Chinese Economic Policy

China’s economic policy has been transformed during the reform period that began in 1979 when the world’s most populous nation adopted market-oriented reforms. As compared with the centrally planned period from 1949 to 1978 when economic policy was dictated by the plan that promulgated the targets of the command economy, economic policy is now dictated by a variety of instruments that would be familiar in most countries. These include monetary and fiscal policy, financial regulation, growth policies, and reforms of the exchange rate. But, as with all reforms in China, the transition from central planning to a market economy is gradual and makes for a complex set of policies that govern an economy that still has a segment of state-ownership and controls on its external sector, including a currency that is still yet to be fully convertible and tradable. Most of the major policies have been geared toward economic growth. And China has been remarkably successful in transitioning from central planning while also contending with the challenges of economic development. The initial impetus for adopting market-oriented reforms in the late 1970s was to address the inefficiencies of central planning and introduce incentives to produce more efficiently. These included the gradual but eventual privatization of many of the state-owned enterprises and the promotion of the nonstate sector, especially private industries in rural areas as well as urban locales. These reforms also changed the labor market in providing incentives to foster innovation. They included not only economic, but also legal and institutional reforms to help raise growth. After three decades of rapid development, China has lifted itself from being one of the poorest countries in the world to its second-largest economy, one that has achieved middle-income status. But, to overcome the so-called middle-income country trap, in which countries begin to slow down considerably after reaching upper-middle-income level, China will need to adopt further reforms to raise productivity in trying to join the ranks of rich countries. It is a feat that only a dozen or so countries have managed in the post–World War II period. China’s growth has been aided by integration into the global economy, so reforms of its external sector have played a significant role in its policy regime.