Socialist Market Economy and Communism in China Research Paper

September 21, 2021 by Essay Writer

A socialist economy is defined as an economy whose main objective is to create equality and ensure that the means of production in the market is owned by the working class of the state. It is an economy whose policies are believed to be equitable, socially serviceable, and often aims at attaining the potential of human beings.

In comparison to capitalism where the capitalist solely owns the means of production, socialist production is guarded and controlled by the state and the working population.1 It is believed to be a bridge between capitalism and communism. In this model, the allocation of resources is largely determined by the market forces. Therefore, it retains the main features of a capitalist economy.

The main policy of socialist economy is that production is limited by individual’s capability while supply is depicted by the needs of the people. Some states like China adopted the socialist market economy and way of governance such as wealth distribution to the poor and acceptable minimum wages.

Issues related to the economy were centrally planned. This economy works through application of the policy of production quotas whereby the clearing of goods is done by a centralized authority. The prices of all essential goods and services in this economy are controlled by the state hence there are no cases of price inflations for the goods regardless of the changes in production factors (Marcos and Eswar, 2010).

This paper focuses on the socialist market economy in China which was first suggested by Deng Xiaoping during his leadership. It was successfully introduced in China after several reforms took place. This economy has been a significant supplement to the centrally planned economy of China, leading to high growth rate of China’s economy. The major components of this economy are both the privately owned and the central owned businesses.

Historical background

Since 1930, the concern over market socialism was embraced in China, whereby the economy was to be comprised of assets owned by the community. However, it was an imitation of supply and demand price adjustment. The plan to adopt the socialist market economy began to take fast pace in 1978. This was introduced by Deng Xiaoping. He targeted introducing a socialist market economy which was purely Chinese.

It was successfully launched in China in 1970. Initially, China depended on agriculture and this was the first sector to be reformed. Private businesses and foreign investments were also encouraged. These changes led to enormous improvement of the Chinese economy, characterized by a privatized state sector, liberated trade and pricing, and an overall wellbeing of the state up to 1990.

The Japanese economy started to deteriorate at the time when that of China was just picking up due to bubble of prices of assets in 1980. The economy had been growing for the previous 20 years. As the Japanese economy stagnated, that of China was growing with double digits on an annual basis. For instance, while the growth rate for Japan was at 1.1% while that of China was ranging at 10.7% in the last quarter of the year 2009. China has been an example to many countries in relation to economic growth.

Growth of the Chinese economy

When Deng came to power in China, the state was still under communism and relatively poor in terms of resource allocation. During the time of Deng’s leadership, reforms in the economy were introduced in China. The market economy of Chinese began growing since 1978 when it adopted radical reforms based on socialist mode of economy.

Since the introduction of the reforms, China’s Gross Domestic Product increased as the authorities adopted an ideal view of many issues in the state, hence introducing capitalist ideas. The government prioritized issues like the social and political stability, the welfare of consumers and the public as a whole. The foreign trade was another area of target which was believed to contribute a vast deal in the growth of the economy.

As the introduced reforms were adopted, the economy of China grew at an exceptionally high rate such that it even surprised the architects behind the reforms. In 1980, the Chinese GDP was 188 billion dollars, which was below that of Japan by 20%. Due to the rapid growth, by the end of 2009, it was nearly equal to that of Japan with a very slight difference. The economy grew at a rapid pace of approximately 9.5%, and at the same time, the inflation increased to 20%.

The rapid growth of the Chinese market economy led to the fall of the poverty level in China by 80%. The China’s economy was a surprise to many because of the fact that it matched with those of advanced states in a remarkably short time and also the fact that they were using the socialist market economy model which was unique and not matching the ones used by advanced states (Wang, 2004).

China recorded an average economic growth of 10% per year in the period between the year 1990 and 2004, which was the highest ever know growth rate in the world. In 2010, China’s total trade was over 2.97 trillion dollars making it the second largest trading nation following United States.

The country experienced many setbacks in the process of its growth. For instance, changing the government sector and making the banking system modern was still a serious problem. Most of the businesses owned by the states were not efficient, and they registered loss most of the times.

Due to these setbacks, in 1997 during the national communist party congress the government publicized its intention to sell all the state owned businesses. With these challenges the government still managed to find ways and improved the economy making it be the world’s second largest. Predictions are that if economy’s growth continues like that by 2030, China will have the largest economy in the world.2

Government involvement in China

Before 1978, the government was entirely responsible in planning and managing the state’s economy. It controlled everything, but when the economic reforms were introduced in 1978, government roles were distributed to all stakeholders. Though government involvement was reduced, according past records, the success of the Chinese economy was mainly facilitated by its government involvement in entrepreneurship.3

The leaders had set clear goals on China’s economy and all the plans were executed as planned without failure. They were capable and highly committed to developing China and did not entertain any nonsense in their plans. They ruled by example and had many other traits which leaders in developing countries do not exhibit.

