China's Transition Economy

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China's transition from a planned economy to a market economy began at the end of 1978. When China started the process, the government did not have a well-designed ‘blueprint’, and so the approach to reform can be characterized as experimental. The process of reform has been gradual and incremental in nature and is still incomplete. In fact, China can’t be treated as a full market economy nor can it be treated as a centrally planned economy in which the Government substantially influences prices of goods or monopolises international trade. It is somewhere in between.

Reform measures:

1) The introduction of enterprise taxation.

2) The new wage system which linked with the productivity of workers (this would give workers incentive to work harder as they’d get paid more. Getting paid more than others would motivate them further now that pay isn’t equal.)

3) A new system of banking finance for enterprise investment.

4) The decentralisation of foreign trade through a rapid increase in the number of foreign trade corporations.


Prior to 1978, prices of all major commodities were controlled by the Central Government, and those of virtually all less-important commodities were set by local governments. Price inflation barely existed prior to reform, and many prices remained fixed at the same level for decades.

Price reform has allowed the introduction of freely-operating market signals in most sectors of the economy. Liberalising prices has allowed supply to be much more responsive to demand from consumers. Price reform is now almost complete as most prices have been substantially deregulated and the state’s role in guiding or fixing prices is now minimal.

By 1994, over 90 per cent of retail prices and approximat...

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Evidence, from analyses of China’s profit rates over the past years, suggests a reduction of entry barriers across Chinese industry and a significant growth of competition. Profit rates of the industrial sector in China have converged considerably since 1980. This indicates that resources are now much freer to move around in the economy. Entry restrictions still apply to oil and gas extraction, oil refining, and beverages.

Source of graph:


Now, while the market mechanism has been introduced throughout most sectors of the economy, the complex task of establishing the necessary procedures in order to facilitate the operations of a market-based economy is still in progress. However, it is clear that China’s transition to a free market is advancing strongly, and that this process is most likely irreversible.

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