The Myth of Capitalist China
‘Trotskyist’ impressionists can’t explain resurgent state sector
The triumph of counterrevolution in the Soviet Union in 1991, heralded by bourgeois ideologues as representing the “end of history,” was widely seen as signifying that capitalism would be a permanent feature of the human condition. The failure of Mikhail Gorbachev’s economic and political reform programme to reignite economic growth in the Soviet bloc and narrow the technology gap with the advanced capitalist countries sapped popular confidence in the system of socialised property and central planning introduced by the Bolshevik Revolution of October 1917.
However, capitalist restoration in the former Soviet Union and across Eastern Europe came in the form of “shock therapy” that resulted in a catastrophic decline in living standards. Many who initially had illusions in the magic of the market came to bitterly regret their choice, but it was too late to go back (see: “Russia: a Capitalist Dystopia”, 1917 No. 24).
Bourgeois experts and popular commentators anticipated that the Soviet collapse would soon be replicated in North Korea, Vietnam, Cuba and, most importantly, China, where the ruling Maoist bureaucracy had introduced market reforms a decade earlier while maintaining a tight political monopoly. It was widely expected that these initiatives would foster a bourgeoisie from whose ranks a Chinese Yeltsin would emerge to consign the Chinese Communist Party (CCP) to the dustbin of history.
The leading cadres of the CCP were profoundly alarmed by the destruction of their former Soviet mentor and were determined to avoid the same fate. A significant section of China’s growing working class which had observed the disastrous impact of capitalist restoration in the Soviet bloc drew similar conclusions. Yet the seemingly inexorable expansion of market forces, the emergence of a layer of Chinese billionaires, the establishment of a stock market and the country’s apparently seamless integration into the capitalist global economy as a cheap manufacturing platform led many to conclude that capitalist restoration was not only inevitable but imminent. Bourgeois commentators generally agreed that the collectivised property system established by the social revolution in 1949 was already in terminal decline and would soon disappear as China’s economy continued to grow.
Yet the Chinese deformed workers’ state has proved far more resilient than many anticipated. Jude D. Blanchette reported:
“the nationalist writer Wang Xiaodong told me, ‘Westerners made the mistake of only talking to the intellectuals they liked or those intellectuals who thought [China] was doomed.’ Had we paid attention to the multitude of voices arguing for different and often competing paths to modernity, we might have better calibrated our expectations. Instead, we imposed our own understanding of where China should go, such that we missed the signs pointing to a much messier, more complex, and far more interesting journey.”
—China’s New Red Guards, 2019
The U.S. crusade to seize Middle East oil in the opening years of the 21st Century, conducted under the banner of a supposed endless “war on terror,” was accompanied by the expansion of globalised production and the offshoring of manufacturing to China and other low-wage countries. The CCP assiduously sought to entice foreign high-tech companies to establish operations in China in order to gain access to their advanced technology and production methods. China’s burgeoning private sector was hit hard by the global economic crisis of 2008, yet while the rate of economic growth slowed, it did not cease, due to a massive infrastructure programme initiated by the CCP.
At this point the U.S. ruling class began to upgrade China from the next “Communist” domino likely to fall to that of a potential challenger for global leadership. In his 2011 book, Henry Kissinger, who had played a key role in America’s 1972 opening to China, insightfully observed:
“The ‘rise’ of China is not primarily the result of its military strength. It reflects importantly a declining American competitive position, expressed by obsolescent infrastructure, inadequate attention to research and development and a seemingly dysfunctional governmental process.”
—On China, 2011
On 17 November 2011 President Barack Obama announced that, despite setbacks in Afghanistan and the Middle East, the U.S. was determined to remain hegemonic in Asia:
“As we end today’s wars, I have directed my national security team to make our presence and mission in the Asia Pacific a top priority. As a result, reductions in U.S. defense spending will not —I repeat, will not—come at the expense of the Asia Pacific.… Indeed, we are already modernizing America’s defense posture across the Asia Pacific. It will be more broadly distributed—maintaining our strong presence in Japan and the Korean Peninsula, while enhancing our presence in Southeast Asia.”
U.S. military bases ring China from Japan, through the South Pacific and the Philippines, all the way to Afghanistan. The Trump administration continued Obama’s “pivot” with a combination of military pressure (e.g., the “Freedom of Navigation” provocations in the South China Sea) and economic sanctions.
The absurd attempt to blame the CCP for the spread of the global COVID-19 pandemic is the latest phase of an imperialist misinformation campaign promoting xenophobic hostility to China. Yet much of the world’s population has drawn their own conclusions based on the stark contrast between China’s swift and effective response to the virus and the dithering, lies and incompetence of the world’s two foremost champions of unregulated capitalism, Britain and the U.S. Trump’s idiotic projection that it would “like a miracle…disappear” and Boris Johnson’s initial advice to “take it on the chin,” resulted in the pandemic raging out of control. In China, after an initial short-lived attempted cover-up by provincial administrations, central state authorities moved decisively and have managed to largely contain the disease.
Workers in North America and the European Union were forced back to work without adequate health and safety provisions in the interests of capitalist profitability. By contrast, Beijing forced private companies to immediately begin producing goods necessary to contain the virus. This difference is attributable to the social revolution of 1949 that resulted from the victory of Mao Zedong’s insurrectionary peasant army which laid the basis for the creation of the Chinese deformed workers’ state modelled on the bureaucratically-degenerated Soviet Union.
Planned economies & the law of value
“Communist China” under Mao was characterised by essentially the same contradictions that Leon Trotsky had enumerated for the USSR in his 1936 book The Revolution Betrayed:
“The Soviet Union is a contradictory society halfway between capitalism and socialism, in which: (a) the productive forces are still far from adequate to give the state property a socialist character; (b) the tendency toward primitive accumulation created by want breaks out through innumerable pores of the planned economy; (c) norms of distribution preserving a bourgeois character lie at the basis of a new differentiation of society; (d) the economic growth, while slowly bettering the situation of the toilers, promotes a swift formation of privileged strata; (e) exploiting the social antagonisms, a bureaucracy has converted itself into an uncontrolled caste alien to socialism; (f) the social revolution, betrayed by the ruling party, still exists in property relations and in the consciousness of the toiling masses; (g) a further development of the accumulating contradictions can as well lead to socialism as back to capitalism; (h) on the road to capitalism the counterrevolution would have to break the resistance of the workers; (i) on the road to socialism the workers would have to overthrow the bureaucracy. In the last analysis, the question will be decided by a struggle of living social forces, both on the national and the world arena.”
Abstracting from the critical necessity to extend the social revolution beyond the borders of a single state—a strategy upon which the Bolshevik Revolution of October 1917 was premised—Yevgeni Preobrazhensky, a co-thinker of Trotsky’s in the Left Opposition, posed the economic transition of a new workers’ state from proletarian dictatorship to classless (i.e., socialist) society as a process during which state planning radically distorted the operation of the law of value, i.e., the law of spontaneous equilibrium in a capitalist economy which stipulates that commodities are exchanged in accordance with the socially-necessary labour-time they embody. Preobrazhensky described this modification of the law of value as the “law of primitive socialist accumulation”:
“By the law of primitive socialist accumulation we mean the entire sum of conscious and semi-spontaneous tendencies in the state economy which are directed towards the expansion and consolidation of the collective organization of labour in Soviet economy and which are dictated to the Soviet state on the basis of necessity: (1) the determination of proportions in the distribution of productive forces, formed on the basis of struggle against the law of value inside and outside the country and having as their objective task the achievement of the optimum expanded socialist reproduction in the given conditions and of the maximum defensive capacity of the whole system in conflict with capitalist commodity production; (2) the determination of the proportions of accumulation of material resources for expanded reproduction, especially at the expense of private economy, in so far as the determined amounts of this accumulation are dictated compulsorily to the Soviet state under threat of economic disproportion, growth of private capital, weakening of the bond between the state economy and peasant production, derangement in years to come of the necessary proportions of expanded socialist reproduction and weakening of the whole system in its conflict with capitalist commodity production inside and outside the country.”
—The New Economics, 1926
The CCP established centralised control of the economy and a monopoly of foreign trade, but China was a very economically backward society with a population that was overwhelmingly composed of peasants and so progress was slow. In an attempt to accelerate development, in 1958 Mao initiated the “Great Leap Forward” programme, characterised by having every peasant commune set up its own backyard steel furnace. The disastrous results led to a more pragmatic faction of the CCP, led by Liu Shaoqi and Deng Xiaoping, sidelining Mao and experimenting with some limited market reforms. A few years later Mao counterattacked, branding his factional opponents “capitalist roaders,” and launching the Great Proletarian Cultural Revolution, which raged for a decade and further impeded China’s economic development.
Despite this history of chaotic policy zig-zags, the Chinese workers’ state still managed to establish a solid industrial foundation with minimal foreign input:
“Save for limited Soviet aid in the 1950s, which was repaid in full (and with interest) by the mid-1960s, Maoist industrialization proceeded without benefit of foreign loans or investments. It was as much a hostile international environment as the once hallowed principle of ‘self-reliance’ that imposed conditions of virtual autarky until the late 1970s.”
—Maurice Meisner, Mao’s China and After, 1999
In the early 1960s the Soviet and Chinese bureaucracies had an acrimonious falling out as Mao branded his former mentors in the Kremlin “social-imperialists.” This was the backdrop to Kissinger’s secret trip to China in 1971 to set the stage for Richard Nixon’s meeting with Mao the following year. This rapprochement was based on a shared antipathy for the USSR. Forty years later Kissinger recalled:
“The cooperation Mao encouraged was not limited to Asian issues. With no trace of irony, Mao encouraged U.S. military involvement in the Middle East to counter the Soviets—exactly the type of ‘imperialist aggression’ that Chinese propaganda had traditionally thundered against.”
—Kissinger, Op. cit.
China’s diplomatic opening to the U.S. was accompanied by an easing of centralised economic control as provinces were given greater latitude in determining how to achieve objectives set by the central plan. After Mao’s death, the swift defeat of the “Gang of Four,” which had advocated deepening the struggle against “capitalist roaders” in the CPP, paved the way for the return of Deng Xiaoping who promised to catch up with the West by promoting those “who dare to think, explore new ways and generate new ideas” (Ibid.).
At the top of Deng’s list of “new ideas” was opening Special Economic Zones. They soon resulted in an “influx of foreign capital to finance industrial enterprises and various other modernization projects, the alleviation of chronic shortages of foreign exchange, greater access to advanced scientific and industrial technology of Japan and the Western countries, and employment for Chinese workers who would otherwise be unemployed” (Meisner, Op. cit.). This was seen by bourgeois experts and much of the left as the first step in a process that would inexorably lead to capitalist restoration via reintegration into the global economy.
Beijing sought to insulate the state-owned enterprises (SOEs), the core of China’s collectivised economy, from foreign contact while simultaneously “opening up” and permitting foreign capitalists to build new factories in which impoverished rural migrants could be ruthlessly exploited. This shift from centrally-planned autarchy was undertaken in order to upgrade China’s industrial base without jeopardising the CCP’s control. Foreign capital eagerly seized the opportunity to slash labour costs while China gained access to modern Western technology. Everything went well for a while and before long China indicated an interest in joining the World Trade Organisation (WTO) in order to lower tariff barriers and gain greater access to global markets.
In a speech at Yale University on 27 May 1991, three months before the triumph of counterrevolution in the USSR and a decade prior to China’s eventual admission to the WTO, U.S. President George H.W. Bush celebrated the “fall of communism”:
“The Iron Curtain collapsed—it’s gone, the wall is down—and with it the myth of an ideology called communism. On the barren ground that once separated East and West, the democratic idea sprouted anew.
“As a nation, we can take great pride in this triumph.”
Bush criticised the short-sightedness of anti-communist rightists who opposed expanding trade links for acting “as if the point is to punish China, as if hurting China’s economy will somehow help the cause of privatization and human rights.” The former CIA chief explained that the best way to promote “democratic change” (i.e., capitalist restoration) in China, was with a carrot, not a stick:
“The real point is to pursue a policy that has the best chance of changing Chinese behavior. If we withdrew MFN [‘most favored nation’ status] or imposed conditions that would make trade impossible, we would punish South China, in particular, Guangdong Province, the very region where free market reform and the challenge to central authority are the strongest. Right now, there’s an estimated two million Chinese who are working and proving that privatization can work–all in South China. Withdraw MFN, and their jobs would be in jeopardy.”
