China’s Unique Growth

Westerners should understand the Chinese economic miracle

Part 2 (part 1 is here) of a series of posts on the economic miracle of China and what we in the West can learn from China. I believe that we need better data-driven analysis from China, likewise we need to become more self-sufficient as countries, finally the West should adopt more cultural sensitivity toward China, which could be a pathway to a better relationship in the world. This is part 2, although a foundational post, setting the scene for a deeper look at the new generation of Chinese, the generation of Chinese born in the 1980s, the 1990s, and the first decade of the 2000s who mark a distinct break from the past, one of innovation instead of imitation.

China’s rise is reshaping the world order and reverberating through the global economy. To misunderstand China is to overlook an economic miracle. Beijing born, Harvard educated, and Professor of Economics at LSE, Keyu Jin cautions us: “China is evolving all the time and I think this is actually one of the key things that the West misses… don't read the (Western newspaper) headlines.” The facts are that China has transformed into a global powerhouse in just under 40 years, economic progress on a mesmerizing scale (China accounted for 19% of global GDP in 2023).

Many in the West remain fixated on outdated perceptions of China, its imports displacing western workers, an economy reliant on cheap imitations, a growth model driven by fossil fuel industries, an inflexible state overshadowing the private sector, and widespread corruption. Whereas the new China is focused on technological innovation, a cleaner environment (99% of taxi’s, in many major cites, are EV’s), greater food security, and a higher quality of life for its citizens.

For the last 20 years they have become the manufacturing factory of the world, the phone you are reading this on is probably Chinese made, your laptop is probably Chinese made, even the new electric car batteries, yes, those are Chinese too. As Tim Cook, CEO of Apple said (9 minutes 50 seconds), China is not cheaper, it has a ‘highly skilled workforce’ advanced tooling and knowhow.

To understand China’s ascent is to grapple with paradox. It is a nation where private entrepreneurship grows under the auspices of an interventionist state, and where market-driven innovation coexists with rigid political centralization. How does the state reconcile its desire for control with the need for innovation, which thrives on freedom and unpredictability? This tension manifests in policies that both enable private ventures to grow and constrain them under bureaucratic oversight, particularly in technology and finance. For instance, stringent data control laws and restrictions on capital flow limit private firms’ ability to expand globally, while the government’s emphasis on self-reliance has intensified regulatory oversight in tech sectors. Such constraints illustrate the state’s dual role as both enabler and limiter of innovation.

The Chinese model balances a dynamic tension between regional decentralization and overarching central government, creating a system that is both structured and improvisational, a paradox that lies at the heart of its economic transformation. It is a nation that defies neat categorizations. What emerges is a compelling hybrid, neither capitalism nor socialism but an enigmatic fusion that perplexes and fascinates in equal measure.

At the core of this economic puzzle lies the “China Model,” an approach that eschews ideological orthodoxy for pragmatic adaptability. Rooted in millennia of Confucian governance principles and shaped by the tumultuous 20th century, this model reflects China’s ability to harness historical lessons while responding dynamically to contemporary challenges. Confucianism’s emphasis on hierarchy and social harmony underpins the state’s role as a conductor of economic stability and development. This cultural foundation enables the state to act as a paternalistic yet strategic steward, balancing collective welfare with individual enterprise. Its foundations lie in a synthesis of collective values and meritocratic traditions, which have been recalibrated to accommodate modern economic imperatives. By blending cultural resilience with strategic flexibility, the China Model embodies a distinctive balance of continuity and change. Deng Xiaoping’s maxim that it matters not whether a cat is black or white, so long as it catches mice, encapsulates this ethos. Post-1978, China embarked on a journey of reform that transcended the Soviet-style rigidity of its past without wholly embracing Western capitalism. Instead, it forged a third way, an experimental yet deliberate synthesis of local governance and central oversight.

Roots of Reform

Deng’s reforms began in the countryside, where the “household responsibility system” replaced collectivized farming with individual incentives. While this shift yielded extraordinary gains in productivity and lifted millions out of extreme poverty, its impact extended far beyond economics. By empowering individual households and dismantling rigid collectivization, the reforms catalyzed a profound socio-political transformation. They redefined rural autonomy, rekindled trust in local governance, and fostered a sense of agency among farmers who had long been constrained by state-imposed quotas. These changes laid the groundwork for a broader cultural shift, setting the stage for subsequent reforms that would ripple through every level of Chinese society. This shift yielded extraordinary gains in productivity and lifted millions out of extreme poverty. From 1978 to 1984, grain output surged, and rural poverty halved. This initial success emboldened further experimentation, leading to the establishment of Special Economic Zones (SEZs). These zones became crucibles of innovation and gateways for foreign investment, marrying the allure of global markets with the efficiency of localized decision-making.

