This chapter provides a comprehensive historical perspective on the ups and downs and the remarkable renaissance of China’s economy in modern times. It delves into the factors influencing China’s economic growth, explores future growth prospects, and examines the challenges it encounters.

China has a contiuous culture of over 5,000 years and Chinese culture was preeminent among world civilizations for 1,500-plus years before the eighteenth century. The prosperity of a civilization is determined by its material productivity, and the continuity of Chinese culture can be attributed to the preservation of its core value, i.e., benevolence (Ren in Chinese) for 5,000 years. Therefore, China’s cultural rejuvenation depends not only on economic prosperity but also the inheritance and preservation of core value ren.

This chapter describes the century-long national salvation spanning from 1840 when China was reduced to a semi-colony of Western powers as a result of the Opium War, to 1949, when the PRC was founded. This period coincides with the exploration for the path of national rejuvenation among Chinese intellectuals, characterized by a shift in focus from inherited artifacts to social organizations, and to ideas, habits, and values. These endeavors ultimately culminated in the socialist revolution.

This chapter explores the phenomenon known as the “East Asian Miracle,” which refers to the successful catch-up of Japan and the "Four Asian Tigers" with the developed world after World War II. It critically examines popular interpretations of this phenomenon, including cultural determinism, the Cold War, free markets, developmental state, and export-oriented strategies. Furthermore, the chapter introduces the theory of the new structural economics. This theory argues that enterprises are viable in open and competitive markets only if they align their choice of industries and technologies with their economy’s endowment structure.

The primary role of the financial system is to serve the real economy. However, China’s financial system is predominantly characterized by large state-owned banks and the stock market, and it is ridden with a spate of problems including bad debts and a highly speculative stock market. One of the fundamental problems related to economic development is the irrational financial structure, which underserves private small- and medium-sized enterprises (SMEs) and farmers, who are the main players in the real economy. Therefore, alongside enhancing financial supervision, it is crucial to improve the financial structure by promoting the development of regional small- and medium-sized banks, contributing to a healthier and more balanced financial system.

This chapter delves into the internal logic and the impact on economic development of China’s strategy of prioritizing heavy industries and its planned economic system, characterized by direct government allocation of resources. It covers the period from 1949, marking the success of the socialist revolution, to the eve of the reform and opening up program, which commenced in 1978.

This chapter begins by introducing the Needham Puzzle, which examines why and how China had ceded its leadership in science and technology to Western countries after the Industrial Revolution despite its flourishing civilization in her history. Then the author challenges three prevailing hypotheses (cultural determinism, national competition, and high-level equilibrium trap) which try (in vain) to explain the Needham Puzzle. Furthermore, the author highlights that in premodern times technological innovation mainly relied on experience-based trial and error, so the bigger the population, the greater the chance for inventions in those days. However, the civil service examination system’s neglect of the acquired ability in mathematics and experiment hindered China from having an indigenous scientific revolution. Consequently, China failed to transit from traditional experience-based innovation to an indiginous Industrial Revolution, featuring science-cum-experiment-based innovation, leading to a widening gap with the Western world.

The uneven distribution of income that emerged during China’s reform can be primarily attributed to gradual dual-track reform. Measures adopted during this period include suppressing interest rates and other factor prices to subsidize non-viable SOEs. In a market economy, adopting a comparative advantage-following (CAF) strategy can lead to fairness and efficiency in the primary distribution of income. Furthermore, through secondary distribution, the income inequality can be further reduced.

China’s reform and opening up program commenced in 1978 with the transition from the collective production team system to the household responsibility system. This reform aimed to enhance incentives for agricultural production, leading to rapid growth in agriculture and increased income for farmers. It also played a significant role in bridging the urban–rural income gap. However, starting from the 1990s, rural income growth began to lag behind that of urban areas, giving rise to a spate of challenges regarding the countryside, agriculture, and farmers, known as the Three Rural Issues (San Nong Wen Ti, in Mandarin). These issues are primarily rooted in the sluggish growth of rural income.

This chapter explores how enabling governments in historically successful economies played an active role in facilitating the development of industries with factor endowments-based comparative advantage. These governments also played a crucial role in helping firms to overcome market failure and turning latent comparative advantage into competitive advantage.

The neoclassical theories implicitly assume that all existing firms are viable. However, many firms in a transition economy are not viable and many distortions are endogenous to the needs for the survival of non-viable firms. The negligence of viability issue in the neoclassical theories led to the proposals of a comparative advantage-defying development strategy in development economics and shock therapy in the transition economics, causing the failures of development and transition in many developing countries. It is essential to introduce the viability concept into the neoclassical economics to improve the relevance of neoclassical theories in developing countries.

China’s urban reforms commenced with a focus on micro incentives for state-owned enterprises (SOEs). Over time the focus gradually shifted to the resource allocation and pricing mechanism from the single track of the planned economy, to a dual track, and ultimately to the single-track market economy. During the transition, non-state-owned businesses, including private businesses, joint ventures, and foreign-funded enterprises, were encouraged to enter the market. Their growth has facilitated the stability and rapid development of China’s economy in the course of the transition from a planned economy to a market economy. However, this transition has also brought about challenges such as corruption, widening regional disparities, and income gap, among others.