When I first went to China at the start of the 1980s it was a very poor country, poorer than much of the rest of Asia. Everyone was dressed in drab blues and greens, food and most consumer products – to the extent there were any – were rationed, and the traffic of the cities comprised throngs of many thousands of bicycles. The World Bank development indicators placed China in the late 1970s among the poorest countries in the world with a per capita income about the average for Sub-Saharan Africa.

Poor as China was, this was also an exciting time. The “Gang of Four”, which was led by Mao Zedong's wife Jiang Qing and blamed for the excesses of the Cultural Revolution had been put on trial, and China was embarking on economic reforms. Markets were reviving, China was re-engaging with the world, minds were reopening, and the Chinese people were beginning to experience a new world of economic and personal freedoms they had not known for decades. At Nanjing University where I studied between 1982 and 1985, for example, all sorts of “salons” (shalong) sprouted up to debate western philosophies and theories, and the departments of sociology and psychology among others were restarted. Young Chinese were again going abroad in search of knowledge to serve China.

Fast forward 40 years and we arrive in a very different China, one with an upper-middle-income economy, which has a large urban middle class who can afford overseas holidays, modern cities and infrastructure, and whose political leaders are aggressively wanting to stamp China's vision on the future of the world economy and the system of global governance. The personal freedoms that had blossomed in the first three decades of reform after 1978 have been curtailed increasingly after 2008–09. The Communist Party of China (CPC) under General Secretary Xi Jinping has reasserted the authority of the party in all areas of life, preoccupied as it is with “stability maintenance” (weiwen) and its survival. Since 2011 the internal security budget has even exceeded that of defence, such is the party's fear of internal dissent (Shambaugh 2016: 63).

China's economy today is a hybrid capitalism. The private or nonstate sector is the primary driver of economic growth: the most profitable, the most innovative and the major employer that has delivered the stellar growth of recent decades. Yet state sector firms remain important, especially in sectors vital to the interests of the party-state. They are the largest firms in many sectors of the economy and the biggest are included on the Fortune Global 500. But their contribution to employment has vastly diminished, their inefficiency holds back potential growth, and their lacklustre innovative capacity puts at risks China's aspirations has to become an advanced economy. Despite these deficiencies the state sector is privileged; their leaders are at the centre of the party-state, both corporate titans and powerful party officials, who profoundly influence the country's industrial policy.

Explanation for these contradictions rest in the dominance of the Communist Party of China (CPC) over business and economic life. Although the state abandoned economic planning in the 1980s and stepped back from day-to-day involvement in the economy, in what Barry Naughton (1995) called “growing out of the plan”, still everywhere the party-state's hand is at work in shaping the economy and the business opportunities of firms and individuals. And that hand has strengthened. Under Xi Jinping, the General Secretary of the CPC, the appetite for reform has waned during the 2010s and support for the state sector increased, or as the Chinese would put it: “the state advances, the private sector retreats (guo jin min tui)”. Few countries highlight as clearly as China the tension between the role of the state and that of the market in economic development. For this reason, the chapter begins with an overview of the organization of the government administration and the CPC.

This contemporary business configuration described above is not a simple story of a dual economy. Both state sector and private firms are tied together in complex webs of social networks based on personal and particularistic relationships that are a central trait of Chinese societies and indeed of most of Asia.

At the start of 2020 China looked set to deliver the first of the centennial goals its leader Xi Jinping had promised. By 2021, the centenary of the founding of the CPC, China would be a “moderately well off” society and poverty would have been all but vanquished based on the current definition of the poverty line. It had become the second-largest economy in 2010 and an upper-middle-income country. Sure, there were worrying matters, not least the friction between China and the United States over trade, investment and technology. Economic growth had slowed in the 2010s compared with the first three decades after reform began in 1978, but that was to be expected, even though at around 6 per cent a year growth was impressive for such a large economy. Moreover, China had gained an international voice that was stronger than before, some would even say bellicose, as it projected its vision of the future global order through such grandiose schemes as the Belt and Road Initiative.

Less than two months into the year a lot had begun to unravel. A novel coronavirus had taken hold in the central megacity of Wuhan, which led the government to lockdown the country in the third week of January. Rapid spread beyond China soon led to a world pandemic, infecting at least 90 million people with more than two million deaths by early 2021. China's economy massively slid in the early months of the year. China reported its first quarterly GDP contraction of the reform period and the government abandoned in May 2020 predicting the GDP growth rate, which has been the metric by which it and its officials have measured their performance for many years. While the country's success in heading off the virus domestically allowed the economy to begin to recover from late March, the deepening pandemic disrupted the global markets with many economies falling into recession. Of the world's major economies, the IMF (2020) mid-year outlook predicted that only China would record positive growth in 2020 – a paltry 1 per cent – while the United States would grow −8.0 per cent, the EU −10.2 per cent and Japan −5.8 per cent.

The latter half of the nineteenth century to the second decade of the twenty-first century for China were turbulent decades of crises and wars, economic growth and contraction, and finally an extraordinary few decades of transformation of the economy and society. The calamities of the mid-nineteenth century brought a new reckoning about China's future that set the country on the long road to modern economic development. External defeat and internal insurrection had bloodied the Qing dynasty. Britain's victory in the Second Opium War had disposed of the belief that the foreigners had got lucky in the First Opium War less than two decades earlier. British military technology was superior to anything China had, while the domestic rebellions had laid waste large parts of the China heartland, robbed the administration of vital revenue, and exposed the inadequacies of the state to maintain internal security. Confronted with these near-death experiences, prominent court and provincial leaders initiated a modernization programme, despite opposition from conservative officials and outright hostility from most of the Confucian elite.

