The Six Foundational Books to Read on China’s Political Economy

The inaugural essay of this blog

“From the side, a whole range; from the end, a single peak: Far, near, high, low, it shows a different shape.”

— Su Shi in 1084 CE bemoaning the complexity of Mount Lu in Eastern China

An ancient civilization starting anew, China remains poorly understood by the world. Superficial resemblance to the Soviet Union masks its complex history, distinctive culture, and hybrid economy. Yet the importance of getting China right can hardly be overstated.

Below are the six foundational books for the intelligent and curious who wish to begin understanding China. In this author’s opinion, they serve as the necessary steppingstone for in-depth appreciation.

(This author has no affiliation with any of the writers or publishers. They are recommended solely based on merit.)

Deng Xiaoping and the Transformation of China (2011) by Ezra Vogel

The rapid transformation of China from Maoist deprivation to a middle-income superpower has been nothing short of a miracle. The one person most responsible is Deng Xiaoping, the second paramount leader of Red China. Nevertheless, the world lacked an excellent biography of Deng until Vogel’s text was published in 2011. Nominally a biography, it’s a comprehensive history of the Deng era (1978-1992) in China, with occasional rosy views on the titular character. From upper middle-class origins in rural Southwestern China, Deng joined the Chinese Communist Party early on. He rose through the hierarchy owing to his administrative and military prowess, eventually becoming the general secretary of the party under Mao in 1956. Gradually, we see in the book his pragmatism clashing with Mao’s radical ideas, leading to him being purged twice during the Cultural Revolution. After Mao’s death, Deng quickly sidelined Mao’s inexperienced heir, unleashing what became known as Gaigekaifang, or Reform and Opening Up.

Unlike countries in the Soviet Bloc, whose later economic reforms led to the downfall of Communist rule, the CCP under Deng and other party elders successfully fused the free market with one-party supremacy, for both practical and ideological reasons. After the Tiananmen Square Incident and the collapse of the USSR, the general secretary of the party named by Deng began curtailing economic reform, fearing it was undermining political security. Deng, 87 and no longer holding any official position, embarked on his storied Southern Tour to reignite market liberalization. “Whoever refuses to carry out reform will have to step down”, Deng told senior military commanders at a meeting in Zhuhai in Southern China. Jiang Zemin, the wavering general secretary, soon pivoted and put China back on the path of Reform and Opening Up, securing Deng’s legacy. Nonetheless, the tension between economic freedom and political security was never fully resolved.

Quote of the book: “If there is one leader to whom most Chinese people express gratitude for improvements in their daily lives, it is Deng Xiaoping. Did any other leader in the twentieth century do more to improve the lives of so many? Did any other twentieth-century leader have such a large and lasting influence on world history?”

1587, a Year of No Significance (1981) by Ray Huang

Sarcastically titled, 1587 remains the finest book on Chinese history ever written. Huang, having come of age in Central China and fought in WWII against Japan, drew on his encyclopedic knowledge on pre-modern China to paint a detailed picture of the country in 1587 CE. He convincingly demonstrates the institutional ossification of the Ming dynasty, attributing it to causes deeply rooted in the Chinese tradition. It stifled not only novel ideas and culture, but fiscal and military reforms needed to counter the invasion threat from beyond the Great Wall. Ultimately, the volume foreshadows the Ming dynasty’s fall to northern invaders and peasant rebellion, and the long-term decline of China vis-à-vis the West and Japan.

The great divergence in economic performance, between China and the West or Japan since the dawn of the Industrial Revolution, has perennially puzzled intellectuals worldwide. Many answers have been proposed, ranging from natural resources (Kenneth Pomeranz and Robert Allen), institutions (Daron Acemoglu and Douglas North), culture (David Landes and Joel Mokyr), geography (Jared Diamond), and demographics (Gregory Clark), to even the Black Death (Hans-Joachim Voth). The institutional explanation remains the most compelling, however. As the great Adam Smith observed in The Wealth of Nations, “China seems to have been long stationary, and had, probably, long ago acquired that full complement of riches which is consistent with the nature of its laws and institutions”. A country that has reached this plateau, he explains, can “advance no further”. In the institutional context, qualitative evidence is crucial but often ignored.

Quote of the book: “The year 1587 [CE] may seem to be insignificant; nevertheless, it’s evident that by that time the limit for the Ming dynasty had already been reached. It no longer mattered whether the ruler was conscientious or irresponsible, whether his chief councilor was enterprising or conformist, whether the generals were resourceful or incompetent, whether the civil officials were honest or corrupt, or whether the leading thinkers were radical or conservative — in the end they all failed to reach fulfillment. Thus our story has a sad conclusion.”

The Rise of Modern China, 6th Edition (1999) by Immanuel C. Y. Hsu

For a country as consequential as China, its modern history is surprisingly under-researched and under-appreciated. Why did Imperial China fail to industrialize? Why was Republican China too weak to resist its much smaller neighbor Japan? How did the Nationalist Party lose the civil war to the Communists? How was Mao ruling China before he died? Although the book doesn’t address these vital questions in full, it offers an impressive overview. A native of Shanghai, Hsu rose to the challenge of summarizing probably the most complicated modern history of any country. It’s thorough without drowning the reader in details.

The aforementioned historical questions cast a long shadow even today. The ethnic tensions in Xinjiang and Tibet can be traced back to the Qing dynasty. The CCP’s swift victory over the Nationalists is intimately linked to Japan’s invasion of China. Taiwan, the most serious security flashpoint in the world today, is a product of the Chinese Civil War. Last but not least, Mao’s regime, despite its enormously destructive nature, laid the political foundation of today’s China. It’s hard to have a decent understanding of China without wrestling with these basic questions.