. . .
“If we pursue a policy that cultivates contacts with the Chinese people, promotes commerce to our benefit, we can help create a climate for democratic change.
“No nation on Earth has discovered a way to import the world’s goods and services while stopping foreign ideas at the border. Just as the democratic idea has transformed nations on every continent, so, too, change will inevitably come to China.”
Foreign capital in China – restrictions apply
“Change” came to China in the mid-1800s when Britain waged two victorious Opium Wars (1839–42 and 1856–60), turning a country, which a century earlier had been the world’s largest economy, into an impoverished semi-colony:
“Treaties exacted by the foreigners at the cannon’s mouth provided for free propagation of Christianity, the spearhead of Western penetration, and legalized the trade in opium. But their most important provisions opened coastal and river ports to trade, limited the Chinese tariff to a nominal 5 percent, granted territorial footholds and concessions whence later came the different foreign ‘spheres of influence,’ and set up the system of extra-territoriality which exempted the foreigners from the jurisdiction of Chinese law and the payment of Chinese taxes. China became in all but name a subject land, saved from outright division and colonialization only by the acute rivalries among the imperialist freebooters.”
—Harold Isaacs, The Tragedy of the Chinese Revolution, 1938
The social revolution of 1949 ended China’s subordination to world imperialism, smashed the state apparatus of the bourgeois Guomindang, expropriated foreign and domestic capital and unified the country. During the 1950s, with Soviet assistance, China’s heavy industry expanded rapidly. Despite the dislocations of the Great Leap Forward and the Cultural Revolution, the economy grew and living standards improved. According to the OECD:
“From 1952 to 1978 there was a major acceleration in the pace of growth, with GDP rising three–fold and per capita income by 80 per cent. The economic structure was transformed. The industrial share of GDP rose from 8 to 30 per cent. The acceleration in performance was due to a massive increase in inputs of physical and human capital. The capital stock grew by 7.7 per cent a year, labour input rose faster than population. Human capital was improved by significant advances in education and health.”
This period of “socialist” development created a platform which made China an attractive destination for foreign capital. Deng’s reputation as a “capitalist roader” doubtless helped ease investors’ concerns, but far more importantly the CCP invested massively in improving business conditions by:
“…building infrastructure, especially ports, roads, power plants, and telecommunications networks, which made life easier for manufacturers up and down China’s long coastline. The result was that, by the early 2000s, China had a unique and probably unrepeatable combination of low, developing-country labor costs and good, almost-rich-country infrastructure. This created an irresistible platform for export-oriented manufacturers. A further infrastructure drive in China’s interior in the 2000s helped knit together the internal market, bringing closer to reality the old but elusive dream of ‘a billion Chinese customers.’”
—Arthur Kroeber, China’s Economy, 2016
The CCP’s opening to foreign investment fortuitously coincided with the onset of a major capitalist profitability crisis, which spurred “neoliberal” spending cuts in the imperialist heartlands and a massive expansion in international trade. Martin Wolf of the Financial Times observed:
“This rapid growth in trade…was also associated with a rapid shift in production from high-income economies to cheaper low-cost producers. China emerged over a remarkably short time as the world’s largest manufacturing country and largest exporter of goods. This was…made possible by the ease with which know-how could be transferred across frontiers. That in turn followed in part from the rise of integrated global companies, which were themselves the product of liberalization and improved information and communications technology.”
—The Shifts and Shocks, 2014
The Soviet Union in the 1920s made a similar attempt to gain access to modern technology by opening up to capitalist investment:
“Concessions include the furnishing of foreign machinery and foreign production methods to us and the financing of our economy out of the accumulation of world capital. In certain branches of industry the concessions may—and must—acquire a larger significance. It is superfluous to say that our concessions policy must be subject to the same limitations as private capital in general: the state retains the commanding positions in its hands and is vigilantly on guard against any assignment of a decisive predominance in the national industry to the ‘concessionaires’. But within these limits, the concessions policy still has a broad field in which to operate.”
—Leon Trotsky, Toward capitalism or socialism?, 28 August 1925
In a 1987 article entitled “Workers States and Markets” (1917 No. 4) we observed that while there is inevitably tension between capitalist investment and the economic development of a workers’ state, the introduction of foreign capital does not automatically signify counterrevolution. Even the ostensibly Trotskyist International Marxist Tendency (IMT), which considers that capitalism has been restored in China, acknowledges that, within limits, Deng’s turn to the world market made sense:
“In the conditions which prevailed in China in the late 1970s some form of NEP [New Economic Policy] was eminently sensible, subject to certain conditions. The Deng wing coined the phrase ‘market socialism’ in which the main levers of the economy remained under state control guided by the state plan including a monopoly of foreign trade. These proposals were acceptable as a means of stimulating and developing the Chinese economy. Deng and his co-thinkers drew the conclusion that the attempts to make China self-sufficient had failed and, correctly, recognised that China could not develop in isolation from the world market. Socialism in One Country, while remaining official ideology was finally, though quietly, buried.”
—John Peter Roberts, China: From Permanent Revolution to Counter-Revolution, 2016
In the Soviet case, Preobrazhensky noted that opening up to foreign investment posed substantial risks as well as rewards:
“When large concessions are granted in basic branches of state industry which suffer from a shortage of capital it becomes clear from the very start that these concession enterprises are not on equal terms with the state enterprises; they immediately realize the advantages which developed foreign capitalist industry has over our own. Here we have a way round our customs cordon and a contrast between the two economic systems with a relation of forces unfavourable to the state economy. The result of this may be such that a too large dose of concessions taken into the organism of the state economy may begin to disintegrate it, just as in its time capitalism disintegrated the weaker natural economy. This disintegration is expressed, among other ways, in the fact that the workers in the capitalist enterprises enjoy better material conditions than the workers in state industry, a fact which will undoubtedly have political consequences.”
—Preobrazhensky, Op. cit.
Preobrazhensky’s anticipation of potential difficulties arising from workers employed by capitalist enterprises earning higher wages did not materialise in China where workers in the foreign-dominated export sector earn less and face far harsher conditions than those in the SOEs.
The CCP consciously sought to restrict the leverage of imperialist investors, as Chinese economist Yu Yongding explained:
“China has to maintain its capital controls in the foreseeable future. If China were to lose control over its cross-border capital flows it could lead to panic and so capital outflows would turn into an avalanche and eventually bring down the whole financial system.”
—chinausfocus.com, 9 April 2014
China became a prime destination for U.S. corporations which found that access to a disciplined and well-educated workforce willing to work for a fraction of American wages lowered production costs and boosted profits. Outsourcing production to China is estimated to have reduced manufacturing employment in the U.S. by 25 percent between 1990 and 2007 (Kroeber, Op. cit.).
While the inflow of foreign capital created rapid economic growth, the CCP retained tight macro control:
“…the foreign and non-state sectors will be supported only as long as they are critical as a source of jobs (and hence, the all-important household savings), technology and foreign exchange. The resemblance of today’s commercial sector in China, both foreign and local, to that of merchants in traditional, Confucian China is marked: it is there to be used tactically by the Party and it is not allowed to play a dominant role.”
—Walter, Howie, Op. cit.
Foreign manufacturers were initially restricted to Special Economic Zones, but the CCP gradually shifted from restricting the location of private enterprises to encouraging participation from companies capable of helping upgrade Chinese capacity in strategic sectors:
“The state may have permitted foreign capital to penetrate these industries, but it has done so to achieve industrial goals and strategically utilize FDI [foreign direct investment] to benefit the development of the domestic industrial base. To balance bureaucratic conflicts and retain its authority to manage sectoral developments, including leveraging FDI and technology and knowledge transfers and retaining control over strategic assets, the state typically consolidates control over industry through administrative and corporate restructuring. To retain or enhance central authority over industry, the state manages competition to limit the number and type of market players and reformulates old rules and writes new ones concerning market entry and business scope with sector-specific goals in mind.”
—Roselyn Hsueh, China’s Regulatory State, 2011
Foreign enterprises were often forced either to participate in joint ventures with Chinese partners or provide unlimited access to their data. Recently there have been a flurry of complaints from the U.S. about Beijing’s appropriation of modern technique as a violation of the rules of global trade. But “theft of intellectual property” was an essential element in the rise of European capitalism and later the U.S. and Japan:
“Tolerance of copying and IPR [intellectual property rights] theft is a tactic commonly used by technologically backward nations to catch up on the technological frontier. The development of the European porcelain industry in the early eighteenth century depended substantially on reports by Jesuit missionaries on Chinese ceramic techniques, which the Chinese state considered trade secrets. Theft of tea plants whose export was prohibited by China enabled the British to establish a tea industry in India. In the early nineteenth century, the United States was cavalier in its treatment of European intellectual property, and its first great textile complex in Lowell, Massachusetts, was founded essentially on industrial espionage. After World War II, Japan, South Korea, and Taiwan relied in part on reverse engineering and copying of Western technologies, in violation of Western patent rules. Before China became the main target, the US government engaged in constant IPR skirmishes with Japanese and Taiwanese firms. The point is not that IPR violations are morally defensible, but simply that they are routine and last until a country has enough IPR of its own to decide that protection produces more benefit than stealing.”
—Kroeber, Op. cit.
Marxist economist Michael Roberts reports that in recent years China’s economic development has made foreign direct investment “less important to the economy: in 2016 it accounted for a little more than 1 percent of China’s gross domestic product, down from around 2.3 percent in 2006 and 4.8 percent in 1996.”
China’s move up the global value chain is evident in its development of solar panels, smartphones and 5G technology. Nouriel Roubini, a leading American economist, succinctly summed up the overheads that U.S. attempts to exclude China’s Huawei from participating in the development of 5G infrastructure would impose on America and its allies:
“The 5G of Erickson and Nokia costs 30 percent more than the one of Huawei, and is 20 percent less productive. So to install non-Chinese 5G networks, we’re going to pay 50 percent more.”
—New York Intelligencer, 22 May 2020
This is why appeals to American businesses to pull up stakes in China and “re-shore” back home have generally received a lukewarm response. Foreign firms that have left China have generally done so in response to rising wages in low-tech manufacturing sectors, caused by changes in China’s industrial policy, originating in the CCP’s concern at rising levels of class struggle in the export sector that is dominated by capitalist multinationals. The All-China Federation of Trade Unions (ACFTU) has been instrumental in the CCP’s effort to contain social unrest by upgrading wages and working conditions in foreign-owned enterprises:
“The ACFTU is therefore strengthened in its role and responsibility, as defined by the party state, to channel the workers’ demands into institutional channels and deal with them there. In doing so, the ACFTU is given state power and corresponding resources to act in accordance with the political will of the party. Multinational and foreign companies are particularly affected by the nationwide campaign for ‘unionisation’ initiated in 2008/2009. Many Fortune 500 companies active in China, including Walmart and Coca Cola, have been pressured by the ACFTU to form unions.
. . .
“Trade unions at various levels exert a strong top-down influence on the initiation and implementation of wage negotiation, both in traditional state-owned enterprises and in private and foreign companies, from large to small rural enterprises. Linked to this is the clear political intention to ensure ‘social stability’ by regulating capital competition and labour relations. Our research also shows that most of the ‘consultations on wages’ and the establishment of trade union organisations were initiated by higher union bodies and are not the result of strikes.”
—Suki Chung, “Reflexionen zu jüngsten Entwicklungstendenzen in der chinesischen ArbeiterInnenbewegung“ (Reflections on recent development trends in the Chinese Workers’ Movement), in: Egger, Fuchs, Immervoll, Steinmassl, Arbeitskämpfe in China (Workers’ Struggles in China), 2013 [our translation]
China’s success in closing the labour productivity gap with the West has allowed the CCP to attempt to “rebalance” the economy by increasing domestic investment and given it considerable flexibility in relation to workers’ economic demands:
“Will ‘cheap labor’ soon be a phenomenon of the past in Guangdong Province? This is at least what several commentators suggested after workers launched a series of fairly successful wage strikes in the automotive industry in the summer of 2010. This view also seems to be vindicated by the stance of the Communist Party of China leadership since the middle of the 2000s. On the national level, the central government pushes to raise domestic demand through higher mass incomes in order to rebalance the economy. In Guangdong, the provincial government is stressing the need for structural transformation by moving beyond low-tech, labor-intensive production and toward technology-intensive sectors.”
