Even China sees the role of capitalism in society

How China’s Selective Embrace of Free Markets Fostered a Middle Class

As we enter into the final throes of our next election cycle for President of the United States, I wanted to remind us all of something: capitalism grows the middle class. We have often talked about the importance of the middle class in America and that it is disappearing. We want to help people in America climb out of poverty, have enough food, and opportunity for safety and security. China is known for their Communist political structure, centralized planning, and strict controls on their people, yet even they have looked to capitalism to foster growth and reward wise investments. Are they a reminder of something we are losing track of ourselves?

Anyone familiar with China’s economic evolution knows that the country’s growth story is far from a simple transition from communism to capitalism. Instead, it's a calculated dance between state control and market freedom, which has allowed certain areas to flourish while others remain tightly regulated. This selective approach by the Chinese government has led to the rise of a substantial middle class in those areas experiencing market freedom - an outcome that was both intentional and strategic.

1. The Birth of Market Reforms: A Calculated Experiment

China’s economic transformation began not with sweeping changes but with targeted experiments. In 1978, under Deng Xiaoping, China started opening up to market-driven economics. Rather than implementing a nationwide policy change, Deng focused on creating Special Economic Zones (SEZs), like Shenzhen, where market liberalization could be tested in a controlled environment.

These SEZs were granted unique privileges—tax breaks, reduced regulations, and greater economic autonomy. This wasn’t just a leap of faith but a calculated experiment to see how far market principles could be pushed without destabilizing the country. The SEZs became magnets for foreign investment, sparking economic activity that spread beyond their borders and set the stage for further reforms.

2. Measuring Success: The Rise of a Middle Class

The success of China’s market reforms is most visibly reflected in the rise of a robust middle class. But how do we quantify this transformation? Let’s examine a few key indicators:

• Income Growth: A clear sign of the burgeoning middle class is the rapid increase in income levels. In 1980, China’s per capita GDP was a mere $300. By 2023, it had soared to over $12,000, marking a massive shift in living standards for hundreds of millions of Chinese citizens, many of whom have moved from poverty into the middle class.
• Urbanization: In 1980, only about 19% of China’s population lived in urban areas. By 2020, that number had jumped to over 60%. This migration from rural areas to cities has created a new consumer base driving demand for everything from housing to luxury goods, further fueling economic growth.
• Consumer Spending: The rise of the middle class is also evident in consumer behavior. With more disposable income, Chinese consumers are spending more on cars, homes, and high-end products. Today, China’s middle class is one of the largest consumer markets in the world, and their spending is a significant driver of the country’s GDP.
• Education and Skills Development: The value placed on education is another hallmark of China’s middle class. As incomes have increased, so has the demand for quality education. This focus has led to an explosion in the number of college graduates, helping to drive growth in high-tech and service industries.

3. Why the Chinese Government Allowed Market Growth

Understanding why China embraced market reforms requires us to look beyond the numbers and consider the strategic reasoning behind these decisions. Here’s a breakdown:

• Economic Pragmatism: By the late 1970s, China’s centrally planned economy was under significant strain, particularly in agriculture and industry. Introducing market mechanisms in SEZs was necessary to inject competition and efficiency into the economy without losing control over the broader economic system.
• Political Stability: The Chinese Communist Party (CCP) has always prioritized political stability. A sudden, widespread shift to capitalism could have destabilized the nation, so the government chose a measured approach. By testing market reforms in specific areas, the CCP could carefully monitor the impacts and adjust policies as needed, ensuring that economic liberalization didn’t come at the expense of social or political stability.
• Attracting Foreign Investment: SEZs were also created to attract foreign investment. These zones were designed to appeal to international businesses, offering favorable conditions for setting up operations in China. The influx of foreign capital brought not only financial resources but also technology and expertise, which were crucial for modernizing the Chinese economy and integrating it into the global market.
• Economic Nationalism: Despite embracing certain market principles, China has always maintained a strong sense of economic nationalism. The goal has been to build a robust, independent economy that can stand toe-to-toe with global powers. This led to a unique model of state capitalism, where the government maintains control over key industries like energy and telecommunications, while allowing private enterprise to flourish in other sectors.
• A New Social Contract: Finally, the rise of the middle class has served as a kind of social contract between the CCP and the Chinese people. By delivering economic growth and improving living standards, the government has secured public support and maintained social cohesion. The middle class, with a vested interest in the country’s continued stability and prosperity, has become a key pillar of support for the CCP.

A Balancing Act with Global Implications

China’s selective embrace of free-market principles has been a cornerstone of its economic transformation and the rise of its middle class. The government’s strategic approach—allowing market forces to operate in specific regions and sectors while retaining control over key areas—has driven remarkable growth and lifted millions out of poverty. They are not perfect and nothing says some of their gains won't be lost as they face other challenges in their country, but they have seen some success and we would do well to not lose track of the benefits they have received.

As China continues to evolve, the balance between market forces and state control will remain a challenge for their society. The rise of the middle class in China is not just a story of economic growth; it’s a testament to the government’s recognition that free markets create opportunity that governments only hinder when interfering. How does China's model differ greatly from our "great experiment" here in the United States? In many ways! But, what can we still learn from their success? I believe the survival of our middle class depends on us continuing to grow and embracing the very roots of our own country. How can we reinvigorate our own free markets and refocus on the very core of our founding to see success for every American again?