Decentralized Dynamism

China’s economic decentralization, a curious counterpoint to its political centralization, imbued local officials with entrepreneurial zeal. These “mayors” acted not merely as administrators but as stewards of economic vitality, nurturing industrial clusters and courting private enterprises. For example, in Shenzhen, the first Special Economic Zone, local leaders facilitated rapid infrastructure development and created a business-friendly environment that attracted foreign direct investment. Similarly, cities like Chengdu leveraged local governance to build thriving tech hubs, aligning regional priorities with national objectives. These cases illustrate how localized innovation and strategic partnerships have propelled economic growth, showcasing the interplay of local ambition and state guidance. Their incentives aligned with national objectives, GDP growth, job creation, and technological advancement, while fostering localized innovation. This synergy exemplifies the nuanced interplay of central vision and regional initiative that defines the China Model. Many of these cities of 5 or more million people like Shenzhen, China's "Silicon Valley," have unexpectedly clean air, widespread technological integration (AI, electric vehicles, ubiquitous apps for payment, like WeChat), and high automation in various sectors.

The Private Sector’s Rise

The Chinese Communist Party’s (CCP) influence is omnipresent, guiding economic priorities through strategic interventions. This interplay between Party directives and market forces creates a unique environment where private firms operate within parameters set by political objectives. Today, the private sector accounts for over 60% of GDP, 70% of national wealth, and 80% of urban employment. This entrepreneurial vigor flourished not despite state involvement but, paradoxically, because of it. The state’s capacity to mobilize resources and enforce policy coherence created a fertile environment for private ventures to thrive, a symbiosis seldom seen in other nations economies.

The backbone of most economies is not just about attracting big multinational corporations. It's about fostering an ecosystem that supports small and medium-sized enterprises. Likewise, Chinese authorities realized the importance of upskilling the workforce and made significant investment in education and training which has created a highly skilled workforce, a workforce capable of adapting to the demands of a constantly evolving global economy. They made sure that people have the skills they need to thrive in current jobs and the jobs of the future, especially in areas like technology, engineering, and data science. They have built a culture where lifelong learning and adapting are seen as essential for success, not just something you do at school.

The Challenges of Maturity

Critical pillars such as legal systems, regulatory frameworks, and contractual norms, though improving, lag behind the sophistication of the market they serve. Nevertheless, the state’s interventionist approach often compensates for institutional weaknesses. Regulatory bodies, while less robust compared to those in advanced economies, are frequently bolstered by centralized directives and targeted policies that aim to stabilize growth. However, these mechanisms also introduce risks, such as overreach and inefficiencies. For example, rapid financial liberalization juxtaposed with weak regulatory oversight has led to vulnerabilities in China’s shadow banking sector and real estate market.

It is worth noting that this institutional nascence is not without strategic advantage. It provides the flexibility to experiment with new policies, such as the phased reforms in Special Economic Zones or the gradual opening of financial markets. These controlled experiments, though constrained by institutional gaps, have allowed China to adapt and recalibrate its growth trajectory in ways that more rigid systems cannot.

Yet, as China transitions from catch-up growth to innovation-driven development, the cracks in this hybrid model seem to become apparent. Heavy state intervention, effective during industrialization, risks stifling the creative destruction essential for technological breakthroughs. China’s efforts to address inequality include rural revitalization programs and targeted poverty alleviation, which lifted over 800 million people out of poverty, but these achievements have not fully bridged the widening income gap. On the innovation front, initiatives like the Made in China 2025 strategy seek to reduce reliance on foreign technology and foster indigenous innovation, including supercharging scientific development. However, these policies face criticism for being overly ambitious and potentially isolating China from global supply chains. Balancing control with creativity and addressing structural inequalities remain persistent challenges. The very mechanisms that propelled China’s rise, low wages, suppressed interest rates, and export-driven policies, are increasingly ill-suited for a middle-income nation aspiring to global technological leadership.