—Florian Butollo, “The Impact of Industrial Transformation on Labor in Guangdong’s Garment and IT Industries”, in: Anita Chan (ed.), Chinese Workers in Comparative Perspective, 2015
The tendency of government authorities to respond to workplace conflict by pressuring employers for concessions has made China’s coastal provinces less attractive as production sites for foreign corporations. Rising real wages and a developing bipartisan consensus in America in favour of “decoupling” from China has led many Western companies to look for other tariff-free jurisdictions with lower labour costs:
“Demographic factors, rising energy costs, and increasing competition are already eroding profits for factory owners in China and pushing them to relocate…. Labor costs in China have risen sharply in recent years: since 2001, manufacturing hourly wages have increased by 12 percent each year. At the Eighteenth Party Congress, in October 2012, the Chinese government set a target of doubling per capita income by 2020…. And although the productivity of Chinese manufacturing workers has grown substantially, productivity-adjusted wages grew nearly threefold from 2004 to 2014. Energy prices have also risen: the cost of electricity grew by 66 percent and the cost of natural gas more than doubled during this period.”
—Irene Yuan Sun, The Next Factory of The World, 2017
In 2010 Hillary Clinton informed an ASEAN meeting in Hanoi that the U.S. considered the South China Sea to be an area of national interest. A decade later, American Secretary of State Mike Pompeo called for regime change in Beijing, blustering: “If the free world doesn’t change Communist China, Communist China will change us.” Intensifying imperialist military pressure is based on a recognition that while China has undergone a significant degree of integration into the global economy and developed a sizeable domestic bourgeoisie, it remains “communist,” i.e., a deformed workers’ state. The position of the Chinese proletariat today is qualitatively similar to that of workers in the Soviet Union during the 1930s—“a ruling and at the same time an oppressed class”:
“The pressure of imperialism on the Soviet Union has as its aim the alteration of the very nature of Soviet society. The struggle—today peaceful, tomorrow military—concerns the forms of property. In its capacity of a transmitting mechanism in this struggle, the bureaucracy leans now on the proletariat against imperialism, now on imperialism against the proletariat, in order to increase its own power. At the same time it mercilessly exploits its role as distributor of the meager necessities of life in order to safeguard its own well-being and power. By this token the rule of the proletariat assumes an abridged, curbed, distorted character. One can with full justification say that the proletariat, ruling in one backward and isolated country, still remains an oppressed class. The source of oppression is world imperialism; the mechanism of transmission of the oppression—the bureaucracy. If in the words ‘a ruling and at the same time an oppressed class’ there is a contradiction, then it flows not from the mistakes of thought but from the contradiction in the very situation in the USSR. It is precisely because of this that we reject the theory of socialism in one country.”
—Leon Trotsky, Not a Workers’, and Not a Bourgeois State?, November 1937
CCP’s market reforms: No counterrevolution
Deng’s initial reforms permitted farmers to set prices for their produce, but land remained state property:
“The system’s communist facets include continued Party-state ownership of all land, a relatively equitable distribution of land based on household size, Party-state-set prices for produce from ‘responsibility’ land, and assured basic sustenance for all rural residents. Its capitalist characteristics include individual control over production and sales, and market-set prices for most produce.”
—Teresa Wright, Party and State in Post-Mao China, 2015
During the 1980s and 90s restrictions on private enterprise were loosened, a new indigenous capitalist class developed and many SOEs, particularly those at the sub-provincial level which could not cover their costs, went bankrupt. Township and Village Enterprises (TVEs), the small and medium-sized collectives often controlled by local CCP authorities, were left to sink or swim and the “Iron Rice Bowl,” the cradle-to-grave welfare system established under Mao, was abandoned. These measures meant real hardship for many:
“From 1995 to 2005, state and collective enterprise employment almost halved (to only 30 per cent of urban employment); 70 million workers lost their jobs—almost half the workforce of urban state and collective enterprises (and twice the entire British labour market).”
—Timothy Beardson, Stumbling Giant, 2014
The unpopularity of market “reforms” spurred widespread working-class participation in the 1989 student-initiated Tiananmen Square protests which, at their height, threatened to spill over into a proletarian political revolution. A few weeks before CCP hardliners eventually succeeded in suppressing the protests, the Beijing Autonomous Workers’ Federation (BAWF) was denouncing the growth of social inequalities resulting from Deng’s reforms and reaffirming its commitment to collectivised property:
“Also, when we oppose some leaders in the government, we are not rejecting socialism. Is it not the lack of democracy that permits those leaders freely to accuse us of being something which we are not[?] We must all unite to sweep Deng Xiaoping off the historical stage as soon as possible, save China and her people, and turn over a new page of democracy and freedom.”
—Beijing Autonomous Workers’ Federation, “The People in Command”, in: Mok Chiu Yu, J. Frank Harrison (ed.), Voices From Tiananmen Square, 1990
One of the more influential ostensibly Trotskyist groups promoting the notion that China has gone capitalist is the Socialist Equality Party (SEP) and its World Socialist Website (WSWS). The SEP considers the crushing of the Tiananmen Square uprising to have been the beginning of capitalist counterrevolution in China, but is uncomfortably aware of Trotsky’s condemnation of pseudo-Marxists who, “in believing that the foundations of society can be changed without revolution or counterrevolution…unwind the film of reformism in reverse.” SEP supremo, David North, and the rest of the group’s leadership would doubtless like to be able to identify a point at which the CCP’s connection to the collectivised property forms established under Mao was severed, but has thus far been unable to do so. While there have been plenty of hints and off-hand comments, as far as we know the WSWS has never attempted to provide a coherent account of how the Chinese workers’ state supposedly turned capitalist.
In a piece commemorating the 30th anniversary of the brutal repression of the Tiananmen Square protests, the SEP equated the CCP of the 1980s with the capitalist-restorationist faction of the Communist Party of the Soviet Union (CPSU) led by Boris Yeltsin which triumphed over the party’s decrepit “hardliners” in August 1991:
“The 1980s witnessed the turn by the Stalinist bureaucracies in the USSR, Eastern Europe and China, confronting economic stagnation and collapse, to preserve their material interests through the restoration of private property relations and the re-integration of their countries into the world capitalist market—a perspective accomplished through the systematic destruction of the social gains and conditions of the mass of the population.”
—wsws.org, 7 June 2019 (Repost from 1989)
Capitalist restoration in the USSR and Eastern Europe meant the collapse and disintegration of the Stalinist parties, the break-up of the state administrative bureaucracy and the liquidation of collectivised property. The minority of bureaucrats who benefited from the wholesale privatisation of state property did so as individuals. Nothing like this has occurred in China, where, as in North Korea, Vietnam and Cuba, the ruling Stalinist parties continue to exercise political and economic control much as they did in the 1970s and 80s.
The WSWS/SEP’s insistence that capitalist restoration in China has somehow escaped the attention of all the imperialist think tanks and intelligence agencies, parallels their uniquely incorrect refusal to admit that Fidel Castro’s peasant-based insurrectionary guerrilla movement carried out a social transformation that changed Cuba from an American neo-colony into a deformed workers’ state qualitatively similar to China, North Korea or Yugoslavia. For the past six decades the SEP and its political predecessors have stubbornly (and absurdly) insisted that despite the expropriation of foreign and domestic capital and the establishment of a planned economy Cuba has always remained “capitalist.”
The SEP’s refusal to acknowledge the incursions on private capital in China during the recent past that have accompanied the expansion of the state sector has pushed it into a theoretical dead end and given rise to incoherent speculation that the CCP somehow seamlessly transmogrified into some sort of bureaucratic new class, or collectivist bourgeoisie—a position long discredited in the Trotskyist movement. A 2019 WSWS article on the revival of Maoism in China went a step further and suggested that the CCP which, under Mao’s leadership, won a protracted civil war against the Guomindang, smashed the bourgeois state and expropriated foreign and domestic capital, was only an “organic” channel for capitalist restoration:
“A layer of youth, intellectuals and workers have turned to Maoism, and its banal ‘revolutionary’ slogans, for answers. Capitalist restoration in China, however, was not a break from Maoism. It flowed organically out of the dead-end of ‘socialism in one country.’”
—wsws.org, 8 June 2019
In another article one SEPer, Peter Symonds, bluntly characterised China today as “capitalism pure and simple”:
“What the regime terms ‘socialism with Chinese characteristics’—with its huge private corporations, stock markets, flood of foreign investment and market pricing of all commodities including wage labour—is capitalism pure and simple.”
—wsws.org, 24 October 2019
A serious analysis would require a materialist explication of the process through which the CCP bureaucracy somehow turned itself into a new bourgeoisie, yet so far David North et al. have maintained radio silence. The closest approximation of a historical timeline that we know of was a 2012 suggestion that, during a tour of China’s southern provinces in January-February 1992, Deng decided that the CCP “must transform itself into a ruling class”:
“In 1992, Deng exploited the glaring deficiencies produced by bureaucratic command and national autarchy—further compounded by the steps toward capitalist restoration already taken—to argue for the unfettered operation of the capitalist market. Like a bourgeois economist, he promoted the market as the most efficient means of allocating resources and overcoming the lack of consumer goods.
“Following the political upheavals of the previous two years, Deng concluded that the CCP bureaucracy had to quickly consolidate capitalist property relations and transform itself into a ruling class, before the next eruption of the working class.”
—wsws.org, 27 November 2012
Eight months later, according to the SEP, the CCP was “embracing every aspect of capitalist economy”:
“Deng’s victory was consolidated at the 14th CCP congress in October 1992. The message from the gathering was, according to China specialist Michael E. Marti, ‘nothing short of opening China to a foreign capitalist invasion’. The ‘socialist market economy’ meant embracing every aspect of capitalist economy, from the establishment of financial and securities markets, to the destruction of state enterprises.”
The article highlighted the closure of many SOEs between 1996 and 2005 which cut the workforce in state enterprises in half. While acknowledging that SOEs remained “in strategic industries” the SEP asserted that the CCP leaders had, at some unspecified moment, “effectively” turned themselves into the “collective” owners of state assets:
“The remaining better-equipped, profitable state enterprises, especially in non-strategic sectors, were transformed into subsidiaries of, or joint-ventures with, foreign transnationals, or became private enterprises in their own right. A small number of state-owned ‘national flagships’ were preserved in strategic industries, such as banking, steel, infrastructure, energy and auto. These effectively became the collective assets of the top CCP bureaucrats, who often appointed their children as CEOs.”
The idea of the transformation of a Stalinist bureaucracy in a workers’ state into a “collective” bourgeoisie was advanced by “Third Camp” revisionists during Trotsky’s lifetime, as David North et al. are well aware. Perhaps the reason they have thus far attempted to dance around the issue, rather than seriously engage with it, is that they are uncomfortable being aligned with Bruno Rizzi, James Burnham and Max Shachtman against Trotsky.
The International Marxist Tendency is another “Trotskyist” group that shares the SEP’s position:
“In principle the capitalist transformation of China is complete, there is no longer either monopoly of foreign trade or a central economic plan, and those nationalised industries that can are being progressively privatised.”
—John Peter Roberts, Op. cit.
Like the SEP, and most other ostensible Trotskyists, the IMT refused to take sides in the August 1991 showdown between the “hardline” remnants of the Soviet bureaucracy and the forces of capitalist restoration. Yeltsin’s victory in that confrontation opened the door for the massive privatisation of collectivised property and the rule of a lumpen bourgeoisie composed of parvenus and gangsters, but for the IMT’s Roberts and his comrades, it never happened. They present the restoration of capitalism in the Soviet Union as a template for understanding China’s supposed “transition back to capitalism without…major confrontations”:
“Trotsky had argued that the Soviet Union could not be ‘reformed’ into capitalism, without some form of violent counter-revolution. But Eastern Europe, Russia and China have all made the transition back to capitalism without armed counter-revolution, without even major confrontations between the different wings of the bureaucracy.”
