The Establishment of the Socialist Market Economy

From: English Edition of Qiushi Journal Updated: 2012-10-08 15:24
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This year marks the 20th anniversary of the CPC’s decision to establish the creation of a socialist market economy as the goal of China’s economic reforms. Since the launch of the reform and opening up drive, China has successfully realized the historic transition from a planned economy to a socialist market economy. As we stand at a new starting point, looking back over the great process, glorious achievements, and precious experiences of our market-oriented reforms bears great significance for further deepening reform and opening up, promoting scientific development, claiming new victories in the effort to build a moderately prosperous society in all respects, and creating new horizons for the cause of socialism with Chinese characteristics.


The development of a market economy under socialism represents an unprecedented undertaking of great proportions and a necessary choice for the development of socialism with Chinese characteristics. China implemented a planned economy for a period of many years following the founding of the People’s Republic of China in 1949. However, the drawbacks of the planned economy eventually became apparent during the course of practice. As the planned economy proved increasingly unsuited to the development of productive forces, the reform of the economic system became imperative. The establishment and improvement of the socialist market economy took place following an arduous process of exploration and practice.

The decision to identify the creation of a socialist market economy as the goal of reform was preceded by a phase of theoretical and practical exploration that took place between the Third Plenary Session of the Eleventh Central Committee of the Communist Party of China in 1978 and the Fourteenth National Congress of the CPC in 1992. With the curtain of reform and opening up having been lifted, the reform of the economic system began in rural areas, which had been the weakest link in the planned economy. Rural reforms focused on the implementation of a system for the contracting of farmland to farmers on a per-household basis that links remuneration with output. This was followed by economic reforms in urban areas, which focused on invigorating state-owned enterprises and expanding their decision-making powers. In 1982, the Twelfth National Congress of the CPC advanced the policy of “maintaining the primary role of the planned economy whilst giving play to the supplementary role of market forces in economic regulation.” This was the first time since the end of the Cultural Revolution that the Party acknowledged the status of the market in the national economy. In 1984, the Third Plenary Session of the Twelfth CPC Central Committee advanced the policy of “establishing a planned commodity economy on the basis of public ownership.” At the Thirteenth National Congress of the CPC in 1987, the policy of establishing “a system that integrates planning with the market” was adopted. Under this system, planning and market forces would cover the whole of society, and a mechanism whereby “the government regulates the market and the market guides enterprises” was to be established. At the Fifth Plenary Session of the Thirteenth CPC Central Committee in 1989, the Party further clarified the market orientation of China’s economic reforms by stating that “the core of reform lies in gradually establishing a mechanism for economic operation that integrates the planned economy and market forces.” Other reforms that were pursued at this time included the separation of ownership rights from operation rights in state-owned enterprises and the introduction of a dual-track price system for commodities. The scope of mandatory government planning was gradually narrowed to create more space for guideline planning and regulation by market forces. The system of unified state control over fiscal revenue and expenditure was replaced by a system of fiscal delineation between the central government and local governments. Moreover, market-oriented reforms with regard to planning, investment, materials, the circulation of grain and cotton, and the opening up of the economy to the outside world were promoted in succession. During his tour of the south in 1992, Deng Xiaoping pointed out that: “The proportion of planning to market forces is not the essential difference between socialism and capitalism. A planned economy is not equivalent to socialism, because there is planning under capitalism too; a market economy is not capitalism, because there are markets under socialism too. Planning and market forces are both means of controlling economic activity.” This important discourse dispelled the doubts that people had over the market economy. It broke through the ideological barriers that the planned economy had long imposed, and laid down the theoretical foundations for the implementation of the reform to create a socialist market economy.