The Chinese leaders had the needs of their people as the first priority when introducing the economic reforms in the state. The government put many policies in place which helped in raising the economy of China in a period of thirty years to a world superpower.

In the period between 1978 and 1993, the government put various policies in place. Firstly, governance was changed from centralized to decentralized system. This policy empowered the local government by ensuring that they benefited more by paying low taxes and getting higher revenue shares.

The local government had more authority over the local economy and it ensured equal distribution of government resources. Secondly the government encouraged and supported the expansion of non state businesses rather than making the state owned businesses private. These businesses became the vehicles to the growth of China’s economy, raising their contribution to the national industrial output from 9% in 1978 to 36% in 1993.4

The dual-track approach was another government key policy the government of China used to raise the market economy. This policy was the opposite of the single fixed price system which was used before 1978 by the centralized government. This policy saw the prices of essential commodities like petroleum, and steel controlled by the government, while that of other ordinary commodities were determined by the market condition.

Lastly, the government introduced a system known as “the particular contracting system” which was aimed at expanding the enterprise autonomy. The government set policies which played a crucial role in raising China’s economy though it faced some setbacks. Critiques do criticize the government of China, but regardless of these, credit is given to the same government for the success of its economy.

Effects of China’s market growth economy


The rise of China’s economy has led to basic changes both in the global and China’s political systems. China’s partners are benefiting at the same time with China and will still benefit more in the future.5 The other superpowers will have to adjust to the fact making China to have moved from a lower position to a top position becoming one of the most powerful states. One of the basic adjustments will be on the political life of China.

Other powerful states will want to control the political life of China for its development has a significant impact on the international market, capital and investments. Having transformed from a small economy to massive economy China has a role like other states with massive economies of controlling the international political systems. The Chinese political system is different from that of the other states with large economies, and for it to fit in this group and control the other international political systems, it has to reform.

The states with large economies have a role of controlling other countries’ economies worldwide. This role has seen China adhere to the international norms which have been put in place, and also has joined significant institutions. These actions enable China to play an active role in international diplomacy. As a superpower, China is a role model to many developing countries and therefore, it has to have a perfect which can be copied by others who learn from it.

Some examples of political changes brought about by the economic growth of China include: first we have the recent changes in the legal system of China, introduction of the great democracy between parties, and the introduction of elections at the village level. Considering the changes in the legal system, which were posted in the white paper issued in 2008.

It explained the progress made by introducing modern legal systems. Despite the changes in the legal system, the law is still dictated by politics in China, and political parties still interfere with sensitive cases.

The second reform in improving inter party democracy has been a success in improving the democratic character. Three policies have successfully been implemented in the party, first retirement age limit for the party leaders has been put in place, limits on the term of leadership have also been set and lastly the party has opened its rank to include capitalists. Though these reforms have been successful in parties, there is still no balance in the leadership which is blamed on corruption in the government (Lardy, 2004).

The other reform in politics due to the economic growth in China is that of introducing elections at the village level. Village elections were made a law in 1998, but still many of the local authorities keep on frustrating the implementation processes. The village elections were introduced to reduce corruption and deal with the increasing local disposition among the local parties.

Though the elections have been able to reduce corruption, local democracy has not been promoted. As a result of this, the village elections have been criticized by many. The economic growth of China has continued to have an enormous effect on the political system of China leading to many reforms being put in place.

Middle class

The current and the predicted effects of China’s economy on the middle class are not easy to determine due to the transparency issues surrounding China’s economic growth. Using data from the national bureau of statistics of China, approximated effects can be drawn.6 In China, the group termed as the middle class is the one that earns an annual income between 25,001 and 100,000 R M B. The population in the middle class is approximated to be 39% while that of the poor to be 50%.

Changes in China’s economy have led to increased people’s number in the middle class as the poor keep reducing. Predictions show that the population of the middle class level will keep expanding up to approximately 79% of the total population in the year 2020. Though this prediction contradicts one done in 2003, which stated that the middle class level will rise at a rate of 1% per year, rising from 19% to 40% by 2020 they all prove that the middle class population has increased and will keep increasing due to the economic growth of the state.

Social economy

The growth of the market economy of China has also had a sizeable impact of the social economy of China. Considering the education system of the state, it has been transformed significantly. The enrollment in both high schools and colleges has been increasing at an extremely high rate. Statistics shows that, the total colleges as well as universities’ enrollment in 1998, to be 3.4 million, but after a period of four years, it increased by 165%.