The 1991 coup and counter-coup in Moscow validated Trotsky’s proposition that capitalist restoration would require a decisive rupture. Yeltsin’s victory was sealed when the soldiers manning the tanks dispatched to surround his headquarters, switched sides. He quickly moved to dissolve the CPSU, liquidate the central planning apparatus, privatise collectivised property and consolidate a new, capitalist, state committed to the defence of private property. Nothing like this has occurred in China, where the CCP bureaucracy retains effective control over the state apparatus and all essential components of the economy.
The IMT’s notions about capitalist restoration “without armed counter-revolution” is of a piece with its advocacy of a peaceful, parliamentary road to socialism in Britain through the simple mechanism of a Labour government passing an enabling act. While the IMT is consistent in its willingness to “wind the film of reformism” forwards or backwards, the SEP likes to try to present a more orthodox façade. But they both agree that the deliberations of the CCP’s upper strata at the party’s 14th Congress in October 1992 was an important moment in the consolidation of the supposed social counterrevolution. According to John Peter Roberts:
“The return of capitalism [in China] was an ongoing and complex process but it is possible to date the process by the Central Committee meetings at which key decisions were made. We can see that the transition lasted from 1982, when selected SOEs began to produce outside the state plan according to market forces, to October 1992 when the 14th CCP Congress finally buried state planning and the monopoly of foreign trade and agreed to begin wholesale privatisation of SMSOEs [Small and Medium-sized SOEs] with the perspective of selling-off the larger companies as soon as suitable arrangements could be made.”
State Owned Enterprises—Core of Chinese deformed workers’ state
The single biggest factor distinguishing the Chinese economy from its advanced capitalist competitors is the central role played by the state sector—particularly in banking and strategic industries. Unlike the Soviet Union under Stalin, China has a significant private capitalist sector which accounts for a large chunk of its economy and produces most commodities for export. But the SOEs, which remain at the core of the economic and social order, do not operate according to the same principles as for-profit enterprises. A 2018 study by the China Institute at the University of Alberta described their activity as ensuring “social stability through economic development”:
“On top of the important roles in China’s economic development, SOEs bear enormous social obligations for which they are gradually being held to greater account. For instance, the dominance of SOEs in the telecommunication sector has facilitated the realization of connectivity projects across the country, including in the less-developed regions. SOEs in the energy sector apply a price inversion that guarantees the electricity and energy supply for the population and enterprises. Moreover, SOEs contribute more to social security funds than private companies, provide healthcare services to their employees, and contribute retirement benefits to over 17 million retired workers. Their involvement in thousands of social institutions, such as workplaces, schools (primary, middle, and high schools), and hospitals involve significant financial costs each year. Housing benefits and other fringe benefits, including life insurance, meal subsidies, 16 transportation subsidies, etc., are other substantial expenditures. Before China’s latest economic reforms and its recent preoccupations over excess capacity in some sectors, many SOEs employed additional workers, even to the point of redundancy. This was done largely for political reasons—mainly to ensure social stability through economic opportunity.”
Workers in SOEs generally enjoy considerably better conditions than those in private companies:
“It is common to see workers taking breaks to smoke, drink tea, and chat with coworkers, which is allowed by supervisors as long as it does not seriously affect production. Although this does not mean that disciplinary measures do not exist there, supervision on the shop floor is not as coercive in SOEs as in private companies. Shop-floor relations in SOEs are still built on personal relationships forged over long years. Informal bargaining over workload and speed still goes on between workers and their supervisors, who may have developed friendships after long years of working together. This is in part a continuation of the paternalistic regime under Mao.”
—Kevin Lin, “Recomposing Chinese Migrant and State-Sector Workers”, in: Anita Chan (ed.), Chinese Workers in Comparative Perspective, 2015
SOE workers who fail to meet production quotas are less likely to lose their jobs: “…the fact that senior managers, as political appointees, are evaluated on their economic as well as political performance makes it imperative for them to balance labor stability against profit maximisation” (Ibid.). For SOE managers, labour peace often trumps all else:
“The chances of promotion…are increased by raising productivity and avoiding layoffs at subsidiary firms within the group. But there is asymmetry in this incentive structure—productivity improvements are rewarded, but productivity impairments are mostly ignored. So avoiding layoffs at subsidiary firms becomes the primary goal of the senior management at the group level, leading to internal capital allocations that prop up larger and struggling subsidiaries within each group.”
—Nicolas R. Lardy, The State Strikes Back, 2019
Deng’s pro-market “reforms” threw tens of millions of workers out of their factories and transformed the ways in which planning took place, but the CCP bureaucracy always retained the ability to steer economic development:
“The very fact that so much of the economy is subject to market forces makes traditional-style allocation of inputs and outputs across sectors rather meaningless. For exactly this reason, Chinese planning in practice is indicative. Targets are set and the government uses a range of fiscal and financial instruments (primarily taxes and interest rates) to achieve those targets.
. . .
“Nevertheless, trends during plan periods after 1991 display a degree of coherence which suggests that Chinese macroeconomic planning was by no means dead even in the new millennium. It may not have been the planning of old, but it is evident that the government sought, and to a considerable extent succeeded, to control the pace and pattern of development.”
—Chris Bramall, Chinese Economic Development, 2009
A key element in the reform program was the adoption of the “Modern Enterprise System” for the state sector at the Third Plenary of the 14th Party Congress in November 1993. The intent was:
“to establish is a Modern Enterprise System which suits the requirements of the market economy, and features clear-cut equity ownership, distinct responsibilities and rights, separation of government from enterprises and scientific management (Chen and Lin, 2002). The Modern Enterprise System is intended to promote the corporatization of SOEs, bringing in some features of typical Western company structure such as boards of directors and shareholders, reducing government interference in the running of enterprises, and making them more entrepreneurial and less reliant on the state.”
—Jie Zhang, China’s State-owned Enterprises Development under the Modern Enterprise System—the Case of Shougang Group, 2007
The CCP’s 15th Party Congress in 1997 modified the Modern Enterprise System by introducing the policy of “grasp the large and let go of the small,” which led to the privatisation of many smaller government enterprises, particularly at the local level. But in many cases the CCP, anxious to avoid social upheaval, intervened to soften the blow for redundant state-sector employees:
“…the area where state interference is most often reported is in questions of employment and the divesting of surplus labour. We have noted also how a number of large SOEs which pioneered the MES [Modern Enterprise System] reform programme have been compelled by local authorities to take over loss-making enterprises, not in order to reform them and return them to profit, but primarily in order to guarantee the wages and pension payments owed to those companies’ employees. This directly contradicts the general line of MES reform, which is to reduce as far as possible the social and historical obstacles to large SOEs’ international competitiveness, namely a high proportion of surplus labour and the obligation to act as a welfare state in miniature for employees. This has occurred even in areas where, in general, the aims of reform in freeing management to manage without state interference have to a large extent been achieved.”
—John Hassard et al., China’s State Enterprise Reform, 2007
In 2003, under Hu Jintao, the party formally adopted a policy of consolidating the biggest SOEs into “National Champions”:
“In December 2006, the head of SASAC [the State-owned Assets Supervision and Administration Commission] announced SOEs would maintain ‘absolute control’ over seven strategic industries (military industry, electrical power generation and grids, petroleum and petrochemicals, telecommunications, coal, civil aviation, and shipping) while keeping strong influence over other pillar industries (machinery, automobiles, information technology, construction, steel, and nonferrous metals). Through a series of government-directed mergers, a handful of large-scale enterprises came to dominate these key industries, protected from private and foreign competition and investment. As a result, the scale of total SOE assets increased rapidly; between 1999 and 2008, the average total assets of industrial SOEs—including those at the local, provincial, and central level—increased 589 percent to more than $135 million per enterprise, while the average assets of industrial non-SOEs in China increased by only 67 percent to under $9 million per enterprise.”
—Sean O’Connor, SOE Megamergers Signal New Direction in China’s Economic Policy, 24 May 2018
In 2004 Larry Lang, a US-educated journalist who hosted a popular television show, created a sensation with his blistering denunciations of SOE privatisations:
“The Larry Lang Storm coincided with a string of large-scale anti-privatization protests that reinforced the sense for the left that Lang’s campaign was having an impact outside of meeting rooms in Beijing and Shenzhen. In one city in Shaanxi Province, six thousand workers at a former textile SOE went on strike in September 2004 to protest the loss of wages and benefits after the firm was privatized. At a former military factory in Chongqing, thousands of workers protested the sale of the company to a private entrepreneur for under fair value.… Despite the growing intensity of debate over SOE reforms, the Chinese government remained quiet, clearly hoping to carefully guide the debate through its control of a vast network of newspapers and magazines. In December, it finally weighed in and did so on the side of Larry Lang and his now-legions of supporters: MBOs [Management Buy-Outs] would no longer be allowed for large SOEs, and the rules for acquisitions for smaller SOEs would be dramatically tightened.”
—Blanchette, Op. cit.
This turn by the CCP signalled that state control over the core of the Chinese economy would not be abandoned. Gavekal Dragonomics observed:
“In short the goal of SOE policy was no longer to discipline enterprises to force them to improve performance (as it arguably was in 1997-2003), but to preserve and protect the state sector in its existing configuration. This meant that SOE managers no longer faced the threat of market exit in the event of poor performance. The resulting change in incentives contributed to the poor financial performance that returned after the global financial crisis in 2008. And by re-tightening the bonds between firms and government, the new policy laid the groundwork for the later use of SOEs as the main tool for supporting growth.”
Funding for the SOEs soared, but the salaries of top management did not:
“As Sinopec chairman, Mr Fu earned Rmb863,000 ($141,000) in 2012, a paltry figure when compared, for example, with the more than $3m earned by Christophe de Margerie at the French oil major Total. The contrast in other sectors is even starker. The president of Bank of China, one of the country’s ‘big four’ lenders, was paid Rmb997,000 ($163,000) last year – or less than 1 per cent of the $20m pocketed by JPMorgan’s Jamie Dimon.”
—Financial Times, 12 October 2014
In 2013, when Prime Minister Li Keqiang told the Third Plenum of the CCP’s 18th party congress that henceforth the market would play a decisive role in allocating resources, commentators in foreign business publications were delighted. Few paid much attention to an important caveat that accompanied the announcement, which stipulated that: “We must unswervingly consolidate and develop the public economy, persist in the dominant position of public ownership, give full play to the leading role of the state-owned sector, and continuously increase its vitality, controlling force, and influence“ (Elizabeth C. Economy, The Third Revolution, 2018). In other words, the SOEs would continue to follow the priorities laid down in the five-year plan:
“It does not matter that the 12th Five-Year Plan does not mention SOEs explicitly with regards to key development projects and industry goals; the SOEs are already dominant in most of the industries which are mentioned in the plan. And, in cases where projects require large capital expenditures, only SOEs are in a position to make such investments. Thus, although China is comfortable with a mixed economy that incorporates private enterprises and foreign investments, it continues to rely on SOEs to carry out what it deems to be the most important projects. And although China is comfortable with the market allocating resources to improve enterprise decision-making, it does not trust the market to determine China’s industrial structure.”
—Andrew Szamosszegi, Cole Kyle, An Analysis of State-owned Enterprises and State Capitalism in China, 2011
The China Labour Bulletin (CLB), no partisan of the CCP, noted that strikes declined as market pressures eased on the SOEs:
“The restructuring process was basically complete by 2006, with the remaining SOEs in a much stronger economic position than before. The remaining SOEs tended to be large-scale, monopolistic, profit-oriented enterprises concentrated in the financial, energy and communications sectors where wages and the proportion of skilled labour tended to be higher. There is often intense competition for jobs in SOEs and those already employed in the state sector usually want to hang on to their jobs. Surveys suggest that SOE workers are generally more satisfied with their wages and working conditions than those in the private sector.”
The IMT offered the following explanation for the disparity between the improving conditions for industrial workers in China and the continued decline of those in the advanced capitalist West:
“The state leans on working-class anger in an attempt to manage the contradictions of capitalism, especially as it wants to see workers getting higher wages in order to boost domestic demand in the economy. It also needs to show that it responds to their grievances, since its claim to legitimacy in building capitalism is that it is raising the living standards and improving the lives of the masses. But it will tolerate no independent activity of the working-class.”
