How capitalist is China?

January 26, 2010 | Posted by Chris

More capitalist than you might think. Despite several decades determined to build a communist state, China cannot shake a tradition of capitalism that goes back thousands of years.

There was in Neolithic China a booming silk industry. Two thousand years ago people were permitted to buy and sell land, and there were farm enterprises. In medieval times there was the hugely important Silk Road, and let's not forget that coins and paper money were first invented in China.

This all points to what anyone who does business with Chinese counterparts quickly realizes: capitalist instincts are deeply ingrained in Chinese culture.

So, it should come as little surprise that the Chinese have shrewdly navigated a path to economic growth. What is surprising is the rate at which the Chinese economy growing: more than 8% on average. Every year. Since 1978.

(Note: China reported economic growth of 10.7% in the fourth quarter 2009 compared with the previous year and is on track to surpass Japan as the world's second largest economy in 2010.)

This growth has been accomplished through a "dual track" policy, where farmers and producers of goods were able to sell their surplus production after their obligations to the state were met. Over time the sectors open to competition gradually increased, resulting in more capital, expertise, and jobs for the Chinese economy. This application of liberalization at the margins has since grown in depth and been employed in areas like industrial goods and labor markets.

China's growth has also utilized special economic zones that offer foreign companies favorable terms of investment. The first special economic zone, opened shortly after China's reforms, was Shenzhen, which was once a sleepy fishing village and now is home to over 8 million people and Wal-Mart's global purchasing center.

Since 2000, China has been working to develop its western provinces, which lag far behind the coastal cities the world is becoming increasingly familiar with. Known in Chinese as the xībù dà kāifā (西部大开发), the China Western Development strategy focuses heavily on the development of infrastructure, and to this end about $65 billion has so far been spent to build railroads, airports and energy stations.

Notably, as William Overholt points out, the Chinese economy has reformed in such a way that it is more open than the Japanese economy, the second largest in the world and East Asia's modern economic powerhouse.

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