China was one of the world's poorest countries when the Communist Party came to power in 1949.

Decades of war and civil conflict had damaged the infrastructure and choked off a nascent industrial revolution.

Mao Zedong and his revolutionaries were determined to eliminate inequalities, promote self-reliance and develop China into a modern industrial state.

But it was not until the post-Mao period, and the end of the political instability of the Cultural revolution, that the economy really took off. The new Chinese leadership, under Deng Xiaoping, resolved to push China on a course of economic reform and opening up to the West.

Rickshaws now decorate modern shopping malls

In the last 20 years, the economy has been growing at a phenomenal rate - just under 10% per year. China now boasts the world's seventh largest economy - nearly the same size as the UK and Italy.

Some Western economists, most notably the US Treasury Secretary and former World Bank economist Lawrence Summers, have estimated that China will overtake the US and Japan early in the next century to become the world's biggest economy.

Others dispute these figures, which are based on a method of comparing China with developed economies that may be suspect.

But there is no doubt that the economic growth that began when China accepted a market economy has lifted hundreds of millions out of poverty, and made China a major factor in world trade.

Now that growth - and that strategy - is under threat.

Growth and foreign investment are slowing down, and modernisation of state-run industries has stalled.

Poverty reduction

China's President Jiang Zemin has made the eradication of poverty by the year 2000 his top priority.

Poverty is still widespread in rural China

According to China's official figures, the number in poverty has dropped from 250m or 30.7% of the rural population in 1978 to 42m, or 4.6% in l998.

"This is a miracle not only in Chinese history but in world history," Jiang has said.

He says the rural poverty that remains, especially in more remote districts, should be tackled as part of China's economic development strategy, reducing the gap between regions in order to achieve the goal "of all getting rich together."

Observers of China agree that the country is on track to dramatically reduce absolute poverty, even if their definition is perhaps too modest.

The World Bank, using a higher poverty line, puts the number of rural poor at 13.5% of the population. Growing inequality

While China is struggling to reduce poverty, the economy has raced ahead, spurred by foreign investment.

But that investment, and the subsequent economic growth, has largely been concentrated in the coastal areas, particularly in large urban areas like Shanghai, the Pearl River Delta near Hong Kong, and Fujian province opposite Taiwan.

As a result, the gap between regions in China has increased, with the interior - especially the rural areas - lagging behind.

According to Professor Carl Riskin of Columbia University:

"China in the 1970s was one of the world's most egalitarian countries; today, it is certainly one of the more unequal of the developing countries in Asia."

Income inequality has increased in cities, with the growth of entrepreneurs who can afford Western-style consumer goods.

The government does relatively little to redistribute wealth - it only just announced the creation of unemployment insurance, for example, and there is no benefit system.

Jobs - particularly in the state sector - and the related benefits of housing, medical care, and pension - have been the main mechanism of redistribution.

But now many of the 100m state sector factory workers face layoffs and an uncertain future as the economy restructures, with a loss of status as well as income.

Mao's economic legacy

The huge state sector is a legacy of Mao's approach to economic development.

Under that strategy China began a determined drive in the l950s for modernisation and equality - but one which left the economy battered by the rapid changes in policy.

Initially, China planned to follow the Soviet model of large-scale industrialisation and the collectivisation of agriculture.

Peasants were encouraged - or forced - into communes, while private land ownership was abolished.

Huge investments in state factories were made, producing goods for heavy industry rather than for consumers or to meet any real demand.

Mao's vision began to fracture during the period of the "Great Leap Forward," when the alliance with the Soviet Union also began to falter.

In a push to drive through industrialisation more quickly, between l958-61, rural communes were encouraged to produce industrial products like steel and iron to the neglect of agricultural production.

The result was widespread famine, with per capita grain consumption falling by 22% and millions of deaths.

'To get rich is glorious'

The death of Mao and the rise to power of Deng Xiaoping in l978 led to a fundamental change in China's economic policy.

The world's largest car company, GM, produces in Shanghai

Deng emphasised the introduction of the market and the opening up of the country to foreign trade and investment.

He proclaimed "socialism with a Chinese face" in which "to get rich is glorious."

Peasants were allowed to produce for the market, dissolving the hold of the commune, and agricultural production shot up.

Foreign factories were set up in special economic zones to produce for export.

Foreign investment poured into China, and the country became one of the world's largest exporters.

China's refusal to devalue its currency during the Asian crisis also gave it enhanced credibility, although it meant other exporters became more competitive.

Fractured future?

China's economy faces many challenges in the first decade of the new millennium.

According to Lord Desai, China's next decade could be "much more troubled" than the l990s.

The biggest problem, he argues, is restructuring China's large state-run industries, which are inefficient and over-staffed.

As millions of peasants flood into China's cities, the problems of finding employment will become even more acute.

And China's extraordinary success in attracting foreign investment may not last, he says.

Foreign investors are becoming concerned about the lack of financial controls, which have led to a number of international investment trusts to go bankrupt. And returns on investment have not been as high as expected.

China's modernisers are counting on that foreign investment to help manage the next stage of the transition.

They are already at odds over how far to open up China's service sector, including financial and telecommunications services, to foreign investment in order to join the World Trade Organisation by the end of this year.

Some Chinese officials fear the Internet

Opening up the service sector is the key to the expansion of the economy, according to the World Bank, which sees a great potential for investment. Unlike more developed countries, China's economy is still skewed towards industry.

But opening up the service sector could carry political risks.

China's Telecoms Ministry, for example, wants to ban all foreign investment in the Internet, which it sees as potentially subversive.

And if political unrest were to intensify in the next decade, the remarkable transformation of the Chinese economy might prove more difficult to carry through.