—Marxist.com, 30 November 2017
The IMT did not explain why China’s “capitalists” should be so eager to respond to grievances and boost wages at a time when those in Germany, France, the U.S., Britain, etc., were imposing austerity and pushing wages down. The answer is simple: China’s SOEs do not operate in accordance with the principle of profit maximisation. Indeed the preferential treatment they enjoy tends to impede capitalist development, as the Wall Street Journal observed:
“One reason Chinese companies often flout global norms is that the rules at home make life hard for private firms. Cutting regulatory corners, often with the blessing of local officials, is sometimes necessary to survive. That’s why Beijing’s recentralization of power under committed statist Mr. Xi has been so damaging to private enterprise: space for local ‘experimentation,’ particularly finding ways to work around the calcified state banking system, has disappeared.
“State-backed companies’ advantages aren’t limited to bank finance. Their dominant market position helps them squeeze private sector suppliers by refusing to make timely payments for goods. The problem tends to worsen when overall industrial SOE profit growth slows—like now. Rising payables at SOEs could effectively extract an additional 1 trillion yuan ($148 billion) from private companies in 2019, estimates Thomas Gatley, a senior analyst at Gavekal Dragonomics. That’s equivalent to about three times their total corporate bond and medium-term note issuance last year.
“Private companies getting squeezed on both funding and revenue was probably a major factor driving the 2018 spike in borrowing using shares in private companies as collateral last year. More than 1,000 non-SOE listed firms now have controlling shareholders who have pledged more than 50% of their stock for loans: Collectively, they recorded a big rise in receivables in the past three years. In turn, their financial weakness has created juicy targets for cash-rich SOEs, which gobbled up more than $6.2 billion of private companies’ equity in 2018.”
—Wall Street Journal, 7 February 2019
China’s financial system, which is dominated by four big state-owned banks, does not operate like those in capitalist countries. Chinese bankers do not invest in companies likely to generate the highest returns—if they did, private enterprises would get most of the money. Instead they issue credit in accordance with priorities set by the CCP:
“Xiao Yaqing, who in early 2016 assumed leadership of SASAC, has stated that the competitive spirit of many SOEs ‘isn’t strong.’ Indeed, Xiao is likely understating the challenge. The list of SOEs’ financial and other sins is a long one.
First, private firms consistently outperform SOEs on a number of measures including profit margins, cash flows, and return on assets. Excluding financial institutions, SOEs earned a return on assets of 2.4 percent in 2014 compared with 6.4 percent for U.S. firms and 3.1 percent for Chinese companies listed on the stock exchange. Locally owned SOEs boast an even poorer return on assets of around 1.5 percent. Despite this, private companies have a much more difficult time accessing capital and are assessed much higher interest on their loans: In [sic] the second quarter of 2016, they paid an average annual interest rate of 9.9 percent on loans—approximately 6 percentage points above the rate for SOEs.…
In addition, SOEs are a significant source of government debt. The outstanding debt of SOEs outside the financial sector is already nearly 120 percent of GDP.”
—Economy, Op. cit., 2018
The Financial Times complains that China’s bankers, acting in accordance with CCP directives, have been “weighing down the private sector”:
“There are signs that Mr Xi’s strategy to place state-owned companies at the heart of the economy is weighing down the private sector, which has been responsible for such a large part of China’s dynamism over the last four decades.
“The most striking indication of the choice in favour of state-owned companies has been a ‘stark reversal’ of a decade-long trend of increased bank lending to the private sector, according to Nicholas Lardy of the Peterson Institute for International Economics. State-owned companies secured 83 per cent of bank loans in 2016, up from 36 per cent in 2010, leading to the ‘crowding out [of] private investment’, he says.”
—Financial Times, 13 May 2019
In an October 2016 speech Xi Jinping was unambiguous: “Party leadership and building the role of the party are the root and soul for state-owned enterprises….The party’s leadership in state-owned enterprises is a major political principle, and that principle must be insisted on” (Economy, Op. cit.). CCP patronage has long insulated SOEs from many of the central concerns of private enterprises, like turning a profit or repaying loans:
“The Party tells the banks to loan to the SOEs, but it seems unable to tell the SOEs to repay the loans. This gets at the nub of the issue: the Party wants the banks to support the SOEs in all circumstances. If the SOEs fail to repay, the Party won’t blame bank management for losing money; it will only blame bankers for not doing what they are told. Simply reforming the banks cannot change SOE behavior or that of the Party itself.”
—Walter, Howie, Op. cit., 2011
In commenting on the CCP’s 19th Party Congress, the IMT described some of what distinguished Xi’s policies from those of his immediate predecessors:
“Since taking office in 2012, Xi Jinping’s administration has been characterized by his marked elevation as preeminent leader of China; his high-profile anti-corruption campaign against powerful Party bosses; his gratuitous quotation of Mao; and his halting of the privatization of state owned companies. Many of these traits have led some in the West to believe that Xi has a program of returning to the Mao era of a nationalized planned economy under a Stalinist party dictatorship.”
—Marxist.com, 30 November 2017
Xi of course has no intention of returning to the autarchic national isolation of the Mao era—the massive investment in the ambitious One-Belt, One-Road Eurasian integration project makes that clear. Decrying reports in the Western media that “Xi’s increasing concentration of power…is leading China away from capitalism,” the IMT foolishly insists that: “for those of us not blinded by liberal prejudices, it is clear that the centralisation of power serves the very opposite purpose: the further strengthening of capitalism throughout China” (Ibid.) In reality the CCP’s recent policies reflect the fact that most bureaucrats have a material interest in resisting a transition to capitalism:
“After all, ‘vested interests’, including local officials, SOE heads, and even ministers of government agencies tied to economic planning and development, were unlikely to welcome radical reform that would diminish their role and importance.”
—Economy, Op. cit.
The dogged refusal of the IMT, SEP and various other ostensibly Trotskyist tendencies to admit that capitalist influence in China has been shrinking in recent years is presumably dictated by a reluctance to acknowledge that it was a mistake to have ever claimed that capitalism had been restored.
Exploitation & poverty declining in China
Most workers employed by private companies, unlike those in the SOEs, are former peasants trying to escape rural poverty:
“Since the late 1970s, decollectivization has unleashed millions of peasants to enter the city in pursuit of waged employment. But the dismantling of the Chinese communes does not lead to ‘accumulation through dispossession’ that Marx analyzed with respect to the enclosure movement of the English countryside. Nor is it an instance of the kind of predatory process in third-world countries whereby various collective forms of ownership are converted into private property rights. Rather, the distinctiveness of the Chinese agricultural reform is that it returns farmland to the village collective, which then allocates land use rights to individual peasant households. Most of the migrant workers holding rural household registrations are entitled to a renewable land lease in their native village.”
—Ching Kwan Lee, Against the Law, 2007
Migrant workers in the private sector, who make up a third of China’s total workforce, are brutally exploited:
“One study conducted by the Communist Party Youth League in six cities in Guangdong polled 1,800 migrant workers in December 2001. It found that 80 percent worked more than ten hours per day. Most worked twelve to fourteen hours per day, and 47.2 percent said they rarely had any holidays or rest on weekends.”
The impact of the 2008 global economic crisis was softened somewhat in China by the expansion of employment in the SOEs and the fact that restrictions on private land ownership allowed many migrant workers to return to their villages:
“While the collective system currently keeps rural Chinese from selling their plots off and is subject to land grabs from hungry officials … it seems to have helped act as an unemployment buffer in the wake of the 2008 financial crisis. When foreign demand dropped and factory output slowed, many laid-off migrant workers in China—particularly in Guangdong province—returned to their plots in the countryside when they couldn’t find work.”
—China Economic Review, 24 October 2014
The CCP’s image has improved recently due to efforts to raise wages, discourage egregious displays of wealth and punish a few corrupt bureaucrats. A 2020 Harvard University study reported that since market “reforms” were curbed “citizen satisfaction with government” has risen:
“We find that first, since the start of the survey in 2003, Chinese citizen satisfaction with government has increased virtually across the board. From the impact of broad national policies to the conduct of local town officials, Chinese citizens rate the government as more capable and effective than ever before. Interestingly, more marginalized groups in poorer, inland regions are actually comparatively more likely to report increases in satisfaction. Second, the attitudes of Chinese citizens appear to respond (both positively and negatively) to real changes in their material well-being, which suggests that support could be undermined by the twin challenges of declining economic growth and a deteriorating natural environment.”
An important element in the CCP’s ability to improve the “material well-being” of the population has been the steady expansion of the state sector:
“It is less widely understood that in fact employment in state-owned enterprises also expanded as a share of the economy—those owned by government entities at the central, provincial, and local levels. Between 2000 and 2011, employment in state-owned enterprises grew from 33 percent of all employment in China to 37 percent. Following 2011, official statistics do not report observations for the full range of ownership forms, but assuming proportional growth, state-owned enterprise would account for well over 40 percent of all jobs in China today. This expanding of state employment does not reflect the surplus labor long-since shed from official payrolls, but rather the real expansion of the footprint as enterprising managers learn to effectively capitalize on the incentives provided in China’s economic system.”
—Adam Hersh, Testimony before the U.S.-China Economic and Security Review Commission on China’s Shifting Economic Realities and Implications for the United States, 24 February 2016
Despite the horrendous conditions prevailing in the private sector, China’s dramatic economic growth over recent decades has significantly improved life for most of the population:
“The country saw the number of impoverished rural residents decline from nearly 770 million in late 1978 to 5.51 million by the end of 2019, as shown by data from China’s National Bureau of Statistics. And the poverty headcount ratio dropped to 0.6% from 97.5% during the period. On the road to ‘poverty alleviation’, China eventually bridged the huge number gap between 97.5% and 0.6%, 770 million and 5.51 million with decades of unremitting exploration and efforts.”
—Yahoo Finance, 26 May 2020
The SEP, which insists that capitalism has been restored in China, disputes such assertions:
“In reality, despite the regime’s claims to have lifted hundreds of millions of people out of poverty, by some estimates poverty afflicts up to half a billion Chinese workers and peasants. Moreover, China now has one of the most unequal wealth distributions of any large economy in the world.
“A study released in June by French economist Thomas Piketty sharply revised upward China’s official inequality estimates. Piketty reported: ‘The top 10 percent income share rose from 27 percent to 41 percent of national income between 1978 and 2015, while the bottom 50 percent share dropped from 27 percent to 15 percent.’”
—wsws.org, 16 October 2017
Inequality has indeed soared in China since 1978, but at the same time hundreds of millions have also been lifted out of abject poverty. The vague reference to “some estimates” of a half billion Chinese remaining mired in poverty, is hardly persuasive. At the conclusion of the article the author recommends an earlier WSWS piece entitled “Chinese government’s phony anti-poverty plan,” which estimates that 70 million (not 500 million) people were living in poverty in 2016:
“An estimated 70 million Chinese live below the official poverty line of 2,300 yuan per year (at 2010 prices). By comparison, the legal minimum wage is 2,310 yuan a month in Guangdong, one of the country [sic] richer provinces, and falls to 1,210 yuan a month in smaller towns and more impoverished areas.
“Beijing claims to have largely eradicated urban poverty in large part because of a government subsidy paid to urban dwellers to lift incomes to a minimum level of 4,476 yuan per year. A survey of 140,000 households by the China Household Income Project found that only 1.4 percent of the urban population was below the minimum level.”
—wsws.org, 25 March 2016
Presumably the SEP’s indifference to China’s current reality derives from an acute sensitivity to preserving the political prestige of its leading members. But for revolutionaries, the truth must always take priority over protecting the vanity and fragile egos of people who have trouble admitting their mistakes.
The expansion of production and rapid technological progress recorded under the CCP does not validate its oppressive, anti-working class regime, any more than the development of the productive forces in the Soviet Union in the 1930s refuted Trotsky’s critique of the “terroristic methods” of the Stalinist caste. Yet, regardless of the crimes of the ruling stratum, Trotsky considered that bureaucratised central planning by Stalin’s regime had a positive historical significance:
“But that does not prevent us from seeing that the new society is progressive in comparison with capitalism, for on the basis of nationalized property the new possessing ‘class’ has assured a development of productive forces never equaled in the history of the world. Marxism teaches us, does it not, that the productive forces are the fundamental factor of historic progress. A society which is not capable of assuring the growth of economic power is still less capable of assuring the well-being of the working masses, whatever may be the mode of distribution. The antagonism between feudalism and capitalism and the decline of the former has been determined precisely by the fact that the latter opened up new and grandiose possibilities for the stagnating productive forces. The same applies to the USSR. Whatever its modes of exploitation may be, this new society is by its very character superior to capitalist society. There you have the real point of departure for Marxist analysis!”
