In the 1980’s, political dissent over social problems, including inflation, political corruption, massive urban migration, and prostitution emerged. The time period between 1982–89 saw freedom of the press like never before, and never yet again. Students and intellectuals urged greater economic and political reforms, while revolutionary party elders became increasingly skeptical of the pace and the ultimate goals of the reform program, as it deviated from the intended direction of the CCP.

In late 1983, there had been a brief revival of the Cultural Revolution when the "Anti-Spiritual Pollution" campaign was launched, during which pornography and unacceptable writings were confiscated, and people with Western hairstyles were forced to cut their hair. Also during the 1980s, religious freedom was restored in China. The state recognized five official faiths, Protestantism, Catholicism, Islam, Buddhism, and Taoism. Houses of worship were permitted to operate with a license and under the condition that they not oppose the party or socialism. This religious settlement has led to certain anomalies, such as a Catholic bishop sent from Rome leading one congregation, and a bishop recognized by Beijing leading another.

In December 1986, student demonstrators, taking advantage of the loosening political controls, staged protests against the slow pace of reform, confirming party elders' fears that the current reform program was leading to social instability. Inspired by Fang Lizhi, a physicist from the University of Science and Technology of China who gave speeches criticizing Deng's go-slow policies, students began to call for campus elections, the chance to study abroad, and greater availability of western pop culture. Hu Yaobang, a protégé of Deng and a leading advocate of reform, was blamed for the protests and forced to resign as the CCP General Secretary in January 1987. In the "Anti-Bourgeois Liberalization Campaign," Hu was further denounced. Premier Zhao Ziyang was made General Secretary and Li Peng, a staunch conservative who was unpopular with the masses, was made Premier.

Then Zhao’s economic and political reforms came under increasing attack from his conservative colleagues. His proposal in May 1988 to accelerate price reform led to widespread popular complaints of rampant inflation and gave opponents of rapid reform the opening to call for greater centralization of economic controls and stricter prohibitions against Western influence. 

The death of Hu Yaobang on April 15, 1989, coupled with growing economic hardship caused by high inflation and other social factors, provided the backdrop for a large-scale protest movement by students, intellectuals, and other elements of the disaffected urban population. University students and other citizens in Beijing camped out at Tiananmen Square to mourn Hu's death and to protest against those who would slow reform. Their protests called for an end to official corruption and for the defense of freedoms guaranteed by the Constitution of the PRC. The protests spread to other cities, including Shanghai, Guangzhou, and Chengdu.

On April 26, the central leadership, under Deng Xiaoping, denounced all recent actions of protest as a form of "turmoil." Premier Li Peng was able, in cooperation with Deng, then-head of the Central Military Commission, to declare martial law in Beijing and order a military crackdown on the protests, even though this was in direct opposition to the wishes of the Party General Secretary Zhao Ziyang and other members of the Politburo. On May 4, many demonstrators recalled the slogans of the May Fourth Movement and bemoaned the fact that whereas Mr. Science had been made welcome, Mr. Deomcracy had not. On May 15, Soviet leader Mikhail Gorbachev, who had introduced democratic reforms in the Soviet Union, visited China. His visit caused widespread calls for democracy in China as well. On May 18, Li Peng met with the leader of the student hunger-strikers, Wuer Kaixi. The next day Zhao Ziyang, in a conciliatory gesture went to the square and delivered by bullhorn a speech that was to be his last. Martial law was declared on May 20, 1989. Local militia units were sent into the streets, but tended to sympathize with rather than attack the students. As demonstrators mounted tanks and posters called for the overthrow of the CCP, leaders in Beijing began to panic. Late on June 3 and early on the morning of June 4, military units from Inner Mongolia, where there was no sympathy, as there had been among the local militia, for the “bourgeois elements” were brought into Beijing. Armed force was used to clear demonstrators from the square. PRC estimates place the number of deaths at between two to three hundred, while the Red Cross believes the number to be in the two to three thousand range.

After the protests, the Chinese government faced bitter criticism from the US for the suppression of the protests, which had been covered live on US TV. The government detained large numbers of protesters, and required political re-education not only for students but also for party cadres and government officials. Zhao Ziyang was placed under house arrest until his death 16 years later.

Deng Xiaoping formally retired after the Tiananmen Square protests and was succeeded by former Shanghai mayor Jiang Zemin. Deng's idea of checks and balances in the political system also saw its demise as Jiang consolidated power in the party, state and military. 

In the aftermath of the Tiananmen Square protests, China became an international pariah and the next three years were grim. Hardliners took over the government and began reining in free enterprise. CCP leadership was further dismayed by the collapse of communism in Eastern Europe in 1989-1990. Despite its political repression, though, China still welcomed foreign business and investment. 

In the spring of 1992, Deng Xiaoping suddenly reappeared in public and embarked on his famed Southern Tour of China to restore faith in his economic reforms and stop the country's slide back into Maoism. The visit was not only Deng's last major public appearance, but also seen as a test of the direction of the new leadership. Deng's renewed push for a market-oriented economy received official sanction at the 14th Party Congress later in the year as a number of younger, reform-minded leaders began their rise to top positions. 

Deng's legacy

Deng Xiaoping's policies opened up the economy to foreign investment and market allocation within a socialist framework, and put into practice a daring and unprecedented system that allowed free enterprise and capitalist ideas to grow under a single-party political system. Since his death, China has sustained an average of 8% GDP growth annually and become the world's fastest growing major economy. Also, due in part to "socialist" measures and price/currency controls, the inflation of the years leading up to the Tiananmen protests subsided.

It became obvious by the mid-1990s that many state-owned enterprises were unprofitable and needed to be privatized to prevent them from being a permanent and unsustainable drain on the economy. As the pace of urbanization continued to increase, urban unemployment became a serious problem, and urban housing shortages caused the rise of low-income slums. 

Finally, Deng's policy of asserting the primacy of economic development, while maintaining the rule of the Communist Party, raised questions as to the degree to which a one-party system can indefinitely maintain control over an increasingly dynamic and prosperous society. Questions have also been raised about the amount of foreign enterprise within China, and the time it takes before the government will no longer be able to control private enterprise.

Deng Xiaoping died on February 19, 1997. His ideology, Deng Xiaoping Theory, was elevated to the status of "guiding ideology" in the Constitution.

Return of Hong Kong and Macau

On July 1, 1997, at the expiration of Britain’s 99-year lease, Hong Kong was returned to PRC control, by applying Deng's theory of One Country, Two Systems: Hong Kong was to maintain independence in all areas except for foreign affairs and defense, without major changes for fifty years. Macau reverted to Chinese control under a similar agreement with Portugal on December 20, 1999. The two former colonies kept their legal systems. Some debate ensued over the legitimacy of Hong Kong Chief Executive Tung Chee-hwa and the level of democracy in Hong Kong. Hong Kong is also competing with Shanghai to remain the regional finance hub.

Third generation of leaders

Deng's health deteriorated in the years prior to his death in 1997. During that time, the "third generation" leadership governed collectively with Jiang as the "core." Jiang recentralized leadership by 1998 by ousting conservative faction leader Qiao Shi and becoming paramount leader of China's tripartite Party-State-Military structure.

The government enacted tough macroeconomic control measures to expunge low-tech, redundant projects and to avert violent market fluctuations. Attention was focused on strengthening agriculture and continuing a moderately tight monetary policy.

In March 1998, Jiang was re-elected President, while Li Peng was constitutionally required to step down from his post as Premier and replaced by Vice Premier Zhu Rongji. Zhu was believed to be a tougher and more charismatic leader than Li Peng, whom many blamed for Tiananmen.