The number of skilled worker in China is extremely high too, and it is still rising.7 The trained personnel are more productive that the untrained and because most of China’s population is trained the production is remarkably high and efficient (Huang 2003). The economic growth in China has encouraged its population to seek education for there is competition for skilled personnel in the available job vacancies.

In China, there are township villages, which were established to serve the rural areas. These towns grew with the growth of the economy and they transformed approximately 120 million of people from depending on agriculture. These people started working in these towns which were highly efficient and exposed to the international market.

The managers of these towns were highly efficient and transparent which was the key to their development. Development of the township villages led to urbanization which was at 18% in 1978, and by 2002, it reached 39%.8 The urbanization in China was increasing at a precise high rate and at the same time industrialization was growing.

Relationship with the United States

China and United States started trade relations in the year 1972. United States invested in many areas in China such as hotels, factories, and oil. In 1992, the trade between the two states was approximated to be 33 billion dollars, which increased up to 285.3 billion dollars by 2010.9

Many United States citizens have capital investments in China and vice versa. Though the two have depended on each other’s economy, their dependency is not equal. The unbalanced nature of trade between the two states has complicated the relationship between them. This tightens the relationship between the two economies making them more independent. The United Nation economy depends largely on imports from China at a remarkably low cost, and has also benefited from financial help to support its budget and account deficits.10

China depends on United States export market largely and keeps on depending on the United States stock market for its increasing foreign stock exchange. With time, United States has become less depended on China and at the same time China is trying to detach its self from United States market, but it faces challenges.11. For instance Chinese exports to United States were at $100 billion in 2000 and by 2009 it had risen to $296 billion, and the imports increased from $16 billion to $70 billion over the same period.12

Effects on Businesses in China

The economy of China has been favorable to all businesses in China. The changing social, economic, cultural, and political environment in China is easily recognized, and it supports the entrepreneurial environment. The environment in China can be assed as one with opportunities by business people who are efficient in business.

It may be termed as a burden with low cost and high risk by people who are not efficient in entrepreneurship. Individuals with high efficiency tend to believe in their actions and always visualize positive outcomes. Such people tend to venture in business because that attitude is the best in the business field.

The leadership in China is largely efficient and it is attributed to the success of China both politically and economically. This attitude in the leaders has contributed to the whole population being encouraged to venture in business. Business in China has continuously grown at a extremely high rate, and a sizeable population is involved in small and large enterprises.13

Local businesses have advanced for local demand for goods and services has increased with the growth of the economy. Due to the growth of China’s economy, it is rising to be one of the largest economies in the world. This has made China to be a target for many countries to invest in and also to import or export goods. This has resulted into improving businesses in China where most of the local traders are able to do business both locally and internationally.14

Is this political tactic helping China?

The Chinese political system has been of substantial help to the growing economy of the country. The political system has set policies which have contributed to the growth of the economy. The political policies are enforced by the political leaders who are for the country, and its success comes before any of their personal interests. The qualities endowed in political leadership have helped in the growth of Chinese economy a vast deal.

Good management is basic if any developments are to take place and the political managers have proved to be excellent managers. The political reforms like the introduction of the village elections have successfully reduced corruption in China though it has not fully cleared all the cases. It has been a notable achievement to China which has increased the confidence of their investors. Again the political tactics have ensured stability and peace in China which still encourages foreign investors hence boosting the economy in China.15

The future of China with socialis market economy

The future of China is predicted to be a bright one with the socialist market economy. It is predicted to be a place which will be truly safe to invest, economically rich with well equipped labor, a reliable as well as a stable society and government. These factors are expected to attract more foreign investors in China.

The economy will record a particularly high growth rate in the future. It is predicted that in the next ten years, China’s economy will still grow at an approximate rate of 10% , and the GDP will add up to 38 trillion.16 Though the level of the GDP is still low in China, it will grow at a slow rate, and it will have to be boosted to raise the living standards in China. When the living standards of Chinese population is raised, the difference between the income earned by the rich and the poor will be decreased.17

In the future, customer satisfaction in China will lead to increase in local demand for goods and services which will keep the economy growing. Increased demand will result into more production of goods and services hence raising and sustaining the growth of the economy.18

In China, the population is high and a big percentage is comprised of trained personnel which provide cheap labor to the state. The education system in China has been growing rapidly, and it is predicted to have same rate growth in the future. With the education system advancing and a sizeable part of Chinese population acquiring a higher level of education China is predicted to have a particularly bright future.

The urbanization in China is taking place at a extremely high rate and is predicted to keep rising in the future. China had an agricultural based economy in the past, and it has been transforming to from rural agriculture society to urban industrialized society.

