Starting in 1970, the economy entered into a period of stagnation, and after the death of Mao Zedong, the Communist Party leadership decided to abandon Maoism and turn to market-oriented reforms to salvage the stagnant economy.

The Communist Party authorities carried out the market reforms in two stages. The first stage, in the late 1970s and early 1980s, involved the de-collectivization of agriculture, the opening up of the country to foreign investment, and permission for entrepreneurs to start businesses. However, a large percentage of industries remained state-owned. The second stage of reform, in the late 1980s and 1990s, involved the privatization and contracting out of much state-owned industry. The 1985 lifting of price controls was a major reform, and the lifting of protectionist policies and regulations soon followed, although state monopolies in the commanding heights of the economy such as banking and petroleum remained.

Reforms went into stagnation after the military crackdown on 1989 Tiananmen Square protest, but were revived after Deng Xiaoping's Southern Tour in 1992. In 2010, China overtook Japan as the world's second-largest economy by nominal GDP and in 2017 overtook the United States by becoming the world's largest economy by GDP (PPP). In 2001, China joined the World Trade Organization (WTO). Not long after, the private sector grew remarkably, accounting for as much as 70 percent of China's gross domestic product (GDP) by 2005. From 1978 until 2013, unprecedented growth occurred, with the economy increasing by 9.5% a year.

A parallel set of political reforms were launched by Deng in 1980, which also inspired the then Soviet Union's Glasnost and Perestroika, but eventually ended in 1989 due to the crackdown on Tiananmen Square protest, halting further political liberalization.