—Once Again: The USSR and its Defence, November 1937
China’s capitalists: ‘a vulnerable class’
China’s economy has a significant capitalist component, unlike the Soviet economy which was virtually entirely collectivised. There have been conflicting estimates of the relative size and influence of China’s state and private sectors:
“In September 2005, CLSA, the emerging markets brokerage based in Hong Kong, produced a thick report about how entrepreneurs had taken over as the motor of economic growth in China. ‘The private sector now contributes more than 70 per cent of GDP and employs 75 per cent of the workforce, creating the foundations of the vibrant middle class, so a rollback of market reforms is not an option for the world’s largest Communist Party,’ the report said. ‘Today’s most important economic question is not, “How will the government respond to an economic slowdown?” but rather “How will China’s entrepreneurs respond?”’
“A week later, a rival and equally respected China research unit at UBS, the Swiss bank, put out a rejoinder, saying the private sector ‘accounts for no more than 30 per cent of the economy, whichever indicator you use.’”
—Richard McGregor, The Party – The Secret World of China’s Communist Rulers, 2012
A 2011 study by the U.S.-China Economic and Security Review Commission which estimated that China’s state sector made up at least 50 percent of the economy, failed to take into account the fact that the mixed ownership reform programme permitting private investment in SOEs did not give investors any influence over decision-making. Assigning such investment to the private sector, while technically correct, can therefore result in significantly underestimating the effective weight of state ownership.
A related issue is posed by the listing of SOE shares on the Shenzhen, Shanghai and Hong Kong stock markets. In capitalist countries anyone owning a majority of a company’s total outstanding stock usually gains effective control and is free to replace the existing management. But that is not how China’s stock markets operate:
“Most of China’s listed companies are majority state-owned. Imagine that three-quarters of the companies on the FTSE 100 were like Royal Bank of Scotland. The upshot is that the share price of Chinese firms is largely an irrelevance as far as their managements are concerned. They owe their position to their political connections, not to the approval of ordinary shareholders. And the stock-price falls have no impact on a firm’s ability to borrow. Those figures about trillions of dollars being wiped off Chinese wealth are in themselves something of a myth. Most of those losses are paper losses for the Chinese state, not losses borne by private households.
“This is the bigger point about China that is so often missed by the rest of the world. China has copied outward forms of Western market economies—stock markets, limited companies, commercial banks—but often not the substance. The state retains a massive role in directing economic activity.”
—The Independent, 28 August 2015
It is essential to understand that despite the nominal introduction of many features of a capitalist market economy the fundamental relationships established by the 1949 Revolution have not changed. Many of the apparent changes are essentially cosmetic and introduced solely to encourage foreign investment:
“Over the past 18 years, China has developed stock and debt-capital markets, a mutual-funds industry, pension funds, sovereign-wealth funds, currency markets, foreign participation, an internationalist central bank, home loans and credit cards, a burgeoning car industry and a handful of brilliant cities. As it looks like the West, international investors easily accept what they see; they are excited by it because it is at once so familiar and so unexpected. There is the feeling that all can be understood, measured and valued. They would not feel this way if China explicitly relied on a Soviet-inspired financial system even though, in truth, this is largely what China remains.”
—Walter, Howie, Op. cit.
Individual investors were permitted to buy some Township and Village Enterprises outright, but the SOE reform primarily involved (semi-)privatisation deals which resulted in complex mixed-ownership structures designed, at least in part, to obscure the extent of state control. A 2011 study described some of the restrictions imposed on owners of newly-privatised enterprises:
“First, the government expects that the enterprises would not relocate after the ownership reform; second, the government expects that they would keep the original brand name; third, the government expects that the strategic investors would invest further funds in order to expand the business; fourth, the government expects that the new controlling shareholders would retain the original management and keep the employment of all workers in order to prevent social instability. However, the government does not fully trust private firms about those issues. It seems that the reality often justifies its incomplete trust. Incomplete trust can lead to the incomplete selling of state shares, thus the government will ‘retain a hand’.”
—Wenkui Zhang, The Emergence of China’s Mixed Ownership Enterprises and Their Corporate Governance, 2011
In his 2016 book, the IMT’s China expert brushed aside the complicated reality of the CCP’s “mixed ownership reform” and airily declared that China was entering the “last lap” of full-blown capitalist restoration:
“However, in 2013 the PRC announced that many of the large SOEs that are profitable, such as the China National Pharmaceutical Corporation which appears on the Fortune 500 list, are to be privatised. These companies are already stock exchange listed because they have minority shareholders, but private shareholders will now become the majority and company structures will be radically changed by the profitability imperative. This move suggests, that while investment in certain strategic areas will remain tightly controlled, the CCP believes it is on the last lap of creating a Chinese bourgeoisie that can adequately support itself without state assistance.”
—John Peter Roberts, Op. cit.
Far from the “last lap of creating a Chinese bourgeoisie,” the mixed ownership reform in many cases turned out to be a means of enabling state encroachment on private property:
“According to the author Wu Xiaoping, the private sector had completed its ‘historic task’ in helping state-owned companies to develop and that it was time for it to start ‘fading away.’ In previous years, the suggestion would have been too far-fetched to garner attention. But it hit a nerve last summer after President Xi Jinping signalled that Communist party branches should have a greater say over corporate governance, and oversaw the abolition of presidential term limits, making it possible for him to remain top leader for life. ‘It felt like history was going backwards,’ says one Chongqing entrepreneur who asked not to be named. There were even signs that Mr Wu’s prediction was becoming a reality, with the unravelling of a popular strategy to raise funds by pledging shares as collateral for loans. As their share prices fell over the past year, more than 60 listed companies were forced to sell significant stakes to state-owned groups. In some cases, the companies sold majority stakes and were effectively nationalised.”
—Financial Times, 13 May 2019
The CCP’s expanded role in directing private enterprise has naturally taken a toll on business confidence:
“Finally, starting in 2015, the increased role of both the state and the party in the economy and the illegal seizure of private enterprises by the state chilled the investment enthusiasm of private entrepreneurs. In speeches at the 19th Party Congress in the fall of 2017 and at the National People’s Congress in the spring of 2018 President Xi called for an expanded role of the party, including enhancing the role of party committees, even in private enterprises. At the Third Plenum of the 19th Party Congress in March 2018, the central committee adopted a plan calling on ‘the party to exercise leadership over all areas of endeavour in every part of the country’ (Chinese Communist Party Central Committee 2018). This plan too is likely to further erode the confidence of private businesses.”
—Lardy, Op. cit.
At a press conference during the National Peoples’ Congress in March 2018, Premier Li Keqiang candidly admitted that low levels of private investment could be attributed to the “weak protection of property rights” (Lardy, Op. cit.). While China’s banks provide SOEs with easy credit, private companies have been finding it increasingly difficult to obtain financing:
“…since 2011 the share of domestic-currency corporate loans to state firms, including local government financing vehicles, has surged. By 2016 the state share had jumped 55 percentage points to 83 percent, while the share of new corporate loans to private companies had fallen 43 percentage points to only 11 percent.… It appears that private companies were able to partially offset their declining access to loans from financial institutions by stepping up their borrowing from nonbank financial institutions, i.e., shadow banks. Starting in 2016, however, the authorities began to restrict the operations of the less well-regulated shadow banking system in order to reduce financial risk. As a result, private firms were squeezed out, leading to the first ever decline in their share of investment….”
Entrepreneurs who rely on the semi-legal shadow banking sector, or bribe state officials in exchange for loans, risk being charged with illegal activity:
“The richest businessman of 2008, Huang Guangyu, the owner of retail giant Gome, was jailed on insider dealing charges. The second-richest entrepreneur in 2008 lost control of his company to a state enterprise after claiming he had been denied bank credit and then becoming involved in a bribery case.… Is it a problem of becoming ‘too big’ for the taste of the authorities, or one of operating outside the Party networks? The individuals concerned might be guilty of crimes, but it is difficult to know.”
—Timothy Beardson, Op. cit.
Most of China’s private businesses are small-scale operations with short lifespans, but a few, including Huawei, Tencent and Alibaba, have become global players. Yet even the biggest private Chinese companies have nothing like the influence wielded by major multinationals in the advanced capitalist countries:
“China’s three dominant internet companies, Baidu (a search engine), Alibaba (e-commerce) and Tencent (messaging and gaming), known collectively as the BAT, have all felt the government’s wrath. In 2018, Tencent lost $200bn in its market capitalisation after regulators stopped approving new online games, pushing the company out of the world’s top 10 companies ranked by their share market valuation.”
—The Guardian, 25 July 2019
China’s burgeoning bourgeoisie obviously has no stake in preserving either the political monopoly of the CCP or the remaining social gains of the 1949 Revolution. They rightly tend to regard the CCP as a fetter, not an enabler:
“Liu Chuanzhi, the chairman of the information technology giant Lenovo, probably put it best when he said that ‘China’s entrepreneurs are a vulnerable class….Even when faced with the improper actions of government departments, entrepreneurs do not have either the courage or the ability to fight back….All they can do is to minimize losses.’”
—Willy Wo-Lap Lam, Chinese Politics in the Era of Xi Jinping, 2015
In 2013 private capitalists made up six per cent of the CCP’s membership, compared to 44 per cent who were classified as either small-scale farmers or blue-collar workers (Wright, Op. cit.). Many entrepreneurs who got their start during the sell-off of state-owned enterprises had a CCP background:
“…a survey of private business owners in 2002 showed that almost two-thirds of the 6.2 million owners of private firms had been former officials and executives in the SOEs and government agencies. This indicates that a very large number of officials—almost 4 million—had exited to the private sector in the 1990s.”
—Minxin Pei, China’s Trapped Transition, 2008
Those capitalists who retain their CCP memberships are not generally motivated by socialist idealism:
“Although party members who have become private entrepreneurs choose to maintain their party membership, only a small number of non-CCP private entrepreneurs appeared to have joined the party on their own. Politically, such ambivalence makes sense. For those who were CCP members before they were private entrepreneurs, quitting the CCP would be unnecessarily risky because that step would signal disloyalty and could have negative political repercussions.”
Bloomberg’s 27 February 2012 online edition estimated the net worth of the 70 wealthiest delegates to the CCP’s National Peoples’ Congress as $89.9 billion. While they undoubtedly favour taking “market reform” all the way to outright capitalist restoration, they are also very aware, unlike the IMT, SEP and sundry other leftist impressionists, that China has yet to undergo a social counterrevolution.
Property Rights & CCP’s Anti-Corruption Campaign
The legal status of private capital—particularly domestic capital—is not clearly defined. Xi’s on-going anti-corruption campaign, which served to simultaneously mobilise popular support while eliminating or intimidating potential factional opponents, signalled that domestic capitalists transgressing ground rules laid down by the party do so at considerable risk. Xi explicitly identified his campaign to reign in bureaucrats flaunting ill-gotten gains with Mao’s “tigers and flies” anti-corruption drive of the mid-1950s:
“For Bo Zhiyue, a veteran China politics watcher at the National University of Singapore, the anti-graft drive has taken on its own dynamic. ‘Lower-level governments are now competing to dig up corruption,’ he said.
“’It’s like in the anti-rightist campaign of 1956, when they had to fulfill quotas,’ Bo said, referring to the campaign waged against critics of Mao Zedong during the early years of the People’s Republic.
“’Nobody is sleeping well now,’ he said. ‘There is a lot of uncertainty and there are no clear rules as to who gets investigated.’”