The basic framework of the socialist market economy was established during the period from the convening of the Fourteenth National Congress of the CPC in 1992 to the beginning of the new century. In his report to the Fourteenth Congress of the CPC, former General Secretary Jiang Zemin clearly stated that “The target of China’s economic reforms is to establish a socialist market economy.” This was followed by the introduction of the basic connotations of this system as well as the main tasks of reform. This marked a new phase in the reform of China’s economic system. With a view to better promoting China’s socialist market reforms, in 1993, the Third Plenary Session of the Fourteenth CPC Central Committee passed the Decision of the CPC Central Committee Regarding a Number of Issues Concerning the Establishment of a Socialist Market Economy, which clearly defined the basic framework of China’s socialist market economy. The Fifteenth National Congress of the CPC went a step further to clarify China’s basic economic system and reform plans for the primary stage of socialism, paving the way for a series of major breakthroughs in economic reform. The first was the establishment of a modern corporate system. The overall reform of state-owned enterprises was pushed forward in line with the principles of clarifying ownership, rights and responsibilities; separating government administration from the management of enterprises; and implementing scientific management. In addition to the bolstering of the public sector, rapid development was also seen in the non-public sector, which primarily comprised of individual-proprietorship businesses and private enterprises. The second breakthrough was the intensified development of a market system. Prices for competitive commodities and services were liberalized across the board; the dual-track price system for the pricing of means of production was gradually phased out; market-based reforms for real estate and factors of production such as capital, labor, technology and information were introduced; remarkable increases were seen in the scale of trade in both goods and services and in the flow of capital; and the regulatory role of the market in economic development became much more apparent. The third major breakthrough was in the reform of macroeconomic regulation. This involved the gradual transition from direct regulation to indirect regulation through the establishment of a regulatory mechanism integrating planning and the use of fiscal and monetary policies. The fourth breakthrough was the establishment of a framework for an open economy. With the constant opening up of the economy to the outside world, China began to attract more foreign investment than any other developing country. The system for the management of foreign trade was reformed to give enterprises more extensive rights to engage in import and export trade. The foreign exchange rate system was also reformed, which led to the significant expansion of China’s foreign exchange reserves. Moreover, during the process of China’s entry into the World Trade Organization and alignment with international rules, a large number of laws, administrative regulations, and departmental regulations were formulated, amended, and repealed to ensure conformity with the requirements of the market economy. In addition, the number of items that required administrative approval was also streamlined. The reforms that were initiated during this period promoted the formation of the basic framework of China’s socialist market economy.

Panorama of the Lujiazui Finance and Trade Zone in Pudong, Shanghai. In response to Deng Xiaoping’s call to “lose no time in developing the Pudong District and persevere until construction is completed,” Pudong has constantly embraced new ways of thinking and worked to liberate productive forces during the past two decades, increasing the scale of its economy by nearly 90 times and transforming from a stretch of farmland into a “symbol of China’s reform and opening up drive.” / Xinhua

China’s socialist market economy has been improved on a constant basis since the holding of the Sixteenth National Congress of the Communist Party of China. In 2002, the Sixteenth National Congress of the CPC clearly advanced the task of further improving the socialist market economy. At the Third Plenary Session of the Sixteenth CPC Central Committee in 2003, General Secretary Hu Jintao set out the objectives and the major tasks for the deepening of reform. The session also saw the passage of the Decision of the CPC Central Committee on a Number of Issues Concerning the Improvement of the Socialist Market Economy. New progress has been achieved in a number of important areas and vital aspects of socialist market reform over the past decade. With respect to the improvement of the basic economic system, we have made further adjustments to the layout and structure of the public sector, accelerated the introduction of shareholding systems in state-owned enterprises, and improved the institutional environment for the development of the non-public sector. With respect to the building of a modern market system, we have further regulated and developed the capital market, continuously improved the price system for factors of production, and intensified the protection of intellectual property rights. With respect to strengthening and improving macroeconomic regulation, we have established a system for economic forecasting and monitoring at the macroscopic level, progressively improved institutions for transfer payments and public finance, deepened the reform of the investment system, promoted the transformation of commercial banks into joint-stock companies, and further transformed the functions of the government. With respect to strengthening social services and cultural development, we have accelerated the establishment and development of social safety nets, promoted the active yet steady reform of the health care system, and deepened institutional reform in social spheres such as culture, science, technology, and education.


