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Evolution: China’s Industrial Growth
Aaron Caté
Beijing University of Technology
Author Note
Aaron B. Caté, Engineering Program for International Students, Beijing University of
Technology
Aaron Caté is now at Department of Engineering, New Mexico State University
This research was supported in part by a grant by the SAMPLE grant program
Correspondence concerning this article should be addressed to Aaron Caté, Department
of Engineering, New Mexico State University, Las Cruces NM 88003 (U.S.A.)
Contact: dynocate@nmsu.edu

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Table of Contents
Abstract……………………………………………………………………………………3
Introduction……………………………………………………………………..…………4
I. Departure………………………………………………………………..…………5
II. Escalation……………………………………………………………….…………6
III. New Frontiers…………………………………………………………………...…8
IV. Infinity: Concluding Remarks……………………………………………………10
References…………………………………………………………………….………….12

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Abstract:
The content of this paper explores the effects and outcomes of the economic
reforms in which China and its leaders crafted in a developmental path towards the
reconstruction of its economy and industry. It also discusses briefly the time line
segment in which China took leave from the Maoist era and entered the region of
increasing economic openness and decentralizing state authority and reducing
government planning and control as methods of transitioning from a completely closed
economy to a primary player in the modern global economy. It also discusses how the
Chinese dealt with hurtles and challenges that had to be overcome in-between the
evolutional stages of the economic reform. In conclusion, this literature touches C hina’s
performance in foreign trade and boosting up its Gross Domestic Product (GDP) per
capita and improving the its economic efficiency.

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Introduction:
In 1949, when the dawn of the People’s Republic of China was established, the
transformation of China’s industrial system has changed quite rapidly; especially since
1978, when the country transitioned from a centrally planned system into an accelerating
modern industrial society that plays a major role on the global scale. The alteration
process started out with cutbacks on China’s traditional agriculture followed by
expansion of price liberalization, fiscal decentralization, diversified banking systems, and
the development of stock markets and foreign investments and trades including private
sector growth. There are three main industrial structures in China: 1.) The Primary
Industry, which consists of the limitation of producing primary products such as forestry,
farming, fishing, and additional agriculture; The Secondary Industry refers to the
processing and manufacture of products including, mining, manufacturing primary
products, real estates, electricity, gas and water supply; and the Tertiary Industry provides
a variety of services and, in technical terms, is occasionally more referred to as the
“Service Industry”.
The restructuring of China’s economy and resulting efficiency gains has contributed
in excess of tenfold increase in the gross domestic product (GDP), which is measured on
a purchasing power parity (PPP) basis that adjusts for price differences. According to the
Geography of Transport Systems, China has become the world’s largest exporter and also
the second-largest economy in the world following the United States of America (U.S.).
Although China has accomplished many goals throughout the past three decades, there
have been countless amount of struggles, efforts, and deficiencies to overcome within the
cross-border business interactions and transitions in restructuring a new industrial system.
There was the pre-reform era, after Communism took over China, Mao Zedong tried to
push China’s economy to a new elevation and proclaimed the Great Leap Forward, which
was an unsuccessful attempt that lead to agricultural downfall in rural areas and the
Cultural Revolution resulted in China going into extensive economic dislocation.
Nevertheless, it was until after the late 1970s, when market principles were introduces,
that China took an astonishing journey in transitioning and reforming its economic
industry

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The content of this document will explore the transition and economic reform which
eventually lead to China’s Industrial growth; this paper is organized four components as
follows: Section 1: Departure, which describes the 1978-1984 start of the agricultural
reform in the agricultural economy; Section 2: Escalation summarizes the ups and downs
in the economy of China during the 1980s; Section 3: New Frontiers depicts economic
boost in China’s economy of the 1990s-200s; and Section 4, Infinity concludes.
I. Departure (1978-1984)
China is, in convenient reality, a Communist country, which implies that their
political system is more centralized whereas the U.S. follows a federalist system. The
Chinese government structure is vertical from the highly central government to provincial
and local governments, which means that whenever an order or a decision is made by
higher governmental authority, local and providential government has to implement the
decision. The U.S. system, on the other hand, shares the governmental power between
state and federal governments—each state has their own authority within the federal
structure. However, U.S. state governments do not have authority over certain matters
that are exclusively reserved within the jurisdiction of local or federal governments, such
as land use or properly development. How do these differences apply to the economic
state China is in today? Besides the differences in political systems, it is the principle
methods that Chinese reformist leader, Deng Xiaoping, used in putting China into a
jumpstart to reforming its economy.
Beginning in 1978, the first steps of departure of the pre-reform era, begun with
China’s Primary Industry: agriculture, which previously had been abandoned within the
industrial sector since the 1950s. But because of the shortage of food supplies,
government officials feared that the horrific events during the Great Leap Forward were
going to repeat again, Deng responded to those officials’ concerns by organizing China
into its Primary Industry and setting a practice in which local farmers in rural areas were
given the right to own and use land for cultivation efforts and keeping the harvest
productivity after paying a share to the state government with their collectives. By
improving agricultural production, state procurement prices for major crops were raised
and managerial methods became modified within the collective system and budgetary
expenditures increased on agricultural investments. This move increased the living