—South China Morning Post, 6 November 2014
The anti-corruption campaign has had a chilling effect on private capital:
“Whether or not some entrepreneurs were intent on taking him on, Xi pre-emptively took the fight to them. In 2017, his administration began a campaign to rein in swashbuckling business leaders, starting with some of the corporate chieftains who had become the standard-bearers for aggressive Chinese dealmaking overseas. Some business leaders were forced out of overheated commercial sectors such as real estate. Others were told to pull back from offshore forays, either because their high profile was an embarrassment for Beijing or because the government was trying to stop capital flight. Some, such as Wu Xiaohui, the chairman of Anbang Insurance Group, went the way that communist members who fall foul of the system often do, vanishing without explanation into the party’s detention system. Only months earlier, Wu had been leading negotiations to spend $14bn on hotels in the US, but the deal collapsed. In May 2018, the authorities announced Wu had been sentenced to 18 years in jail for fraud and embezzlement.”
—The Guardian, 25 July 2019
The crackdown on powerful capitalists has tended to embolden leftist Maoist elements in and around the CCP:
“The Party’s use of Mao-era discourse in its descriptions of contemporary policies amounts to a tacit endorsement of his actions. This may be unintentional, but the effect is dangerous: neo-Maoists are led to believe they have the Party’s blessing in their noble quest to adhere to its ideology in its purest form, when in fact their belief in disrupting the system through class struggle and going to war to protect their ideological superiority undermines the principles of peaceful coexistence and stability that form the backbone of the CPC today.”
—Kerry Brown, Simone Van Nieuwenhuizen, China and The New Maoists, 2016
The IMT has bizarrely chosen to interpret Xi’s recent moves as intended to “nurture” a nascent capitalist class, rather than constrain its growing influence:
“The Party has been able to maintain its dominant position within society chiefly because Chinese capitalism is completely unable to develop itself without the nurturing of a strong state, a state which in fact is responsible for the very existence of capitalism in China. This is why in the absence of a severe economic crisis, the CCP can still balance itself between the classes while at the same time developing Chinese capitalism.”
—Marxist.com, 30 November 2017
The CCP responded to record levels of capital flight in 2016 by tightening controls to impede government officials and private capitalists stripping assets and funnelling them through Hong Kong, the traditional gateway for foreign capital entering China and Chinese overseas investment:
“Distrust of the government has for years led mainland Chinese business elites to move their wealth out of the reach of Beijing. For the richest of the rich, Hong Kong used to be seen as a haven but in recent years they have become increasingly wary as China has tightened its grip on the territory. These fears are shared by a range of businesses operating in the territory, a financial, media and professional services hub, particularly after the introduction of the extradition bill earlier this year.”
—Financial Times, 20 June 2019
In addition to curtailing “round tripping” tax avoidance, regulations were increased on foreign investment by Chinese corporations:
“The National Development and Reform Commission, along with four other agencies, released rules that require private enterprises to invest in overseas deals that are genuine and not meant to be used for transferring assets abroad or for money laundering. Private firms are now required to report investment plans to the government, and to seek approval if the investments involve sensitive countries or industries.”
—Forbes, 22 December 2017
Trotsky observed that Stalinist bureaucrats in the Soviet Union in the 1930s who were acutely aware of the “instability” of their privileges would jump at a chance to be upgraded from a “director of a trust” to a “stockholder”:
“One may argue that the big bureaucrat cares little what are the prevailing forms of property, provided only they guarantee him the necessary income. This argument ignores not only the instability of the bureaucrat’s own rights, but also the question of his descendants. The new cult of the family has not fallen out of the clouds. Privileges have only half their worth, if they cannot be transmitted to one’s children. But the right of testament is inseparable from the right of property. It is not enough to be the director of a trust; it is necessary to be a stockholder. The victory of the bureaucracy in this decisive sphere would mean its conversion into a new possessing class. On the other hand, the victory of the proletariat over the bureaucracy would insure a revival of the socialist revolution. The third variant consequently brings us back to the two first, with which, in the interests of clarity and simplicity, we set out.”
—The Revolution Betrayed
The imperialists’ strategic calculation that Chinese participation in the global economy would soon lead to capitalist restoration has not been fulfilled, while China’s economic growth, technological sophistication and geopolitical influence have far exceeded expectations. The IMT, SEP and various other leftists may claim that the CCP presided over a seamless social counterrevolution, but the mavens of global finance capital know better.
One front in the imperialist campaign to contain China has been the promotion of a “democracy” movement in Hong Kong that is supported by foreign and domestic capitalists (including tycoon Jimmy Lai) as well as various pseudo-Marxists. In a 2019 statement we observed that the protests were led by an:
“organized corps of ideologically committed counterrevolutionaries [which] has spearheaded many of the violent episodes during the protests—some of them openly waving U.S. and British flags and singing the ‘Star Spangled Banner.’ These elements have clearly been acting with the support, if not at the direction, of the U.S. and its imperialist allies.”
“The attitude of revolutionaries to this movement must begin by recognizing the necessity to defend the Chinese deformed workers’ state and the collectivized property system upon which it is based. This requires the suppression of the pro-imperialist leadership of the protests and their hard-core followers, who compose an ever-increasing proportion of the demonstrations as participation dwindles.”
China & global capitalist crisis
China’s integration into the world market has exposed it to the ups and downs of global capitalism, much as Trotsky projected for the Soviet Union during the New Economic Policy:
“All the fundamental processes of our economy are not only becoming connected with the corresponding processes dominant in the world market, but are also becoming subject in some degree to the operation of the laws dominant in capitalist development, including changes in economic conditions. There arises a situation in which we, as a business entity, are interested within certain limits in an improvement in the conditions in capitalist countries, and in which, on the other hand, we may be made to suffer some disadvantage as a result of a worsening of these conditions.
“This circumstance, somewhat surprising at first glance, is merely a more emphatic expression of the contradiction involved in the very nature of the so-called NEP, already mentioned by us in connection with the narrower limits of the isolated national economy. Our present order is based not only on the struggle of socialism against capitalism, but within certain limits on cooperation between socialism and capitalism.”
—Leon Trotsky, Toward capitalism or socialism?
The global economic downturn following the 2008 financial crisis chiefly impacted China’s private sector which is geared to production for the world market. The globe’s leading capitalist powers responded to the crisis by bailing out the super-rich while imposing vicious austerity on poor and working people. The CCP, by contrast, invested in expanding the state sector, thereby providing jobs for millions of workers made redundant by private companies:
“In 2009, China launched a $600 billion (€528 billion) stimulus program in an attempt to shield itself from the worst effects of the global financial crisis. Through its system of regional banks, the government offered cheap loans to thousands of state-run industrial enterprises, including steel, aluminum, cement and coal producers.
“Massive infrastructure and real estate projects were undertaken, including new airports, power plants, roads and an expansion of the high-speed railway network. The investments not only saved millions of Chinese from the unemployment lines, but also created millions of new jobs, which in turn pushed up domestic demand.”
—Deutsche Welle, 21 March 2019
The result was that the Chinese deformed workers’ state weathered the 2008 crisis and its aftermath far more successfully than any of its capitalist rivals:
“Over the seven years from 2007, China grew by 80.5 per cent, compared to 7.3 per cent for the US, 0.6 per cent in Japan and 5.2 per cent in Germany. Saying that China’s growth is ‘slowing’, but not noting that China’s total growth has been more than ten times that of the US since 2007, distorts the truth.
Given this outcome, the obvious conclusion would be to learn from what China did. Instead China has been urged to abandon the policies responsible for this success, reduce its level of investment and privatise its state sector. It was state companies which carried out a major part of the stimulus programme and state ownership of the banks that allowed China to instruct its financial system to engage in countercyclical investment programmes while all that Western governments could do was plead with non-compliant private banks and companies.”
—Jude Woodward, The US vs China–Asia’s new Cold War?, 2017
Woodward cites a study by Singapore-based economist Vu Minh Khuong who attributed 64.2 percent of China’s GDP growth between 1990 and 2010 to increased investment, 29.7 percent to improved productivity and 6.1 percent to the expansion of the workforce. Khuong identified China’s state sector as the source of its meteoric economic ascent, a conclusion with which Michael Roberts concurs:
“…China has grown exponentially not just because of cheap labour but also because of massive productive investment promoted and controlled by the state sector. Actually, as a result of that investment expansion, consumption spending is also growing very fast.”
—Thenextrecession.wordpress.com, 7 June 2018
The comrades of the IMT, who hailed Jeremy Corbyn’s modest 2019 election promises about investing in the British economy as “bold and radical” were considerably less enthusiastic about the CCP’s far more ambitious intervention:
“2008’s stimulus may have kept the economy growing, but it laid the basis for the depth of the coming crisis. It was delivered not with the socialist method of planning to meet need, but with the capitalist methods of speculation and credit. It was achieved by China’s state-owned banks lending money to local governments and others to spend on infrastructure projects, mainly. As a result, bad debts have ballooned.”
—Marxist.com, 18 March 2020
Michael Roberts noted that Beijing’s investments were neither speculative nor merely aimed at stimulating demand, unlike those advocated by Labour lefts around Corbyn:
“Indeed, the Wren-Lewis’s of this world [Simon Wren-Lewis was a senior economic adviser to former Labour leader Jeremy Corbyn] never advocate or even mention the idea of the nationalisation or socialisation of capitalist sectors. For them, Keynesian policy is government spending to ‘stimulate demand’.
“China’s policy in the Great Recession was not just ‘fiscal stimulus’ in the Keynesian sense, but outright government or state investment in the economy. It actually was ‘socialised investment’. Investment is the key here—as I have argued in many posts—not consumption or any form of spending by government. The Great Recession in the US economy was led and driven by a fall in capitalist investment, not in personal consumption or caused by ‘austerity’. In Europe, 100% of the decline in GDP was due to a fall in fixed investment.“
—Thenextrecession.wordpress.com, 6 August 2018
China’s huge 2008 infrastructure package enlisted some chronically underperforming SOEs (sometimes referred to as “zombies”) in either building infrastructure projects or producing inputs for them. In 2017, on the eve of the CCP’s 19th Party Congress, the SEP seized on plans to close down some of these same SOEs as evidence of the party’s acquiescence to the dictates of global capital:
“The ousting of Bo Xilai five years ago was a repudiation of the politics he advocated—the protection and boosting of state-owned enterprises as national champions that could compete internationally, along with a more concerted push-back against US efforts to undermine and contain China, if need be through war.
“However, while Xi and Premier Li Leqiang [sic] have pursued the pro-market agenda demanded by the World Bank and International Monetary Fund, they have done so cautiously, fearing that rising unemployment would lead to widespread social unrest.”
—wsws.org, 17 October 2017
The CLB reported measures undertaken to minimise the pain for workers made redundant when their companies were shut down:
“Most of the enterprises affected in the drive to scale back excess capacity were state-owned. They suddenly had to face production cutbacks and shutdowns, closures and clearances. Some so-called ‘zombie’ companies were closed down or merged into other enterprises. Around 1.5 million coal miners were reassigned or ‘internally retired.’ To avoid a recurrence of the situation at the end of the last century where workers at SOEs were laid off without adequate social security cover, the central government demanded improved measures to find alternative placements for workers. In the steel industry, it stressed the need to ‘handle labour relations legally, strengthen social security access and focus on risk prevention,’ and ensure that there were employment options and livelihood guarantees for workers cast off by their enterprises.”
—“The Workers’ Movement in China 2015-2017”
The current global capitalist crisis is once again hitting China’s private sector particularly hard; a study by Tsinghua University issued in March projected the collapse of 85 percent of all non-state businesses if the country’s COVID-19 lockdown continued for even a few months. The CCP responded by easing financing for troubled private companies:
“However, reducing the lending bias and making more credit available to private firms in an ecosystem that privileges state-owned enterprises is a long-standing objective which has only been marginally successful. Many SMEs [Small and Medium-sized Enterprises] have relied on irregular finance, such as shadow banking and peer-to-peer (P2P) lending. These avenues were choked off, before the coronavirus crisis unfolded, in a zealous but poorly coordinated push by regulators. It is possible that a large part of the newly available liquidity will go into the refinancing of existing debt, as companies struggle for survival.”
—Michiel Haasbroek, merics.org, 13 July 2020
The current $4 trillion stimulus package, unlike that of 2008, includes China’s large private information technology companies:
“Unlike previous, more conventional, infrastructure investment programs, this new economic stimulus will rely on a more diverse set of players. Whereas state-owned enterprises (SOEs) play the predominant role in bridge or railway construction projects, the construction of digital infrastructure will, at least in part, have to be driven by private Chinese technology companies.