In over three decades of reform, we have made decisive progress in the establishment and development of a socialist market economy, liberated and developed productive forces to a huge extent, and captivated the world with the incredible achievements of our economic and social development.

The basic economic system for the primary stage of socialism has been established. Prior to the reform and opening up drive, the two predominant forms of ownership in the Chinese economy were ownership by the whole people and ownership by collectives. Through a process of reform, we have gradually put in place a new system whereby public ownership plays the dominant role and diverse forms of ownership develop side by side. We have made adjustments and improvements to the ownership structure in an attempt to experiment with multiple forms for the realization of public ownership. By making major efforts to develop the joint-stock system and absorb and organize non-governmental capital, we have been able to expand the functions of state capital and raise the capacity of the public sector to steer, influence, and drive the overall economy. Moreover, through the establishment of a modern system of ownership, we have ensured that all market entities enjoy equal legal status and equal rights to development, thereby providing an institutional guarantee that allows economic entities under all forms of ownership to compete and develop on equal terms. In an endeavor to break away from equalitarianism in the distribution of income, we established a system whereby distribution according to work is the dominant form of distribution and multiple forms of distribution exist side by side. In addition, we also encouraged some areas and some people to become rich first, thus paving the way for the gradual transition to common prosperity.

The vitality of microeconomic entities has been remarkably enhanced. A modern corporate system has gradually been established and the majority of state-owned enterprises have been restructured as joint-stock companies. New operational mechanisms have been adopted in state-owned enterprises, which, in the capacity of producers and business operators, have assumed responsibility for their own management decisions, profits and losses, and operating risks. This has done a great deal to boost the vitality of state-owned enterprises on a sustained basis. Although the number of state-owned enterprises has been reduced, the public-sector as a whole has become more economically efficient, its capacity to steer and influence the economy has been enhanced, and the scale of its assets has continued to grow. The non-public sector, which comprises of private businesses and the self-employed, has maintained rapid growth, becoming an important engine for growth, employment, and market prosperity. The non-public sector has also given birth to a number of major corporations, which are continuing to display increasingly high levels of vitality. The diversity of market entities conforms to the inherent requirements for the development of productive forces in the primary stage of socialism. Under this backdrop, a large number of internationally competitive enterprises are emerging in China. A total of 69 Chinese enterprises have been listed in the Fortune 500 rankings this year.

The basic role of the market in the allocation of resources has been exerted.Through a process of reform, China has basically established a mechanism whereby prices are primarily determined by market forces. Mandatory plans have been abolished in the production of all consumer goods and in the production of the vast majority of producer goods, and the prices of over 95% of goods and services are now subject to market forces. Multi-tiered markets have been established for consumer goods, and rapid development has been seen in markets for factors of production such as labor, land, capital, and technology. The interaction and interlinking of these markets has gradually given rise to a modern and fully comprehensive market system that is characterized by developed mechanisms, uniform openness, and orderly competition. This integrated system of markets allows for various kinds of commodities to be exchanged in the most efficient manner. Under market conditions, which provide for the regulation of supply and demand in line with the law of value, there has been a significant enhancement in the capacity for the supply of goods and services, and the vast majority of commodities have either maintained a balance between supply and demand or seen an excess in supply. Having totally abandoned the shortage economy of the past, the China of today is placing an increasingly strong emphasis on improving the quality and economic efficiency of products.

