China has maintained a high growth rate for more than 30 years since the beginning of economic reform in 1978, and this sustained growth has generated a huge increase in average living standards. China had many characteristics in common with the rest of developing Asia 25 years ago: large population, low per capita income, and resource scarcity on a per capita basis. In the 15 years from 1990-2005, China averaged per capita growth of 8.7%.
The whole reform program is often referred to in brief as the open door policy". This highlights that a key component of Chinese reform has been trade liberalization and opening up to foreign direct investment, but not opening the capital account more generally to portfolio flows. China improved its human capital, opened up to foreign trade and investment, and created a better investment climate for the private sector.
After joining the WTO China’s average tariffs have dropped below 10%, and to around 5% for manufactured imports. It initially welcomed foreign investment into special economic zones", but it is important to note that some of these were very large, amounting to urban areas of 20 million people or more. The positive impact of foreign investment in these locations led to a more general opening up of the economy to foreign investment, with the result that China has become the largest recipient of direct investment flows in recent years. The opening up measures have been accompanied by improvements in the investment climate. Particularly in the coastal areas have cities developed their investment climates. In these cities the private sector accounts for 90% or more of manufacturing assets and production. In 2005 average pretax rate of return for domestic private firms was the same as that for foreign-invested firms. Local governments in coastal cities have lowered loss of output due to unreliable power supply to 1.0% and customs clearance time for imports has been lowered in Chinese cities to 3.2 days. China’s sustained growth fueled historically unprecedented poverty reduction. The World Bank uses a poverty line based on household real consumption (including consumption of own-produced crops and other goods), set at $1 per day measured at . In most low-income countries this amount is sufficient to guarantee each person about 2000 of nutrition per day, plus other basic necessities. In 2007, this line corresponds to about 900 RMB per year. Based on household surveys, the poverty rate in China in 1981 was 64% of the population. This rate declined to 10% in 2004, indicating that about 500 million people have climbed out of poverty during this period. This poverty reduction has occurred in waves. The shift to the household responsibility system propelled a large increase in agricultural output, and poverty was cut in half over the short period from 1981 to 1987. From 1987 to 1993 poverty reduction stagnated, then resumed again. From 1996 to 2001 there was once more relatively little poverty reduction. Since China joined the WTO in 2001, however, poverty reduction resumed at a very rapid rate, and poverty was cut by a third in just three years
China has been the most rapidly growing economy in the world over the past 25 years. This growth has led to an extraordinary increase in real living standards and to an unprecedented decline in poverty. Between 1981 and 2005 it is estimated that the poverty rate fell from 85% to 15%, roughly 600 million people. However because of this, China faces serious and environmental degradation.It has also seen growing disparities of different kinds as people in different parts of the country and with different characteristics have benefited from the growth at different rates.
Starting from the pre-reform situation, some increase in locations benefited first from the opening policy and as the small stock of educated people found new opportunities, though particular features of Chinese policy may have exacerbated rather than mitigated growing disparities. The household registration (hukou) system kept rural-urban migration below what it otherwise would have been, and contributed to the development of one of the largest rural-urban income divides in the world. Weak over rural land also limited the ability of peasants to benefit from their primary asset.
Aside from income inequality, there has also been an increase in inequality of educational outcomes and health status, partly the result of China’s uniquely decentralized fiscal system, in which local government has been primarily responsible for funding basic health and education. Poor localities have not been able to fund these services, and poor households have not been able to afford the high private cost of basic education and healthcare.
The large trade surplus that has emerged in China have exacerbated the inequalities and makes them harder to address. The trade surplus stimulates the urban manufacturing sector, which is already relatively well off. It limits the government’s scope to increase funding for public services such as rural health and education. The government has been trying to rebalance China’s production away from investment and exports and toward domestic consumption and services to improve the country’s long-term macroeconomic health and the situation of the relative poor in China.
Recent government measures to reduce disparities including relaxation of the hukou system, abolition of the agricultural tax, and increased central transfers to fund health and education in rural areas.
In conclusion, China's poverty reduction techniques come at a price and she has to be able to cope with the arising challenges and issues.