. . .
“However, whether and how these companies will turn the government’s wishes into action still depends on how exactly government funding will be distributed and what supportive policies they can benefit from. Private technology companies will only jump on the bandwagon if there are long-term financial gains to be made. China’s leading tech companies with global ambitions may also not want to be perceived as state-directed companies. As some Chinese commentators have suggested, involvement in these projects could turn them into a ‘new generation of SOEs’.”
—Caroline Meinhard, merics.org, 4 June 2020
Once again the SOEs, upon which the stability of the CCP’s rule depends, have benefitted disproportionately from the state’s economic intervention:
“China’s headline economic data released on Thursday showed growth of 3.2 per cent in the second quarter, a strong rebound from the first three months of the year when the country reported its first contraction since the end of the Cultural Revolution in the mid-1970s.
That puts the overall decline for the first half of the year at just 1.6 per cent—an enviable performance compared with most big economies still struggling with the pandemic that began in the central Chinese city of Wuhan.
. . .
A bit of digging into Thursday’s data release reveals investment by state-owned enterprises in the first half of the year rose by 2.1 per cent, while investment by private companies fell by 7.3 per cent. This important data point was conveniently absent from the English press release provided to most international investors. But it is in keeping with a three-year plan recently approved by Mr Xi to enhance the role of state enterprises in the economy at the expense of private and foreign-invested businesses.
China’s roughly 130,000 state enterprises are riddled with inefficiency, corruption and waste. But in a time of national crisis they are an indispensable source of employment and stability for the ruling Communist party.”
—Financial Times, 16 July 2020
As has been widely noted, China’s recent economic performance compares favourably with its capitalist competitors:
“In its most recent analysis, the World Bank predicted that the global economy will shrink by 5.2 percent in 2020. The U.S. Bureau of Labor Statistics recently posted the worst monthly unemployment figures in the 72 years for which the agency has data on record. Most analyses project that the U.S. unemployment rate will remain near the double-digit mark through the middle of next year. And the Bank of England has warned that this year the United Kingdom will face its steepest decline in output since 1706. This situation is so dire that it deserves to be called a ‘depression’—a pandemic depression.”
—Foreign Affairs, September/October 2020
The distinction between China’s economic rebound and the continuing pain being experienced in the major imperialist countries seems lost on some leftists whose adherence to the mistaken notion that the CCP is running a purely capitalist economy leads them to see similarities where there are in fact important distinctions. For example, the International Socialist Alternative (ISA—which includes most of the national sections of the former Committee for a Workers’ International), commented:
“In terms of economic measures, Beijing announced US$12 billion in emergency funding to fight the epidemic. But in the same week it pumped US$174 billion into the banking sector and stock market to prevent a market meltdown. As well as their fear of market collapse, this also shows that the Chinese regime, just like Western capitalist powers, has a clear class allegiance to big business, and to profits over human life.”
—Internationalsocialist.net, 19 March 2020
The ISA, which claims to have a Chinese affiliate, seems unaware that China’s banks are state-owned and that most of the shares listed on the stock exchanges are those of SOEs. It is simply nonsensical to equate CCP support for state-owned financial and industrial entities to the massive transfer of public funds to private interests in the U.S. and other imperialist “relief packages.”
CCP: balancing between capitalist & working-class pressure
The manifest incapacity of global capitalism to address the abscess revealed by the 2008 crisis significantly undercut the once powerful pro-market faction of the CCP:
“If nothing else, the events of the fall of 2008 added an additional seal to the Party’s determination to sustain a closed, tightly controlled, economy. ‘Don’t show me any failed models,’ is the refrain of the Chinese officialdom these days.”
—Walter, Howe, Op. cit.
As “free market” economics lost their allure, the CCP’s popular support rose as its economic credentials were enhanced by its perceived willingness to stand up to U.S. bullying. But the party is not only threatened by capitalist restorationists at home and abroad—it also faces pressure from a militant and self-confident working class. A World Bank study reported that the CCP’s 2008 Labour Contract Law, introduced in response to an upsurge of working-class militancy, has resulted in higher wages, improved working conditions, enhanced redundancy packages for laid-off workers and guarantees of permanent jobs for all those employed by an enterprise for ten years.
In recent years private-sector workers have been fighting for higher wages and improved working conditions:
“Starting in 2007, the number of reports of collective protests multiplied, especially those from workers. The number of protests by workers in the private sector and in companies with foreign capital was now significantly higher than that of workers in state-owned enterprises. Protests by teachers and former soldiers also began to grow explosively in 2007. From these figures we can deduce the trend that workers’ protests in China took on a more diverse and far-reaching character from the mid-2000s onward. While previously they were primarily protests by workers in state-owned enterprises, they expanded to include a broad spectrum of workers in enterprises with different forms of ownership and in different class situations. Workers now all take to the streets or resort to strikes and other forms of collective action to express their dissatisfaction and fight for their rights and interests.”
—Chih-Jou Jay Chen, “Die Zunahme von Arbeitskonflikten in China: Ein Vergleich von ArbeiterInnenprotesten in verschiedenen Sektoren“ (The Rise of Labour Disputes in China: A Comparison of Workers Protests in Different Sectors), in: Egger et al., op. cit. [our translation]
The CLB recorded more than 10,000 strikes between 2015 and 2020, including more than a thousand in Guangdong province where private companies are centred. The CLB reported that between 2015 and 2017 workers increased the pressure:
“It was a period in which labour conflicts continued to erupt over an increasingly broad range of industries, within the construction and services sectors in particular: ordinary workers struggled to make a decent living and the CCP realised it had to take concerted measures to tackle the massive disparity between rich and poor that was threatening to destabilise the country.”
Many Chinese workers who have faced a combination of brutal exploitation and harsh state repression are not particularly impressed with the CCP’s promises of a glorious socialist future:
“According to leaked notes, Mr. Xi reflected on the collapse of the Soviet Union in his remarks to these officials. The fact that Mr. Xi should dwell on a two-decade old historical subject is illuminating in itself. A reasonable guess is that he might be thinking about the same challenges that faced the leaders of the late Soviet Union. But what he said about the causes of the Soviet collapse was even more revealing, if not disconcerting. The loss of ideological commitment to communism, Mr. Xi allegedly warned his audience, was the root cause of the rapid demise of the Soviet regime. As a result, there was not ‘one real man’ in the entire Soviet Union, Mr. Xi further pointed out, who would stand up to defend the teetering communist edifice.”
—thediplomat.com, 4 April 2013
On the occasion of the 70th anniversary of the CCP’s 1949 triumph, the IMT commented:
“The Chinese Communist Party has studied the collapse of the Soviet Union extensively. It is terrified of facing the same fate. It is well aware of the growing discontent fuelled by rapidly escalating inequality and corruption.”
—marxist.com, 3 October 2019
IMT supporters might ask themselves why, if the CCP leaders are indeed engaged in running a capitalist state, they still identify so closely with their one-time mentors in the Soviet Union. Why not study the fate of the capitalist Guomindang, under whose rule “escalating inequality and corruption” produced the social revolution of 1949? Mao Zedong, who led that revolution, remains popular, so Xi Jinping finds it expedient to try to reconcile the party’s current policies with those of the Great Helmsman:
“Many Chinese still look favourably upon Mao and his legacy, to the point of opposing the Party’s official verdict. This tension was exemplified by the Party’s actions in preparations for the 120th anniversary activities [marking Mao’s birth in 1893] to ensure there was no neo-Maoist disruption to harmony and stability; a concert in Beijing, originally called ‘The Sun is the Reddest, Chairman Mao is the Dearest’, became ‘Ode to the Motherland’, and many independent commemorative activities were either toned down or cancelled by authorities.”
—Brown, Van Nieuwenhuizen, Op. cit.
Xi plays essentially the same role in China today as Stalin did in the Soviet Union:
“The function of Stalin…has a dual character. Stalin serves the bureaucracy and thus the world bourgeoisie; but he cannot serve the bureaucracy without defending that social foundation which the bureaucracy exploits in its own interests. To that extent does Stalin defend nationalized property from imperialist attacks and from the too impatient and avaricious layers of the bureaucracy itself. However, he carries through this defence with methods that prepare the general destruction of Soviet society. It is exactly because of this that the Stalinist clique must be overthrown. The proletariat cannot subcontract this work to the imperialists. In spite of Stalin, the proletariat defends the USSR from imperialist attacks.”
—Leon Trotsky, Not a Workers’ and Not a Bourgeois State?, November 1937
The CCP’s recent moves to strengthen the state sector no more signify some sort of revolutionary regeneration than Xi’s anti-corruption campaign was aimed at transforming the bureaucracy into a cadre of revolutionary communists. The CCP remains a historically unstable, contradictory and transient formation which can only maintain its privileged position by suppressing any form of independent working-class political expression or dissent. A transition to a genuinely socialist society is only possible through working people ousting the CCP bureaucrats and establishing their own direct political rule.
Only the programme of “permanent revolution,” based on recognising the necessity to establish workers’ power in every country on the planet, can provide a coherent alternative to the Stalinist/Maoist programme of “socialism in one country,” which is premised on the illusion of a permanent reconciliation with international capital. To open the road to socialism Chinese workers must create a new revolutionary party based on the internationalist programme of the early revolutionary Communist International in the time of Lenin and Trotsky.
The dramatic economic growth China has undergone in recent decades, which has raised tens of millions out of poverty and created a powerful and technically advanced proletariat, would not have been possible had the “free market” been allowed to set economic priorities. Revolutionaries must defend the Chinese deformed workers’ state against capitalist aggression from abroad and counterrevolutionary subversion at home, while, at the same time, seeking to lay the basis for a workers’ political revolution to overturn the rule of the CPP and transform the political/administrative superstructure through the rule of elected workers’ councils. This perspective, the only path towards genuinely socialist development, requires the leadership of a Leninist-Trotskyist party rooted in the working class and committed to defending and extending the gains of the revolution of 1949.
A capitalist counterrevolution in China would decimate the state sector, throw millions of workers into abject poverty and push down wages for those who could still find employment. The social disaster which accompanied capitalist restoration in the USSR vividly confirms the validity of Trotsky’s programme of workers’ political revolution and the defence of collectivised property:
“Although it is thus impermissible to deny in advance the possibility, in strictly defined instances, of a ‘united front’ with the Thermidorian [i.e., overtly counterrevolutionary] section of the bureaucracy against open attack by capitalist counter-revolution, the chief political task in the U.S.S.R. still remains the overthrow of this same Thermidorian bureaucracy. Each day added to its domination helps rot the foundations of the socialist elements of the economy and increases the chances for capitalist restoration.”
—Leon Trotsky, The Transitional Program, 1938
In 1994 we categorically rejected projections by both bourgeois ideologues and pseudo-Trotskyists that the CCP was leading a social counterrevolution to restore capitalism in China:
“Recent Chinese economic evolution, when carefully examined, shows that the country is not heading in the direction of ‘market socialism.’ Nor is the bureaucracy consciously embarked on an attempt to turn China into a capitalist country, with the 20 million-odd members of the CCP as a new capitalist class….the highest echelons of the ruling party remain tied to state property.”
—1917 No. 14, 1994
We also spelled out an important corollary of unconditional defence of the gains of the Chinese Revolution:
“In any future confrontation we will bloc militarily with those elements of the bureaucracy that attempt to defend collectivized property against the forces of capitalist counterrevolution, just as we sided with the Soviet Stalinists in their last pathetic attempt to cling to power in August 1991.”
The 1949 revolution ended imperialist domination, smashed the existing bourgeois state apparatus and opened the door to the creation of a collectivised economy. Ultimately the preservation of these gains will depend on the resurgence of revolutionary proletarian struggles internationally, particularly within the citadels of imperialism. While impressionists and pseudo-Trotskyists may characterise China as “capitalist,” we in the Bolshevik Tendency take seriously Trotsky’s admonition that: “It is the duty of revolutionists to defend every conquest of the working class even though it may be distorted by the pressure of hostile forces. Those who cannot defend old positions will never conquer new ones.”
See our accompanying short article on Trotsky’s Three Questions to the revisionist James Burnham regarding the class nature of the USSR and how we would answer those questions if applied to China today