The formation of a fully open economy has been accomplished. Prior to 1978, China engaged in a very basic form of foreign trade that was small in scale and involved very few trading partners, whereas during the course of reform and opening up, it has implemented an open strategy based on mutual benefit. Under the guidance of this strategy, China has significantly raised its utilization of domestic and international markets and resources by taking an active part in the international division of labor and cooperation. China’s policy of opening up began in certain designated areas of the country, and was later promoted on a nationwide basis. The first area of the economy to be opened up was commodity trade, which was subsequently followed by investment and services. Since joining the World Trade Organization, China has opened itself up to the outside world in all aspects, across multiple fields, and on multiple levels, and the level of openness in its economy has been raised significantly. Over the space of more than three decades, China has established 163 bilateral mechanisms for economic and trade cooperation, signed 129 bilateral agreements on investment, and entered into ten agreements on free trade. The Chinese market has become an important component of the world market. At present, China is the world’s largest exporter and second largest importer. It is the second biggest recipient of direct foreign investment, and the fifth largest exporter of capital. China is assuming an increasingly important role in the promotion of global and regional economic cooperation. It has promoted the establishment and development of mechanisms for economic cooperation such as APEC and mechanisms for cooperation between China, Japan, and the Republic of Korea, between ASEAN and China, Japan and the Republic of Korea (10+3), and between China and the five countries of Central Asia. Moreover, by utilizing international organizations and platforms such as G20 and the WTO, China has actively participated in the governance of the world economy and worked alongside the global community in addressing global challenges and sharing development opportunities.

The system of macroeconomic regulation has been constantly improved. Before the reform and opening up drive, the regulation of the economy was primarily achieved through the mandatory planning of the government. Following the in-depth reform of planning, finance, banking, and investment, China has completed the transition from direct macroeconomic regulation to indirect macroeconomic regulation. The government maintains the balance of overall supply and demand, promotes the optimization of the economic structure, and controls inflation using economic, legal, and where necessary, administrative means. This essentially constitutes a stable system for macroeconomic regulation that is geared to the open economy. Long-term macroeconomic regulation has allowed China to overcome a series of major problems in the economy, such as overheating, deflation, financial disorder, excessive issuance of currency, and excessive price rises. Regulation has allowed China to end the cycle of economic fluctuation that played out in the years of the planned economy and maintain rapid and steady growth. In the wake of the Asian financial crisis of 1997 and the international financial crisis of 2008, China responded calmly and resolutely by taking a series of measures aimed at boosting domestic demand and rapidly introducing stimulus policies to reverse the economic downslide. This not only averted the onset of upheaval in China’s own economic development, but also turned the country into an important engine for global economic growth.

Considerable progress has been made in various social programs.There have long been imbalances in China’s economic and social development, and the development of social safety nets has lagged behind the pace of economic growth. In our reforms, we have employed all means at our disposal to create more jobs and improve the system of income distribution. As a result of these efforts, per capita incomes have grown by a large margin, and a general increase in family assets has been seen. We have given priority to the development of education. Nine-year compulsory education has essentially become universal, illiteracy among young and middle-aged people has been essentially eradicated, and China now has more university students than any other country in the world. China has implemented a strategy of invigorating the country through science, technology, and education. Under this strategy, the ratio of expenditure on scientific research and development to the GDP has increased on a constant basis. We have deepened the reform of the cultural system, devoted great efforts to the development of welfare-based cultural programs, and promoted the prosperity of cultural industries. We have made breakthrough progress in the development of a social security system that covers both urban and rural areas. The key aspects of this system, including basic pensions, basic medical care, unemployment and injury insurance, and birth support, have been established and gradually improved. In addition, a social aid system whose core aspect is a basic living allowance has been established in both urban and rural areas. The coverage of various social security programs has been expanded on a continuous basis, and the level of assurance that these programs provide has also been steadily raised. The great achievements that China has made in the building of its social security system mark a historic transition in which social security is gradually assuming the burden that families traditionally assumed and that employers assumed in the years of the planned economy.

