Traditional China was predominantly agricultural. Adhering to farming patterns developed over a score of centuries, China could sustain a harsh level of self-sufficiency, given surcease from natural calamities. For almost three decades prior to 1949, the incessant ravages of civil disorder, foreign (principally Japanese) invasion, and gross economic neglect virtually decimated China's frail abilities to sustain itself. The first task of the new PRC government thus was to restore the flow of natural resources to prewar levels. By the early 1950s, the government had succeeded in halting massive starvation. Almost all means of production and distribution were brought under state control, and vast parcels of land were redistributed to the peasantry. During 1953–57, China's first five-year plan stressed heavy industry. Economic development was aided by imports of machinery and other industrial equipment from the former USSR and East European countries. In return, China exported agricultural produce to them. A major geological prospecting drive resulted in the discovery of mineral deposits that provided a major thrust toward industrialization.
The Great Leap Forward of 1958–59 initially produced sharp gains in industry and agriculture, but the zeal for increased quotas quickly resulted in undue strain on resources and quality. The Great Leap was followed by "three bitter years" of economic crisis brought on by bad harvests and the economic dislocation of the previous period. By 1961, the GNP had fallen to an estimated $81 billion, roughly the level reached in 1955. By 1965, however, a readjustment of expectations, coupled with a careful program of industrial investment, helped the economy to recover. China's trade patterns, meanwhile, had shifted radically away from the USSR and toward Japan and Western Europe.
During the late 1960s, in the Cultural Revolution period, long-range central economic planning was abandoned in favor of policies promoting local self-reliance. Self-sufficiency in grain production was particularly stressed. The negative impact of this emphasis on agricultural development, together with the turmoil of the Cultural Revolution, resulted in a drop in industrial production of 10–20%, while agricultural output, aided by good weather, improved only marginally.
The sixth five-year plan (1981–85), adopted in 1982, reflected this new pragmatic approach to economic development by emphasizing agriculture, light industry, energy, and improved transportation facilities. During the 1980s, the Chinese economy underwent a major restructuring under the leadership of Zhao Ziyang. Rural reforms launched in 1979, which linked remuneration to output and centered on household responsibility, had a profound and beneficial impact on the rural economy, and output and income rose to record levels for rural residents. The commune system was disbanded in 1983–84 and replaced by a system of townships, and the household or family became the main unit of rural production. In the wake of the success of these rural reforms, the CCP Central Committee published "A Decision on the Reform of the Economic Structure" in October 1984, with the goal of totally overhauling the national economy and bringing urban industrial organization in line with rural practice. The main points of the decision were that all urban enterprises would be responsible for their own profits and losses, managers would have greater decision-making authority, and national and local governments would relinquish direct control over enterprises and assume a regulatory and supervisory position. Remuneration would be based on productivity, subsidies would be abolished, wages and prices would find their own level, and private and collective enterprises would be encouraged. Centralized planning resumed in 1970 with Zhou Enlai's announcement of key goals for the fourth five-year plan (1971–75), including an increase in grain output. The fifth five-year plan (1976–80), disrupted during the political upheaval that followed the deaths of Mao and Zhou in 1976, was restructured in 1978 to embody the Four Modernizations, with the use of Western technology as necessary. At the same time, a 10-year plan (1975–85) calling for the traditional expansion of agriculture and heavy industry was revamped to emphasize the growth of light industries and the accelerated development of industrial raw materials. Trade with the US expanded after full diplomatic relations were restored in 1979, and four special economic zones were established as centers for foreign investment.
The seventh five-year plan (1986–90) made reform its paramount concern. The reforms put forth in 1984 and firmly anchored in the 1988 Enterprise Law proved remarkably successful, leading to much higher rates of industrial and general economic growth than previously expected. Real GNP grew by an average of 9.6% annually between 1979–1988, reaching 11% in 1988. By this time, however, indicators of a seriously overheated economy were also clearly emerging; inflation accelerated to 20.7% and shortages in raw material and energy supply as well as transportation capacity rapidly worsened. Growth fell to only 4% in 1989 before austerity measures initiated by the government brought inflation to below 10% and eventually restored growth to double digit levels.
Infrastructure development was given special priority in the China's eighth plan covering 1991–1995. During this period economic growth accelerated, averaging more than 10% annually, giving China one of the fastest growing economies in the world. With growth came rising inflation and infrastructural bottlenecks which highlighted the need for further improvements in macroeconomic management. The 1996–2000 economic plan, which called for economic growth of 9–10% through 2000, reaffirmed the importance of the private sector and opening the economy to the outside world. To attract and maintain foreign investors China needed to reform its legal and financial institutions. Despite the government's endorsement of market reforms, the plan continued to affirm the role of state-owned enterprises, which still accounted for more than one-third of total industrial output. In 1996, China committed two-thirds of fixed-asset investment to state-owned enterprises even though most were heavily in debt. By propping up the state sector China risked continuing budget deficits and the higher debt service that came with the borrowing necessary to pay for those expenditures. Investment in the state sector accounted for nearly all of the new investment in 1998, in the form of a special infrastructure-spending package forwarded by the government, supporting a GDP growth rate of 7% in 1999. Economic growth, which slowed during the late 1990s, was expected to rebound after China gained entrance to the WTO.