The New Playbook

China’s evolution into a consumer-driven, innovation-led economy necessitates a recalibration of its economic strategies. Professor Keyu Jin identifies the emergence of a younger, more cosmopolitan generation as a pivotal force. Shaped by unprecedented exposure to global norms yet deeply rooted in Chinese culture, these digital natives prioritize quality of life, environmental sustainability, and social equity over unbridled growth. This generation’s consumer preferences have sparked shifts toward cleaner energy and technological innovation, while their demand for transparency and fairness has pressured businesses and policymakers alike to adapt. Their collective identity, shaped by the one-child policy and digital connectivity, challenges traditional hierarchies and introduces new paradigms of social engagement, underscoring the complex interplay between generational change and economic evolution in modern China. Their influence heralds a shift from smokestacks to software, from imitation to invention.

Moving away from imitator to innovator, China is now one of the leading filers of international patents and has even “set up courses to teach kids about IP protections”.

Bridging Misunderstandings

Mexico and the European Union have overtaken China as the leading suppliers of goods to the United States. This shift reflects the impact of tariffs imposed on China in 2018 and 2019, which have redirected U.S. imports away from the country. The growing prominence of Mexico and the E.U. is expected to add complexity to U.S. trade negotiations in 2025.

Whilst the EU and Mexico is showing progress, remember many of the Mexican imports to the US are of Chinese origin. Professor Jin states “with the possible exception of India, no country will ever emerge to match China’s impact on the global economy.” For the world, understanding China is essential. For Xi Jinping, China’s rise is not just a political goal but a fulfillment of historical destiny, where the contradictions of global capitalism will be resolved in China’s favor, ‘leading to the nation’s rightful place as a global leader in a new world order’.

The China model’s impact on global economic governance is profound, reshaping international trade and investment norms. For instance, China’s Belt and Road Initiative exemplifies how its economic strategies influence global infrastructure development, creating both opportunities and dependencies. Critics in Western nations caution against the model’s long-term sustainability, highlighting risks of debt traps and geopolitical friction. Nevertheless, foreign capital investment by China-based companies reached $162.7bn in 2023.

As nations grapple with the complexities of interdependence and rivalry, a more informed dialogue is imperative.

Values

It is noteworthy that according to The World Values Survey, which examines beliefs and values across more than one hundred countries, reveals that 93 percent of Chinese respondents prioritize security over freedom, in contrast to just 28 percent of American respondents. Additionally the latest World Values Survey indicates that 95 percent of Chinese participants had significant confidence in their government, compared to 33 percent in the US and 45 percent, on average, in the rest of the world.As of 2022, that level of trust was at 91 percent, compared to 39 percent in the US. These differences can only be fully comprehended by considering cultural and historical contexts.

The Paradox Persists

China’s economic miracle is a bag of contradictions, a state-guided market economy, a centralized yet decentralized polity, a nation rooted in tradition yet propelled by innovation. For instance, the coexistence, and competition, of major state-owned enterprises and private firms demonstrates the delicate balance of competition and control, while localized governance structures like those in Shenzhen showcase the adaptability of regional leadership. Its playbook possibly defies replication yet offers lessons in adaptability, pragmatism, and the art of balancing competing imperatives.

In 2025, as China builds its position in an uncertain world, it will likely take center place in any peace negotiations in Ukraine, Syria, Sudan and other ‘hot points’ following Xi Jinping's bold calls for China to “lead in the reform of the global governance system,” and certainly in global economic affairs. It forces us to reexamine the interplay among geopolitical matters, economic models and cultural heritage, challenging our preconceived Western notions.

Overall. I certainly believe that countries need to become more self-sufficient and resourceful… and that will require taking a much closer look at how China is becoming close to achieving this.

Stay curious

Colin

Recommended reading:

The New China Playbook: Beyond Socialism and Capitalism. By Keyu Jin

The Great Transformation: China’s Road from Revolution to Reform. By Odd Arne Westad and Chen Jian

Deng Xiaoping and the Transformation of China. By Ezra F. Vogel

The World According to China. By Elizabeth C. Economy

Empress Dowager Cixi: The Concubine Who Launched Modern China. By Jung Chang

Recommended video – any talk by Professor Keyu Jin. Such as this one, this one, or this one

…and this one: How Will China Retaliate Against Trump Tariffs? China Has Been ‘Preparing’ | Keyu Jin

Image credit - Aerial drone photo taken on Dec. 10, 2024 shows a container terminal of Lianyungang Port, east China's Jiangsu Province. (Photo by Wang Chun/Xinhua)