Updated: April 1999

Two workers carry a wooden beam used to construct a highway in Shanghai in 1997. (AFP)

China embarked on an ambitious experiment in 1978 to pump life into its then-failing economy. Leader Deng Xiaoping set up the first of the so-called "Special Economic Zones" – regions where the Chinese government wanted to encourage more trade with Western countries.

The zones proved to be a watershed for the economy. Previous adherence to the principles of Marxist-Leninism had proved disastrous for the country, causing great social upheaval. The zones, by contrast, became a huge success, spurring investment and increased exports to Asia and the West.

Driven by these economic centers, China's economic growth has been unparalleled, averaging more than 10 percent per year since 1990. In fewer than 20 years, China has gone from having roughly $20 billion in trade (in 1978) to $325 billion (in 1997). At this pace analysts predict China will become the world's largest economy sometime early in the next century.

"Especially after the Asian financial crisis, China has all the reason to expand domestic demand and exploit its domestic market." – Dai Xianglong, central bank governor.

Despite the infusion of capitalist elements, the machinery of the Communist system remains strong. State-owned enterprises still account for about a third of China's Gross Domestic Product (GDP). In addition, the state comprises many hazy sectors of the economy, such as ventures that are considered private but have strong ties to the government entities such as the People's Liberation Army.

This mishmash nature of China's economic system has created several problems for its leaders. Income disparities between the rich coastal areas and the poor country regions have widened significantly since the introduction of the special economic zones. About 270 million Chinese live today in poverty. As China has opened its doors to world commerce, its controversial worker and human rights practices also have come under greater scrutiny.

Its unique economic system is likely to strain its relations with other countries, many analysts say. For one, integrating the country into existing institutions such as the World Trade Organization will be increasingly difficult given its lingering adherence to the principles of Communism.

A steam-roller crushes pirated and pornographic video disks and cassettes near Beijing in 1997. (AP)

The United States has been at odds with China over a myriad of trade barriers and intellectual property rights violations. The International Intellectual Property Alliance has estimated the value of pirated goods in China grew to an estimated $2.8 billion in 1997 from about $2.3 billion the previous year – all despite a 1996 accord between the two countries that averted a trade war over intellectual property-rights violations. In 1998, the U.S. trade deficit with China reached a record $57 billion.

Although China largely has escaped the recent misery experienced by many Asian countries, it does suffer from many of the same problems as its neighbors. China unveiled plans in early 1998 to spend $32 billion to shore up banks ailing from risky lending practices.

The banking sector, for one, continued to suffer into 1999. In January, one of China's most prominent government-backed financial institutions, Guangdong International Trust and Investment Corp. (GITIC), announced it would file for bankruptcy. The move shocked foreign lenders, who warned that China would lose access to international credit markets if central government allowed the shutdown of the provincial government investment house.

The new year also saw China continue to press its bid to join the World Trade Organization. In March 1999, Chinese officials offered to lower barriers to foreign goods in its fast-growing market, helping bolster its image before the world trade body. Clinton administration officials, though, insisted that China's concessions haven't gone quite far enough. Negotiations between the two sides continued into April. – Tim Ito, washingtonpost.com staffer