The establishment and development of the socialist market economy has brought about huge economic, political, cultural, and social progress in China. The country’s comprehensive national strength has increased by a significant margin, living standards have been notably improved, and China’s international standing and influence have both risen considerably. China’s GDP exceeded 47 trillion yuan in 2011, more than 22 times greater than the GDP in 1978 when calculated in constant prices, making it the second largest economy in the world. The GDP per capita in 2011 exceeded US$5,300, a 16-fold increase compared to 1978, indicating that China had become a medium income country. At present, China is the largest producer of principal farm produce and industrial products in the world. A series of world-class technological innovations have been achieved in close succession, and major breakthroughs have been made in the development of water conservancy, energy, transport, telecommunications, and other infrastructure projects. The improvement of ecological environments has been constantly promoted, and both urban and rural areas have taken on an entirely new look. Moderate prosperity has essentially been achieved throughout the country as material standards of living have increased by notable margins. The development of advanced socialist culture has continued, all round progress has been achieved in education, science, technology, health, and fitness, and the growing intellectual and cultural demands of the people have been better satisfied. The reform of the political system has been deepened, the rights that the people enjoy as the masters of their own country have been better safeguarded, and social harmony and stability have been consolidated and enhanced. These achievements have fully demonstrated the enormous vigor of the reform and opening up drive.


The building of the socialist market economy represents a profound revolution and a comprehensive institutional transformation. In addition to enormous achievements, we have also gained numerous important lessons and a wealth of valuable experience in more than three decades of reform. These experiences embody our understanding of the inherent laws that govern the development of socialism with Chinese characteristics, and are a valuable source of intellectual wealth to guide us in the continued development of socialism with Chinese characteristics and the building of a moderately prosperous society in all respects.

Adhering to the principles of emancipating our minds, seeking truth from facts, and advancing with the times. The process of developing, establishing, and improving the socialist market economy has been a constant process of mental liberation. Each step that we have taken to emancipate our minds has, without exception, provided a strong stimulus for the deepening of economic reform and the development of the economy and society. Through the course of practice, we have learned that only by adhering to the principles of emancipating the mind, seeking truth from facts, and advancing with the times can we break away from outdated ideas and practices, be bold in exploration and practice, engage in constant innovation, and promote the establishment and continuous improvement of the socialist market economy.

Adhering to the integration of socialism and the market economy. We have remained committed to the path of socialism with Chinese characteristics during this process of profound and all-embracing change. Whilst giving full play to the inherent superiorities of the socialist system, we have also taken creative steps to fully exert the strengths and advantages of the market economy under a socialist system, thereby bringing economic activities under the governance of market laws. The establishment of an economic system rich in vitality is conducive to the consolidation, improvement, and development of the socialist system. In the building of a new system, we have unswervingly consolidated and developed the public sector, and unswervingly encouraged, supported, and guided the development of the non-public sector. We have encouraged all of society to become involved in development, unleashed the vitality of labor, knowledge, technology, management and capital, and freed up all sources for the creation of social wealth. We have attached importance to maintaining the right balance between market mechanisms and macroeconomic regulation, and have done our best to lift restrictions on economic activities that are best regulated by market forces, so as to exert the role of the market in the allocation of resources. The government has provided effective guidance and regulation with regard to spontaneity and recklessness in market behavior and in cases where markets have lagged behind. Experience has taught us that the need for flexible, powerful, and effective macroeconomic regulation increases as the micro-economy becomes more open and the process of marketization speeds up. These two things are mutually reinforcing, and we cannot emphasize one at the expense of the other.

Taking the emancipation and development of productive forces as the benchmark for judging the success or failure of the reform. Development is of overriding importance. Development is the fundamental means for resolving the principal problems in Chinese society, and the primary task of the Communist Party of China in holding power and invigorating the country. China is still in the primary stage of socialism, and will remain so for a considerable time to come. Under such circumstances, we must continue to promote the constant development of productive forces in order to address the fact that our backward social production is unable to meet the growing material and intellectual demands of the people. In order to liberate and develop productive forces, we must carry out reforms aimed at adjusting aspects in the relations of production that are not suited to productive forces and aspects in the superstructure that are not suited to the economic base. Therefore, all reforms must be judged on the basis of whether or not they are conducive to the development of social productive forces, whether or not they are conducive to the enhancement of the comprehensive national strength of the socialist state, and whether or not they are conducive to the raising of standards of living.