It is predicted that the infrastructure in China will be improved in the future leading to a big number of the rural population moving to the urban centers.19 This will increase the local consumption of the goods produced hence raising the economy higher. With all these changes, there will be better opportunities of investment and production in China.

Will there be capitalism?

Socialist market has been officially described as one that will eliminate capitalism but researchers show that capitalism is still there in this economy. 20It is believed to bring capitalism back where the working class population is disempowered and therefore, inequality is increased in the society.21 It also provides favorable grounds for development of a capitalist class. Classical Marxists say that the socialist economy is controversial, and the Chinese economy is more of a capitalist than the socialist for it has many components of capitalism.22


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Barnett, Doak. Cadres, Bureaucracy, and Political Power in Communist China, New York: Columbia University Press. 1997.

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Fu X, Cheing and Balasubra manyam, Viven. 2003. “The Township and Village enterprise in China”. Journal of Development Studies 39, no. 4 (2003): 1-21. Huang, Yasheng. Selling China: Foreign Direct Investment during the Reform Era, Cambridge: Cambridge University Press, 2003.

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Naughton, Barry. The Chinese Economy: Transitions and Growth Policy, Cambridge: Cambridge University Press, 1991.

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Suliman, Mohamed Osman. China’s Transition to a Socialist Market Economy. WestPort, CT: Greenwood Publishing, 1998.

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Wang, Zhengyi. “Conceptualizing Economic Security and Governance: China confronts globalization”, The Pacific Review 17, no.4 (2004): 523-545.


1 Doak Barnett, Cadres, Bureaucracy, and Political Power in Communist China, (New York: Columbia University Press. 1997), 65.

2 Cheing Fu X and Viven manyam Balasubra, “The Township and Village enterprise in China”. Journal of Development Studies 39, no. 4 (2003): 18.

3 Yasheng Huang, Selling China: Foreign Direct Investment during the Reform Era, (Cambridge: Cambridge University Press, 2003), 94.

4 Barry Naughton, The Chinese Economy: Transitions and Growth Policy, (Cambridge: Cambridge University Press, 1991), 106.

5 Auty Richard, Economic Development and Industrial Policy: Korea, Brazil, Mexico, India and China, (London: Mansell Publishing Limited, 1994), 90.

6Mohamed Osman Suliman, China’s Transition to a Socialist Market Economy. (WestPort, CT: Greenwood Publishing, 1998), 180.

7Thomas Moore, China in the World Market: Chinese Industry and International Sources of Reform in the Post-Mao Era, (New York: Cambridge University Press, 2002), 29.

8Chun Lin, The Transformation of Chinese Socialism, (Durham and London: Duke University, 2006), 46.

9 Edward Chen and Kwan Chen, Asia’s Borderless Economy, (St. Leonards: Allen and Unwin, 1997), 64.

10Susan Shirk, How China Opened Its Door: The Political Success of the PRC’s Foreign Trade and Investment Reforms, (Washington D.C: The Brookings Institution. 1994), 106.

11 David Blasko, The Chinese Army Today. (New York: Routledge, 2006), 92.

12Chamon Marcos and Prasad Eswar, “Why Are Saving Rates of Urban Households in China Rising?” American Economic Journal: Macroeconomics 2, no. 1(2010): 88.

13 David Bachman, Bureaucracy, Economy, and Leadership in China: The Institutional Origins of the Great Leap Forward. (New York: Cambridge University Press. 1991), 80.

14Nicholas Lardy, China’s Unfinished Economic Revolution, (Washington DC: Brooking institution, 2004), 53.

15 Che, Jiahua and Yingyi Qian.”Insecure Property Rights and Government Ownership of Firms” Quarterly Journal of Economics 113, no. 2(1998): 480.

16 Hehui Jin and Qian Yingyi, “Public versus Private Ownership of Firms: Evidence from Kurth, James. “The Political Consequences of the Product Cycle: Industry History and Political Outcomes”, International Organization 33, no. 1(1999): 28.

17Tony, Saich. Governance and Politics of China, (New York: Palgrav, 2001), 76.

18Yun-Wang Sung, The China-Hong Kong Connection: The Key to China’s Open –Door. ( Dirham: Duke university, 1999), 78.

19 Jiahua Che and Qian Yingyi, “Insecure Property Rights and Government Ownership of Firms” Quarterly Journal of Economics 113, no. 2(1998), 470.

20 Ibid.471

21 Doak Barnett, Cadres, Bureaucracy, and Political Power in Communist China, (New York: Columbia University Press. 1997), 87.

22 Zhengyi Wang, “Conceptualizing Economic Security and Governance: China confronts globalization”, The Pacific Review 17, no.4 (2004): 540.

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