The 13th Plenary Session of the 11th National Congress of the Communist Party of China held in 1978 marks an important milestone in China’s economic development. Since then, major changes have taken place: 1. The economic system has step by step stridden into a socialist market economy from the traditional central planning economy. 2. The closed economy is in the transition to an open one. 3. The pace of China’s industrialization and urbanization has accelerated. The major changes in the economic system and structure have promoted the economic development with annual GDP growth averaging 9.8% from 1978 to 1997, much higher than the annual growth rate (5.98%) in the first 30 years after the founding of the New China and the world average in the same period.

Table 1. Economic Growth Rates in China and other Parts of the World (%)

	1980—1988	1989—1997	1979—1997
World	3.4	3.2	3.3
China	10.1	9.5	9.8
Developing Countries	4.3	5.7	5.0
Asia	6.8	7.8	7.3
Hong Kong, China	8.2	4.8	6.6
Malaysia	5.8	8.7	7.2
Republic of Korea	8.1	7.3	7.7
Singapore	7.3	8.5	7.9
Thailand	6.7	7.8	7.2
Latin America	2.7	3.1	2.9
Africa	2.3	2.6	2.4
Developed Countries	2.7	2.2	2.5
The Unites States	2.7	2.3	2.5
Japan	3.8	2.4	3.1
The European Union	2.3	2.0	2.2

Source: Brilliant Achievements in 20 Years, compiled by the State Statistics Bureau.

The high economic growth in the past 20 years has led China to step into the ranks of lower-middle income countries from a low-income country. It has also helped China to improve its people’s life by quite a big margin and greatly raise its in international standing. However, the crucial period will come in the next 20 years. If we can maintain the rapid development in the period, we will be able to further narrow our gap with the developed countries, further raise the standard and quality of the people’s life and lay a solid foundation for realizing the objectives set in the third phase of development strategy. Looking into the prospects of China’s economic development in the next 20 years, the article will first analyze the potentials in and challenges to China’s economic development. Then it simulates the possible economic prospects till 2020 by means of the general dynamic and calculable equilibrium model of China’s economy.

I. Potentials in and challenges to the economic development

To look ahead into future economic development, it is necessary to look back into and summarize the economic development process in the past and the current economic situation. The past has provided us with the starting point of and basic restraints on the future development as well as the fundamental experience and lessons drawn from the success or failure of the policies.

China’s economy has witnessed profound changes in the past 20 years with rapid growth coupled with huge restructuring: the fast industrialization and urbanization, the rapid emergence of non state-owned economy, greater dependence on the external economy and the initial establishment of the framework of a market economy system. The high growth achieved in the past 20 years mainly benefited by fast accumulation of capital in kind and the increase in productivity, while the contribution of the labor force growth was only secondary. Calculation shows that from 1978 to 1997, capital input contributed nearly 60% to the output growth, productivity increase contributed 30%, while the expansion of the gross work force contributed only 12 percent .

Capital accumulation represented the main contributor to the economic growth in the past 20 years. Apart from in the 1980s when the investment had the nature of "making up for the missed lesson," the annual increase in investment maintained at about 38% after 1985 and at 40% from 1993 to 1995. Such an investment ratio was not only higher than that in countries of other areas, but also higher than that in Southeast Asian nations which share a similar cultural tradition and social practice and a high savings tendency with China. The two major sources to ensure high investment ratio come from rapid increase in people’s savings and rising inflow of foreign capital. Since China adopted the policy of reform, people’s income saw great increase in 17 years as a result of the fact that the distribution of the national income kept tilting toward individuals. The traditional consumer goods and new durable consumer products like electric appliances were much sought in the 1980s, but after that, no new hot areas attractive to the consumers surfaced. But on the other side, the Chinese have the tradition of thrift and savings. Such a situation prompted the balance of the savings deposits of Chinese urban and rural residents to reach 4,628 billion RMB yuan at the end of 1997 from 21.06 billion at the end of 1978. In the same period, the decline in the state revenue led to a fall in the government savings/investment, but the huge rise in the savings deposits of the residents ensured the high investment ratio. Meanwhile, direct foreign investment in China increased at a yearly rate of 29.1% from 1979 to 1997, accounting for over 10% of the overall investment in China.

Higher productivity is another major cause to push up the economic growth. The higher productivity since 1978 fundamentally stems from the two state policies of reform and opening up. The reform to turn the economy market-oriented promoted the rational resources flow among the departments, enhanced the disposition efficiency and heightened enterprises’ motive to seek profit. The opening up helped the introduction of advanced foreign technology and equipment into China, but also enabled us to learn the modern management skills and boosted the competitiveness of domestic enterprises both at home and on the world market.

The expansion in the gross work force was not a major cause to push up the economic growth, however the redeployment of the labor force among industrial sectors was an important growth source. Even with the same input and technological level, higher output can still materialize through demand structure change to enable production to lean toward industries with higher productivity and to allow resources to flow to the highly productive sectors from those with lower productivity. When production shifts to the sectors of higher productivity, the growth generated by the redeployment of resources is more evident. In the past 20 years, China’s industrial restructuring also constitutes a major condition for the high economic growth rate, particularly large numbers of work force in agriculture have moved into the secondary and tertiary sectors where the economic yields are relative higher. Research indicates that in the economic growth of 9.8% from 1978 to 1997, the shift from the agricultural work force contributed 0.8 percentage points to the growth.

Therefore, China’s future economic growth will be determined by whether the growth factors mentioned above can be maintained.

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