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standards in the myriad of farmers and also escalated industry in China’s rural areas.
Agricultural production rose for each of the following major grains—corn, wheat and rice.
Additional beneficiaries included rural non-farm enterprises producing light
manufactures that many urban state-owned enterprises failed to provide. After this
development process took place during the initial reform period, the GDP of agricultural
output amplified by 8.2 percent compared to a 2.7 percent annual increase in the pre-
reform period (Rozelle& Huang); food prices also went under a 50 percent drop, while
agricultural incomes increased 4.7 percent per year.
II. Escalation (1985-1992)
Although China’s agricultural sector was initially performing well, the GDP annual
growth rates began to decrease causing the Chinese government to take an even bolder
approach in promoting economic reforms. In the span of China’s economic evolution
period, reformist leader Deng Xiaoping initiated new policies that would combine central
planning market-oriented reforms to boost productivity without causing any budget
shortfalls or unemployment of laborers. Another well-known development growth was
when the power of state control was decentralized and allowed local provincial leaders to
conduct their own ways of enhancing the economy. This became known as the
establishment of township and village enterprises (TVEs) in which townships and
villages began to gain market share at state expense. This was a remarkable step during
the reform; in addition, prior to the reform period, China was essentially a closed
economy. And during the 1980s, a new policy was introduced by Deng Xiaoping, which
China began opening up the doors to foreign businesses trades as well as foreign
economic and technological cooperation, and foreign currency management including
taxation, and exit-entry administration. Subsequently, Special Economic Zones of the
People’s Republic of China (SEZs) was established to attract foreign capital with offering
them tax exemption and regulations; furthermore, and China began expanding in
international trade and allowed foreign direct investment. Deng Xiaoping’s open-door
policy encouraged the opening of China to foreign imports and the promotion of exports
and foreign direct investment (FDI) grew promptly and it was believed that in order for

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the economy to escalate and modernize its industry, foreign direct investment and trade
were heavily encouraged.
The private sectors were revitalized for the first time. Administrative and regulatory
reform of rural-urban migration, foreign trades (both imports and exports), foreign
investment and banking systems elevated diverse compulsory restraints on economic
growth
Reflecting China’s rapid growth of GDP per capita since 1980 depicts a pattern of
growth with high peaks in 1984 and later in the 1990s and 2000s and “China’s economic
reform over the reform period generated significant forces of convergence of both
provincial levels and growth rates of GDP per capita” (Knight and Ding) . Other than the
opening-up policies, other policies were introduced at this time; Pricing and industrial
policies, investment policies and fiscal policies. Of all the technical terms and concepts
behind economics, pricing is the most important leverage on the cost-effective scale
whereas it is core of regional trade the reallocation of resources and incomes. Pricing on
funds and technology was taken far less in the western regions where as the eastern part
of China took more at the advantage; China’s eastern coastal cities were the primary
0
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12
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1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Figure 1: China's GDP Per Capita Growth (Annual %)
Data Source: The WorldBank website, WorldDevelopment Indicators

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regions for economic development, including Shanghai, Guangzhou and Tianjin.Also,
with the rapid development from the east, there goes also higher inflation than the rest of
China. Under the mechanism of free trade, the east might transfer inflation to the rest
through purchasing and interregional consuming, and up pushing the pricing in the center
and west
While pricing is most important, there is another imperative component to the
development of the Chinese economy—industrial policies refer to the essential
intervention on economic activities such as the investment to realize optimized
allocations of resources between regions and sections. Industry policies can bring long-
term influences to regional economies compared to other macroeconomic policies
Despite China’s outstanding achievement during the escalation stage, the economy
became overheated by the late 1980s and became infected increasing rates of corruption
inflation which eventually contributed to the appalling tragic events at the Tiananmen
Square protests in 1989and a series of increasing discontent from citizens and
politicians—the economic reforms started to plunge. Deng Xiaoping responded to these
complications by manipulating political pronouncements to accelerate the market reforms
by establishing a social-based market economy, which would eventually gain a
momentum at the start of the early 1990s, leading to the third stage of the economic
reform.
III. New Frontiers (1993-2005)
During the 1990s, despite Deng Xiaoping’s political retirement in 1992, the
economic reforms continued to press onward under President Jiang Zemin and Prime
Minister Zhu Rongji, both who previously worked with Deng’s as devoted reformers.
Increased investment into capital construction programs and TVEs was also the
government's solution to reviving the economy; however, the Chinese economy
continuously grew but began to overheat with high inflation and the Chinese Communist
Party act in response decided to take control of bad loans that were being carried out. A
comprehensive package to reform the foreign-exchange regime was introduced in 1994,
which included the abolishment of foreign exchange retaining system, coalescing the
double-track exchange rate system, and simplifying the procedures for the obtain and
usage of foreign exchange currency for accounting transactions. This was known as

