Yi Fuxian notes former premier Zhu Rongji oversaw two major reforms in China with potentially dire consequences

Following former Chinese Premier Zhu Rongji’s recent death at the age of 97, homages poured in for a man widely credited with championing the market-oriented reforms that drove decades of rapid economic growth. Yet the two most emblematic reforms of his tenure, a 1994 tax-sharing policy and China’s 2001 accession to the World Trade Organization, did not only fuel robust growth. They also reshaped and partly distorted China’s economic structure and the global economy more broadly, with profound and lasting implications for the country’s political and demographic outlook.

After launching the first market-oriented reforms, China pursued fiscal decentralization policies that increased household disposable income as a share of GDP from 44% in 1978 to 62% in 1983. As these reforms unleashed greater dynamism in the private economy, popular demands for democracy grew as well. Combined with an unusually high share of 15- to 29-year-olds, a demographic group that is especially likely to drive social change, these factors ultimately contributed to the 1989 pro-democracy protests in Tiananmen Square. As that crisis escalated, the central government’s fiscal weakness narrowed its options, leading to the eventual military crackdown.

Between 1988 and 1993, China’s central government faced severe fiscal strains—the impetus for then-Vice Premier Zhu to concentrate revenues at the center and push spending responsibilities down to local governments. The center’s share of national fiscal revenue leapt from 22% in 1993 to 56% in 1994, and has since remained in the 45–55% range. Overall fiscal revenue as a share of GDP rose in tandem, from 11% in 1994 to 22% by 2013, before roughly leveling off. As the government’s share rose, household disposable income as a share of GDP steadily fell, hitting a historic low of 39.5% in 2011. Today, it stands at just 43%, far below the 60–70% typical of peer economies.

This imbalance lies at the root of many of China’s social problems. Economically, the shrinking share of household income constrained domestic consumption, feeding chronic industrial overcapacity. By the 2000s, this model should have become unsustainable, forcing China to undertake serious reform. But WTO accession in 2001 allowed China to sidestep any reckoning by gaining access to global markets and using manufacturing exports to absorb excess capacity and sustain employment. A stronger central fiscal position then reinforced the same model through extensive industrial subsidies, particularly to manufacturing.

Yet subsidies played a far smaller role in China’s manufacturing rise than is commonly assumed. More important was China’s unusually low household share of GDP, which suppressed labor and other domestic costs, giving Chinese firms wide profit margins and formidable cost competitiveness. That is why China’s manufacturing trade surplus has surged from 0.1% of global GDP in 2001 to 1.8% today. The first China Shock, in the 2000s, cut US manufacturing value added from 25% to 15% of the global total, and now a second China Shock is eroding Europe’s manufacturing base.

The declining household share of GDP laid the groundwork for China’s economic slowdown beginning in 2012. It did so by weakening families’ capacity to raise children, contributing to the census-based fertility decline from 2.3 births per woman in 1990 to 1.22 in 2000—a trend that the repeal of China’s longstanding one-child policy could not reverse.

The tax-sharing reform also distorted China’s demographic data. Before 1994, township and village governments funded primary schools, making enrollment figures relatively reliable. But after the reform stripped them of this fiscal capacity, financing shifted mainly to the central government, with provinces, cities, and counties sharing the burden. This gave local officials and schools an incentive to inflate enrollment, typically by 20–50%, to secure more funding.

Making matters worse, the National Bureau of Statistics (NBS) relied on these inflated figures to estimate births. For example, it reported 507 million births in 1991–2018 to account for the 509 million first graders who had supposedly been enrolled in 1997–2024. In 2000, the census counted 13.79 million infants, yet the NBS reported 17.71 million births to match the 17.29 million first graders enrolled in 2006. By 2015, when this cohort should have completed middle school, only 14.18 million graduated—roughly 3.5 million fewer than one would expect.

Politically, the tax-sharing reform concentrated fiscal resources in the central government, strengthening the state’s capacity to manage social and political crises. With household disposable income accounting for such a small share of GDP, four decades of rapid growth failed to produce a sufficiently large and economically powerful middle class. Combined with population aging, this helps to explain why China did not undergo the democratic transition long anticipated in the West. If anything, it has regressed toward the pre-reform era, as households’ share of GDP—the economic foundation for political change—has fallen below its 1978 level.

China now stands at another historical crossroads. Its economy has grown from 4% of global GDP in 2001 to 17% today, making it increasingly difficult for exports to absorb its surplus labor. Employment pressures have consequently intensified. The flexible workforce has grown from about 220 million in 2022 to an estimated 320 million in 2026, accounting for more than 40% of employment. China must therefore raise its household share of GDP to create jobs through domestic demand.

The same imperative applies to demography. In 2025, China’s fertility rate fell below one—less than half the replacement level of 2.1. Reversing this trend—and averting demographic collapse—will require addressing several structural weaknesses, chief among them the unusually low household share of GDP. Unless this rises to the normal range of 60–70%, efforts to revive fertility are unlikely to succeed.

In the end, these challenges point to a common solution: raising household disposable income as a share of GDP. Such a paradigm shift could reshape not only China’s economic trajectory and demographic future, but also its political landscape. Failing that, Zhu’s legacy will not age well.

*Yi Fuxian, a senior scientist at the University of Wisconsin-Madison, spearheaded the movement against China’s one-child policy. His book Big Country with an Empty Nest (China Development Press, 2013), initially banned, now ranks first in China Publishing Today’s 100 Best Books of 2013 in China. Copyright 2025 Project Syndicate, here with permission.