Quote of the book: “In ancient times, the Sinitic civilization reigned supreme in East Asia, and the Greco-Roman, Judeo-Christian civilizations flourished in the West. Each lived in splendid isolation without knowing much of the other. Truly East was East and West was West, the twain did not meet. Today the world is a global village.”

Prisoner of the State: The Secret Journal of Premier Zhao Ziyang (2009) by Zhao Ziyang

The Tiananmen Square Incident remains a watershed moment in modern Chinese history. Icons from the incident became world-famous, such as the Goddess of Democracy statue on the Tiananmen Square. Yet General Secretary Zhao Ziyang, who opposed the crackdown and spent the rest of his life under house arrest as a result, remains obscure. Based on recordings of conversations between Zhao and sympathetic friends after his purge, it serves as an extraordinary insider account from China’s would-be Gorbachev.

Due to the CCP’s opacity, this oral history serves as the best single source on the innerworkings of the party after Mao. For example, we get a detailed picture from the book of how heavily the CCP leadership depends on informal institutions and personal networks. Official party rules are often ignored, while formal meetings and documents serve as a rubber stamp for pre-approved decisions and messages. Senior party leaders communicate by private letters, and political patronage is usually necessary for high-level promotions. Intra-party differences sometimes rear their heads in conflicting party media editorials, but they are settled promptly by consensus or the supreme leader. The clash between orthodoxy ideology and pragmatic reform takes place both between factions and within individuals. By and large, they care deeply about both the future of the Chinese people and the future of the Communist Party.

Quote of the book: “When he [Deng Xiaoping] suggested he retire [in 1989 before the Tiananmen Square Incident], I [Zhao Ziyang] firmly disagreed. I said, ‘With the economic problems we are now encountering, people are talking. If you retire completely, it will be very difficult for us to manage. Politics in the East differs from the West; here in the East, your retirement would not stop the interference, nor would the fact that they no longer held any official positions. As long as these heroic founders of the nation are still alive, it will be impossible to persuade them to stop interfering in state affairs. If you were to stop intervening, but they continued to, it would be even more difficult for us to manage. With you in charge, it is still easier for us to get things done.’”

The State Strikes Back (2019) by Nicholas Lardy

The central question on the Chinese economy is why growth is slowing down. Once an envy of the world, China’s official growth rate began falling precipitously not long ago, from 14.1% in 2007 to 5.0% in 2024. Even though China overtook the U.S. as the largest economy in purchasing power parity in 2014, on a per-person basis China remains only half as rich as Japan or South Korea. Lardy, one of the foremost experts on the Chinese economy, offers a simple yet powerful answer – state-owned enterprises. Specifically, he shows the Communist Party’s failure to further reform the gigantic and inefficient SOE sector is the main drag on growth.

When Mao died in 1976, the entire Chinese economy was essentially one gargantuan state-owned enterprise. As a consequence, the economy teetered on the brink of collapse, with widespread malnourishment. After the private sector was reborn, the economy began taking off, with the SOE sector shrinking to a smaller and smaller slice. By the time Xi Jinping came to power in 2012, the text says their share of total output had fallen to about 30%. Instead of deepening previous reform to reduce their role, however, Xi reversed course by reemphasizing SOEs. His policies include re-directing bank credit, consolidating SOE national champions, and preferential regulatory enforcement. Despite efforts to improve SOE performance, a wide gap in efficiency persists. In industry, SOEs had only 26% the return on assets of private firms in 2016. Pragmatic reform blueprints for SOEs from the World Bank and domestic advisors went unheeded.

Quote of the book: “The large and growing gap in the economic and financial performance of private and state firms reflects the superior management of the former and the failure of banks, almost entirely state-owned, to impose hard budget constraints on money-losing state-owned enterprises. Private firms attempt to maximize profits and returns on assets while managers of many state companies appear to be asset maximizers, borrowing ever larger amounts to expand their businesses even if the returns do not cover the cost of capital.”

How China Works: An Introduction to China’s State-Led Economic Development (2024) by Lan Xiaohuan

Officially, China has been a “socialist market economy” for decades. Historically an oxymoron, the Communist Party appears to have made it work. What does it mean in practice? What role does the party-state still play in the economy? To answer these questions, economics professor Lan Xiaohuan at Fudan University in Shanghai has written a terrific primer. The book starts from government interventions like land-dependent public finance, local industrial policy, and currency-based exports, to the distortions they generate, including steep housing prices, toxic local government debt, underconsumption, and trade tensions. First published in China in 2021 to critical acclaim, it was released in English in 2024.

Despite its unprecedented success, the heavy state involvement in the economy has created serious and entrenched pathologies, hampering future growth. Recognizing the problems, Xi Jinping has chosen the solution of more visible hands of the party, not fewer. It has in turn exacerbated existing issues, and created new ones. To tackle unaffordable housing, instead of supplying more residential land, the government has imposed borrowing limits that bankrupted leading private developers. To handle industrial overcapacity, rather than withdrawing state subsidies, the party has relied on fiats and quotas. To address troubled shadow city loans, in place of removing implicit government guarantees, the state has rolled them over. To mitigate the trade war, in lieu of lowering China’s trade barriers, the country has focused on retaliation. The list continues. All in all, the socialist market economy has grown increasingly socialist in the past decade.

Quote of the book: “If we go back to 1980, even the most ardent promoters of the market economy then would be hard-pressed to imagine the depth and breadth of subsequent reforms. This book tries to introduce specific practices in the process of China’s economic development, which is obviously not a set of models copied from Europe and the US. I believe readers can judge for themselves the pros and cons of China’s model.”