s economic output was largely controlled by the state—they determined production goals, controlled prices, and allocated resources throughout most of the economy. These economic policies contributed greatly to the creation of an inefficient and unproductive economy, as indicated by China’s real per capita GDP, which was only one-fortieth of the U.S.’ level.
The Leap Forward Years
At the time, the CCP government was also certain that economic growth could be achieved through an acceleration of its industrialization process. Consequently, the years between 1958 and 1962 witnessed the beginning of the Great Leap Forward, driven by the CCP’s ambition to transform China from an agrarian-based economy into a communist society—one that would outproduce the industrial accomplishments of Great Britain, the founder of the Industrial Revolution. As a result, the CCP transitioned a substantial portion of its agricultural workforce into the industrial sector while prioritizing investments in heavy industries like steel and concrete. However, the growth seen during the years of the Great Leap Forward, primarily driven by capital accumulation, ultimately proved to be unsustainable and resulted in dire welfare consequences. Not only did it trigger a severe economic downturn, it also greatly damaged China’s agricultural production, causing the Great Leap Famine that killed more than 30 million people.
The Cultural Revolution
Following the disastrous failure of the Great Leap Forward, Chairman Mao was blamed for the events and subsequently initiated the Cultural Revolution that lasted from 1966 to 1976. This was a sociopolitical movement aimed at reasserting Mao’s control and purging the traditional ways of Chinese life. During this period, the Red Guards, students answering Mao's call for communist revolution, perpetrated mass killings against perceived rebels, closed schools, and destroyed historical sites and cultural relics. The resulting widespread political chaos, along with the loss of millions of lives, inflicted significant disruption on China's economy, limiting economic output and further deepening the country's prevailing economic crisis.
“Gaige Kaifang”
After the death of Chairman Mao in 1976, China was left grappling with the scars of his rule. It wasn't until 1978 that the Chinese government recognized the necessity of economic change for the nation. Under the leadership of Deng Xiaoping, they evaluated their strategy, seeking to stimulate economic growth and improve living standards. That year, they began their new strategic policy of Gaige Kaifang, meaning “reform and opening up.” This marked the beginning of China's remarkable journey towards economic prosperity, propelled by a strategy involving large-scale capital investments, decentralization of the economy, and rapid growth in productivity acting as the driving force.
Aggregate productivity is the key
Although China’s high-level investments, facilitated by their substantial domestic savings, played a significant role, the remarkable gains in efficiency and productivity are arguably the primary drivers of its economic growth. Between the years 1978-2008, the contribution of human capital accounted for 38.1% of China’s economic growth. This was mainly due to two reasons: an increasingly larger labor force and heightened labor productivity. High fertility rates in the 1960s-1970s meant that China’s working-age population surged from 62% in the early 1980s, to a growth of 75% in 2010 (Figure I). Consequently, this positive change in demographic raised per capita GDP since a majority of the nation’s population were part of the labor force.
Figure 1: Source Chinese Statistical Yearbook (various years)
In addition to experiencing a growth in its workforce, China witnessed a dramatic surge in labor productivity. As part of the Gaige Kaifang plan, China’s government targeted its agricultural sector, which faced the greatest repercussions from the Leap Forward years. They implemented two changes: first, raising prices for agricultural goods and second, creating ownership incentives for farmers, allowing them to sell a portion of their grains at market prices. The increase in food alleviated China’s food crisis and started a structural transformation of the labor force. Specifically, the government reallocated a large portion of agricultural workers to the more productive manufacturing and service sectors, causing agriculture’s share of total employment to decline from 69% in 1978 to 26% in 2007. As a result, total factor productivity grew 4.01% on average per year between those years (Figure II). This enabled China’s agricultural output to increase by 47% in this period. From these transformations, it is evident that a significant proportion of China's economic growth is linked to the advancement in aggregate total factor productivity. Without this growth, the economic progress achieved would not be possible.
Figure II
Moreover, China’s economic shift to free market principles, as part of the Gaige Kaifang plan, encouraged the rise of the non-state sector (i.e., private firms) which greatly benefited the economy. Along with boosting foreign direct investment (FDI) inflows, as open cities and development zones offered appealing tax and trade incentives, the removal of trade barriers brought about competitive forces and the growth of China’s export market. With the increase in FDI, also came an introduction to new technology that enhanced efficiency in sectors such as manufacturing and services. Guided by the Gaige Kaifang plan from 1978-2018, China’s economy rose from the ashes, achieving an annual real GDP growth of 9.5%. Thus, enabling the country to dramatically double the size of its economy every eight years—growing to an economy 40% the size of America’s by 2010.