Adhering to an active, steady, and progressive approach to reform. Reform is a complex and systematic undertaking that involves the adjustment of power structures and the balancing of interests at a deep level. Not only must we coordinate reforms in the economic domain, including the reform of the ownership structure, enterprise reforms, the development of the market system, and the building of a system for macroeconomic regulation; but we must also coordinate the promotion of political, cultural, and social reforms. This inevitably means that we must follow a step-by-step approach to market-oriented reform that is suited to conditions in China. Therefore, we must begin by establishing the basic orientation and approach to reform. Following this, we must identify fields in which reforms are relatively easy to promote and likely to achieve good results. The overall progression of reform should go from easy to hard; shallow to deep; periphery to core; and local to national. Through a process of trials, experience must be gained before major reforms are implemented on a widespread basis. Successful trials will culminate in successful reforms. For instance, China’s reforms began in rural areas, which were the weakest link in the planned economy. After certain success had been achieved in rural areas, reforms then moved on to urban areas, and gradually progressed to the comprehensive reform of urban and rural areas. The reform of state-owned enterprises began with the decentralization of power and transfer of profits, the collection of taxes instead of profits, and the implementation of a contract responsibility system. Following this, reforms gradually moved towards expanding the decision-making power of enterprises, separating ownership rights from management rights, and switching management mechanisms. Reforms eventually led to the implementation of the joint-stock system and the corporation system, and the establishment of a modern corporate system. This gradual approach to reform is conducive to gathering a wide social consensus behind reform, coordinating the interests of different parties, reducing the costs and the risks of reform, and keeping the process of reform and opening up steadily on track.

Correctly handling the relationship between reform, development, and stability. Reform is the motive force for development; development is our goal; and stability is the precondition for development. Maintaining a balance between reform, development, and stability is an important principle that pertains to China’s overall socialist modernization drive. In regard to the relationship between reform and development, we have adhered to a policy of promoting reform through development, whereby the acceleration of development creates the space that is necessary for the deepening of reforms. We have also adhered to the principle of promoting development through reform, whereby reform removes constraints in the relations of production and the superstructure that are hindering the development of productive forces, thereby providing a new impetus for development. Of course, without a stable political and social environment, there will be little chance of reform and development. Therefore, prior to the introduction of each major reform policy, we must give due consideration to the timing, intensity, and pace of reform, as well as the capacity of the general public to cope. At the same time, we need to establish new types of social security and compensatory mechanisms so as to compensate groups whose interests are affected by reforms. Due to the importance that we have attached to maintaining political, economic, and social stability during the course of reforms, we have been able to avoid the kind of drastic upheavals that some countries experienced as they underwent structural change.

Fundamentally speaking, the key to establishing and improving the socialist market economy has been the firm leadership of the Party. In the face of complex and unpredictable situations internationally and domestically, the Party has, on the basis of conditions in China, strived to adapt to changing times, and has not only taken stock of successful past experiences, but also had the courage to tackle complex issues head on. We have attached great significance to the theoretical analysis of major issues, continued to break new ground in the development of Marxism, and firmly grasped the correct orientation of reform and opening up. In making major policy decisions, the Party has grasped opportunities, forged ahead, and broken away from rigid ideas and practices. In promoting major reforms, it has demonstrated the capacity for rational decision making and the courage to make breakthroughs. Moreover, the Party has been adept at transforming its political advantages and organizational advantages into a driving force behind the progression of reform and development, thereby bringing various positive factors together in a concerted effort to push forward the causes of reform, opening up, and modernization.

In over three decades of surging economic reforms, the Party has demonstrated immense political courage in advancing the theory of the socialist market economy, and great daring and resolve in developing and improving it through the course of reform, creating a great miracle of economic and social development that will forever go down in human history. Coming almost 200 years after the birth of scientific socialism, the socialist market economy represents an important contribution that Chinese Communists have made to the development of Marxism.

(Originally appeared in Qiushi Journal, Chinese edition, No.11, 2012)


Author: Director-General of the China Center for International Economic Exchanges


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