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China’s eighth Five Year Plan –which ran from 1991 to 1995 –and its objectives were to
take the modification of the economy to a whole new level by moving it more towards
infrastructures in the Secondary and Tertiary Industry sectors which consisted of power,
communication, transportation, mining, manufacture, electricity, gas and water supply,
real-estates and services.
A tax system was also reformed to coordinate tax services and auditing operations
and combining taxes paid by local and international firms. Tax revenue grew as a result.
According to the Sam Houston State University sources from the U.S. Department of
State, the economic inflation rate dropped in 1995 from over 17 percent to 8 percent in
early 1996. The following year, early 1997, the Chinese economy started growing at a 9.5
percent rate, accompanied by low inflation and the economy had been continuously
slowing since then. In 1997 Jiang Zemin, pushed through reforms of the taxation system
and state-controlled industries that paved the way for China’s reformation in response to
the 1998 Asian Financial Crisis. In 1999, China and the U.S. started to reach a mutual
agreement on China’s compliance to the World Trade Organization in which the country
officially became a member two years later in 2001. Subsequently, there was a removal
of trading restrictions, which allowed domestic Chinese residents to trade “B” share
stocks, and China was forced to make revisions in their existing laws and enact new
legislation in compliance with the WTO that was to eliminate price controls to protect
local and domestic industries and eliminate any export subsidizations on agricultural
products. In 2003, “A” shared markets became opened to foreign investors, which took
China into the jump stage of becoming successful in the importing and exporting sector.
See Figure 2 below.

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With the reduction of restricted trading systems and increasing extension of new
frontiers in overseas investment, there have been broad opportunities for individual
enterprises to engage in exchanges with foreign firms. The Chinese banking system also
came into place, which controls all access to foreign currencies required for all imports
and exports.
IV. Infinity: Concluding Remarks
Ever since 2005, China’s economic growth has been very rapid; in 2010, China’s
economy surpassed Japan and became Asia’s largest economy industry and the second
largest economy in the world after the United States. China has now been widely known
for standing out as one of the most important and influential countries in a global
economy scale. According to World Bank, China still remains a developing country the
country’s gross national income per capita, as of 2012, is USD 6,091 (approximately
RMB 37,000) and is ranked 90th place in the world; and out of the 1.3 billion population,
about 128 million of its populace still live under the national poverty line of RMB 2,300
per year. Despite China’s economic growth, poverty reduction remains a fundamental
0
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800
1980 1985 1990 1995 2000 2005 2010
Figure 2: China's Export & Inport Volume Index (2000 = 100)
Export Import
Plottedbasedon theData Source from The WorldBankwebsite, WorldDevelopment Indicators

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challenge for the Chinese government. Nevertheless, the country’s voyage of
transitioning from a closed, planned economy to a relative open, market economy has
been a remarkable approach in the economic and industrial world and is referred to as a
successful and developing strategy.
Presently, China has been in the lead in the production of coal, iron, steel, cement
autos and petroleum. China’s manufacturing industry also provides various equipment,
ranging from power generating equipment to footwear, toys, food processing, and
consumer electronics including high-speed computers and telecommunications
equipment. China is also known for producing yarn, cloths, silk, knitting wool, and
synthetic fibers. Labor-intensive light industries played a prominent role in the industrial
boom because without labors, there can be no economic uprising, especially within the
agricultural zone of China’s Primary Industry.
There have been a number of theories and explanations that many scholars and
historians that undergone to explain the reasons behind China’s success in economic
reforms. Many researchers and scholars would criticize China’s economic reform based
on pessimistic scenarios based on the strategies China uses in the socialized-based market
economy. Based on the material discussed in this paper, it is not the political and
economic strategy but the methods that were used in the industrial transition process. The
purpose of the economic reform was not a way for China to abandon communism or
altering the socialist market economy but to improve the economic and market
mechanisms by decentralizing state authority and reducing government planning and
control—allowing local leaders to outreach numerous ways to privatize state sectors and
energize the economy. Another notable method is the change in the GDP trade share,
which also had a positive effect including the contributions of import and exports.
Another one of the most important methods are the open-door policies which lead into
opening up to the global economy and going into foreign trade and investment. Each of
these methods are the principal key components to the structural change in improving the
efficiency and taking it to a new level with new long-run of economic frontiers.

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