The Present
A Miracle
In just 40 years, not only did China’s GDP grow to staggering levels, but more than 800 million people were lifted out of poverty as quality of life and access to health and education drastically improved. Acknowledged by renowned investor Howard Marks during the Forbes 2022 Wealth Summit as the “Chinese miracle,” China has emerged as an economic powerhouse. Operating under a socialist-market economy, the country has established its place on the global landscape by leveraging the strengths of its manufacturing, services, and agriculture sectors. Nowadays, the country is most known as the “world’s factory,” its global manufacturing output reaching 28.7% and placing 1st out of 10 other countries, as reported by Statista (Figure III). With a population of ~1.41 billion, China offers an abundance of human capital, allowing companies to benefit from reduced input costs. Further, the country’s vast reserves of raw resources and low environmental regulations make it a more appealing choice for manufacturing compared to countries like the U.S. and Canada.
Figure III
Additionally, China has achieved significant strides in technological advancements with super-apps like WeChat. Serving as the predominant communication platform, a universal payment mechanism across businesses of all sizes, and a gateway to companies' membership accounts and menus via quick QR code scans, WeChat has become an indispensable part of daily life. To highlight the absolute dominance of mobile payment usage in China, in 2018, WeChat accomplished 1.2 billion transactions in a day, whereas Apple Pay only did one billion a month. China’s innovative advancement, coupled with its quick adoption by citizens, allowed the country’s total gross expenditure via mobile app (roughly $54 trillion) to reach a level 551 times greater than the total expenditure in the U.S ($98 billion).
Repercussions of COVID-19
In the aftermath of the pandemic, China's economy suffered a substantial decline due to the government's zero-COVID policy, which involved a series of strict lockdowns and rigid measures aimed at eliminating the virus. The impact of the restrictive measures were clear across China's wholesale, retail, and tourism sectors, causing a detrimental drop in consumer spending. Additionally, the country's manufacturing sector faced a setback due to a slowdown in export demand, furthering the challenges arising from a real estate crisis and weak customer demand.
Plans of economic revival
Since lifting pandemic restrictions, China’s economy has been struggling with the challenge of rebounding and recovering from the last three years of decline. In an effort to stimulate the economy, China plans to implement a 12-year economic plan with consumption as its primary driver, rather than using effective investments. This policy highlights household spending decisions over the state directing and controlling companies. However, relying on consumption-led growth is not a simple fix for the economy, as many of China’s existing policies and immediate economic priorities clash with the long-term plan. Specifically, the CCP’s decision to strengthen its all-round leadership of private enterprises, focusing its attention on state-controlled sectors of the economy. More recently, China’s central bank cut its main interest rate to encourage consumers to pull out cash and reinvest it into the economy through spending. The government is also considering whether or not to use the country’s power as a major exporter for economic recovery, especially as its currency, the renminbi, has depreciated 7% against the US dollar, making China’s goods much cheaper to buyers. While China’s GDP grew 4.5% YoY during Q1 of 2023, there are still vast amounts of room for economic growth as the country deals with the lasting remains of the pandemic. Nonetheless, as China made its transition from the past to the present, it is clear that the country has undergone an unparalleled transformation, encompassing both its economic and societal dimensions.
The Future
The possibilities are endless
Although concerns about a potential economic downturn in China have sparked market anxieties surrounding Chinese companies, investors anticipate that the country's impressive track record of GDP growth will foster resilience and enable its ability to bounce back in the face of a possible recession. In May 2023, China also revealed their Jing-Jin-Ji industrial cluster plan, aimed at fostering growth for its developed industrial sector ecosystem in the Beijing-Tianjin-Hebei region. Achievements on this plan will improve economic growth and China’s overall global competitiveness, illustrating a solid driver in its long-term economic recovery. Despite the adversities that both Chinese citizens and the nation as a whole have faced throughout history, China has undeniably made exceptional progress in its economic standing. As it continues its commitment to improving the well-being of its people, the country's resilience and capability for innovation will remain a driver in its economic growth and global economic position. These key factors, in addition to China’s trajectory from rags to riches, have sparked investor and analyst assumptions that its gross GDP will soon surpass that of the United States, cementing its position as a powerful force in the world economy. In an ever-changing landscape where choices and decisions can alter the course of the world in an instant, the pressing question arises: How rapidly will China's economy outpace the growth rate of the U.S.? And in this era of uncertainty, will it reach a point where prediction converges with reality?