China's “long” twentieth century, the focus of this chapter, began with these “self-strengthening” (ziqiang) modernization initiatives in the 1860s and 1870s. New state institutions were created and the state sponsored arsenals and firms in shipping, textiles and mining. These fared little better than Japan's state-sponsored firms around the same time. In hindsight, the steps were too small, too few and too limited in scope. Their failings were exposed in the crushing defeat a modernizing Japan dealt China in 1894. The treaty that concluded the brief war with Japan allowed foreigners to establish manufacturing enterprises in China. Between 1895 and 1937, foreign capital and the private sector drove Chinese economic development. Shanghai and a few other places became vibrant centres of modern industry, commerce and urban culture. That economic growth was snuffed out in 1937 when Japan launched a full-scale invasion.

China during 1937–45 was characterized by multiple economies: the Japanese controlled the cities of east and central China, the Nationalists controlled southwest and west China, and in the interstices of the rural spaces between and the remote northwest provinces, the Communists held sway.

China's great transformation has created a huge middle-income, urbanized and sophisticated economy unrecognizable from 40 years ago. The especially rapid structural change after the 2001 accession to the World Trade Organization was pushed further by the massive stimulus investment to ward off the feared negative effects of the Global Financial Crisis, 2008–09. This chapter will take stock of the state of the Chinese economy, looking at not only the national aggregates for production, population and labour, finance and public spending, and international trade and investment, but also the diversity of economic change and growth across China's provinces. Achievements are impressive, but mask challenges for sustaining future growth in the context of an older population and shrinking workforce.

The world's number two economy after the United States and foremost manufacturing exporter is a challenge to describe. No country has sustained such high levels of economic growth for as long as China; no country has seen as many people lifted out of poverty in a generation; and no country has developed a vibrant market-based economy that seeks to become an innovative leader without throwing off the shackles of authoritarianism, least of all a former planned economy. Scale is a major challenge in measuring the current state of the economy. Many provinces are the equivalent in size of large national economies.

Diversity is the other challenge. The modernity of the eastern cities is a world away from the relative underdevelopment of the interior. Within China we find economies that are advanced, middle income and low income. As Jane Jacobs (1984) once observed, national economies are a convenient fiction. What matters are the cities and the urban conurbations that drive regional growth within different parts of a country. This chapter will therefore where feasible go beneath the national aggregates to look at the sub-national variations, the differences between and within provinces that make the Chinese economy so complex.

During 2018–19 celebrations of the fortieth anniversary of policies to reform and open up to the world (gaige kaifang) and the seventieth anniversary of the PRC's founding there was a lot of drum beating of the success achieved over the previous four decades.

China's future will be an urban one, but there are big challenges in building liveable cities and providing work for their inhabitants in the advanced economy of tomorrow. Today China is not so much at a crossroads as at an intersection with many forks. There is no single path that will lead China assuredly to become a wealthy and strong country by 2049, the centenary of the founding of the PRC. Many Chinese would like to see realized this dream of Xi Jinping, but far from all would agree with him and the party leaders on how to build a prosperous and sustainable future. This chapter will look at three challenges that will be crucial: making Chinese cities liveable, reducing energy use without reducing growth and incomes, and becoming a global innovator. These are inter-connected. Indeed, innovation in one form or another is at the centre of all paths to a sustainable future. China will need to develop the capabilities to deliver the science, the technologies and the processes that distinguish a high-income economy from the rest if it is to grow and sustain the living standards of the predominantly urban population.

Cities in China have long been among the largest in the world, yet only 40 years ago 82 per cent of Chinese lived in rural settlements. In 2020, 61 per cent of the population was urban. Rapid economic growth and massive migration swelled existing cities and created vast new urban settlements. Unbridled economic growth has had big environmental consequences, poisoning air, water and land in many parts of the country. China is paradoxically the world's largest emitter of greenhouse gases and the largest producer of renewable energy. Massive investment has created modern urban spaces and efficient intra-and inter-urban transport. The residents of these cities are ardent consumers of Chinese and international brands. Buying a car to get around the new urban areas is a must for the swelling middle class. China is not only the world's largest automobile market for conventional-powered vehicles, but also has more electrical vehicles on its roads than the rest of the world combined.

There are some inescapable truths about the transformation of Chinese lives over the past four decades. Hundreds of millions lifted themselves out of poverty, tens of millions became well off to affluent, and many millions are now rich, even super rich. The Chinese are indeed richer than they have ever been; they are also on average taller, healthier and fatter; they are better educated and more productive; and they have previously undreamed-of opportunities to travel within China and abroad. Materially, the Chinese live in a world of abundance compared with even the very recent past. But inequalities are starker too. These have the potential to destabilize and rip apart society. This chapter will explore these aspects of the social and material change that have accompanied four decades of rapid economic growth.

Every week in China in 2017 and 2018 four new dollar-denominated billionaires were minted (Hurun 2018, 2019). China had 819 billionaires in early 2018, 210 more than the previous year, and pulled further ahead of the United States's tally of 571. The US is still home to the richest in the world: Jeff Bezos, Warren Buffet, and Bill Gates head the global rich list. But Beijing is the world's billionaire capital. In 2018, the capital and seat of power for the Communist Party of China was home to 131 billionaires, 39 more than in New York; 10 cities in Greater China had 15 or more billionaires. Little would the 1980s reform leader Deng Xiaoping have imagined his fellow Chinese would embrace with such lust his call to get rich. Even less so, would he have imagined how his party comrades and their families would likewise enrich themselves at the expense of the state and citizenry. Looting of state assets by officials in collusion with private business was covered in the previous chapter. China is truly a country of peculiar dissonance and phenomenal disparities.

More detail on the life, careers and fortunes of the super-rich will follow next, but most of the chapter is devoted to the less extraordinary, focused on the disparities in income, education and health status that are the lived experience of ordinary Chinese.