The economy of the People's Republic of China is the second largest in the world after the US with a GDP of $10.21 trillion (2006) when measured on a purchasing power parity (PPP) basis. It is the fourth largest in the world after the US, Japan and Germany, with a nominal GDP of US$3.42 trillion (2007) when measured in exchange-rate terms. China has been the fastest-growing major nation for the past quarter of a century with an average annual GDP growth rate above 10%. China's per capita income has grown at an average annual rate of more than 8% over the last three decades drastically reducing poverty, but this rapid growth has been accompanied by rising income inequalities. The country's per capita income is classified as low by world standards, at about $2,000 (nominal, 107th of 179 countries/economies), and $7,800 (PPP, 82nd of 179 countries/economies) in 2006, according to the IMF.

Despite China's size, the abundance of its resources, and having about 20 percent of the world's population living within its borders, for the last two centuries its role in the world economy has been relatively small. Since the late 1970s, however, the Chinese government has reformed the economy from a Soviet-type centrally planned economy that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy. Since being introduced, these reforms have helped lift millions of its citizens out of poverty, bringing the poverty rate down from 53% in 1981 to 8% in 2001. This economic system has been called "Socialism with Chinese characteristics" and can be considered as a type of mixed economy. Only about a third of the economy is now directly state-controlled. As of 2005, 70% of China's GDP was in the private sector. The smaller public sector was dominated by about 200 large state enterprises concentrated mostly in utilities, heavy industries, and energy resources.

Since the late 1970s and early 1980s, the economic reforms initially began with the shift of farming work to a system of household responsibility to start the phase out of collectivized agriculture, and later expanded to include the gradual liberalization of prices; fiscal decentralization; increased autonomy for state enterprises that increased the authority of local government officials and plant managers in industry thereby permitting a wide variety of private enterprise in services and light manufacturing; the foundation of a diversified banking system; the development of stock markets; the rapid growth of the non-state sector, and the opening of the economy to increased foreign trade and foreign investment. China has generally implemented reforms in a gradualist fashion, including the sale of equity in China's largest state banks to foreign investors and refinements in foreign exchange and bond markets in mid-2000s. As its role in world trade has steadily grown, its importance to the international economy has also increased apace. China's foreign trade has grown faster than its GDP for the past 25 years. The government's decision to permit China to be used by multinational corporations as an export platform has made the country a major competitor to other Asian export-led economies, such as South Korea, Singapore, and Malaysia.

China has emphasized raising personal income and consumption and introducing new management systems to help increase productivity. The government has also focused on foreign trade as a major vehicle for economic growth. The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978. Some economists believe that Chinese economic growth has been in fact understated during much of the 1990s and early 2000s, failing to fully factor in the growth driven by the private sector and that the extent at which China is dependent on exports is exaggerated. Nevertheless, key bottlenecks continue to constrain growth. Available energy is insufficient to run at fully-installed industrial capacity, the transport system is inadequate to move sufficient quantities of such critical items as coal, and the communications system cannot yet fully meet the needs of an economy of China's size and complexity.

The two most important sectors of the economy have traditionally been agriculture and industry, which together employ more than 70 percent of the labor force and produce more than 60 percent of GDP. The two sectors have differed in many respects. Technology, labor productivity, and incomes have advanced much more rapidly in industry than in agriculture. Agricultural output has been vulnerable to the effects of weather, while industry has been more directly influenced by the government. The disparities between the two sectors have combined to form an economic-cultural-social gap between the rural and urban areas, which is a major division in Chinese society. China is the world's largest producer of rice and is among the principal sources of wheat, corn (maize), tobacco, soybeans, peanuts (groundnuts), and cotton. The country is one of the world's largest producers of a number of industrial and mineral products, including cotton cloth, tungsten, and antimony, and is an important producer of cotton yarn, coal, crude oil, and a number of other products. Its mineral resources are probably among the richest in the world but are only partially developed. Although China has acquired some highly sophisticated production facilities through trade and also has built a number of advanced engineering plants capable of manufacturing an increasing range of sophisticated equipment, including nuclear weapons and satellites, most of its industrial output still comes from relatively backward and ill-equipped factories. The technological level and quality standards of its industry as a whole are still fairly low.

Other major problems concern the labor force and the pricing system. There is large-scale underemployment in both urban and rural areas, and the fear of the disruptive effects of major, explicit unemployment is strong. The prices of certain key commodities, especially of industrial raw materials and major industrial products, are determined by the state. In most cases, basic price ratios were set in the 1950s and are often irrational in terms of current production capabilities and demands. China's increasing integration with the international economy and its growing efforts to use market forces to govern the domestic allocation of goods have exacerbated this problem. Over the years, large subsidies were built into the price structure, and these subsidies grew substantially in the late 1970s and 1980s. By the early 1990s these subsidies began to be eliminated, in large part due to China's admission into the World Trade Organization (WTO) in 2001, which carried with it requirements for further economic liberalization and deregulation. China's ongoing economic transformation has had a profound impact not only on China but on the world. The market-oriented reforms China has implemented over the past two decades have unleashed individual initiative and entrepreneurship.