Is China now a capitalist country?

31 October

If capitalism is a state in which trade and industry are controlled by private owners, then China is a hybrid. Certainly up until the death of Mao, China was pretty much 100 percent state-owned. But since then, and especially since the reforms of the 90s, launched by Deng Xiaoping after Tiananmen, most analysts put state-owned enterprises at around 30 percent of the economy.

It’s a model pretty close to the one followed by the other Asian tigers, South Korea and Taiwan, whereby the state patronised and protected capitalist development but didn’t directly own the majority of the economy. So in China, while only around 2-3% of enterprises are owned by the state, those enterprises amount to some 30% of the country’s assets – the state-owned ones are extremely large. These are the big, strategic industries: steel, coal, telecommunications, energy. They’re all state-owned, and it’s very difficult for any private or foreign enterprise to invest in those areas.

The process of privatisation was a combination of enormous foreign direct investment, which was attracted by Special Economic Zones in the 1990s and 2000s, and by opening the space for private enterprise. Private enterprise has been allowed to flourish, but it has difficulty accessing capital. So while the state-owned enterprises technically only own 30% of the economy, they are over-privileged and over-powerful.

Who are the beneficiaries of China’s capitalist development? It’s either the Communist Party, or people who are related to Party members. 

I think there’s still an ideological component in the sense that… well, who are the beneficiaries of China’s capitalist development? If we go back to the definition of capitalism as a system that benefits the owners of the means of production, in China those are largely either directly the Communist Party, or those related to the Communist Party. It’s partly that this is a massive cash cow, and it’s partly strategic and political importance.

This is one of China’s many contradictions. China is keen on having market economy status within the World Trade Organisation, for example. More immediately, as the economy changes – and now that China is past the rapid catch-up growth phase and has to grow a more efficient, higher-value, more technologically upgraded economy – some of those things benefit from state intervention or investment, like research and development, or supporting infant industries to the point where they can handle the competition.

Look at renewables. China very rapidly became the biggest supplier of solar panels and wind turbines with enormous state support that allowed them to undercut prices, which allowed them to compete with established players like the Danes and the Germans. But there is now a drag on the economy by the state-owned enterprises, which are the least efficient and least productive part of the economy and are resisting reform. It was a problem in the 90s, when there was a lot of hopelessly inefficient enterprises which were either privatised, allowed to go bankrupt, or closed down, so that what remained was more efficient, but now it’s a problem again.

Government at every level holds shares in nominally private enterprises. And any enterprise beyond a certain size will have a Party committee, often giving the management firm direction.

There’s a further complication in that while you can figure out direct ownership from the statistics that China produces, what is harder to figure out is what indirect ownership there is. Government at every level holds shares in nominally private enterprises. Any enterprise beyond a certain size will have a Party committee, and in some cases the Party committee will override the management, or at least direct the management firmly. So beyond direct ownership, Party influence on the economy is huge. That is partly about enrichment, and rent-seeking – but it’s also ideological.

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