Why China may not be ‘capitalist’: the Role of the State in Chinese Economic Development

* Essay: The Chinese Economic Miracle – A Triumph for Capitalism or the Planned Economy? By Jonathan Clyne.

Please request the full document, which exists in both abridged and full-length version, from author Jonathan Clyde via [email protected]

More generous excerpts are here.

The Key Thesis of Jonathan Clyne is the following:

“A transitional economy is the economy which is established after capitalism and landlordism is abolished, and before there is a real socialist economy. It is common that one’s view of a transitional economy is coloured by how things were in the Soviet Union, Eastern Europe and China. It is easy to draw the conclusion that a well functioning transitional economy equals how things were run then, minus the dictatorship, plus workers’ control and management. In fact, things are more complex than that. In Stalinist states the economy is deformed, compared to the socialist model economy, in a much broader sense than that the plan was decided upon and implemented bureaucratically. Apart from the lack of workers democracy it was deformed in at least three more aspects:

1) not participating on the world market,

2) abolishing market prices, and

3) nationalising more than the commanding heights of the economy.

This document will show that the removal of these deformations is the real cause of the Chinese economic miracle, not the introduction of capitalism.

Discussion:

In China today the state owns the commanding heights of the economy and through the use of the state banks, the state budget, and the five-year plan it can decide upon the what direction the economy should take. The state planning body, the NDRC (National Development and Reform Commission) drafts the five-year plan that is then approved by the Communist Party. The SASAC controls the flow of investments to the SOEs and tries to make sure that the economy runs along the lines laid down by the five-year plan. SASAC was established in 2003 as a means of strengthening the central governments control over the economy.

The Chinese government does more than control the flow of investments. They also appoint the top managers. When the government thought that the managers of the two mobile and the two fixed telephone line companies were spending too much time competing with each other they switched the managers around, forcing them to take each other’s jobs, so that they would learn to co-operate better.

In the command economies the state tried to do far more than control investment and set qualitative targets about what areas of the economy should be developed. The state made quantitative targets for the whole economy. So many cars should be produced at such and such a price and such and such a colour; so much steel with so many different dimensions and qualities; so many tomatoes for so many workers. This is an extremely cumbersome method of planning that would not even be possible to implement well in advanced economies. It requires decades of technological development to achieve. It means just-in-time production married to instant monitoring of the flow of stocks at distribution points and conscious consumer feedback. The outlines of these possibilities can be seen in parts of the advanced economies today. The phenomena of the last decade – widespread computerisation and the internet – are essential building stones. The main reason for planning is to abolish the anarchy of the market. That is, abolish the competition between large privately owned companies, and replace their competition with a general plan. The central state should not be involved in details which should be taken care of lower down the line. This is more or less how things function in China today.”

The Weight of the State in the Economy:

“The popular image presented in western media is that the State Owned Enterprises, SOEs, are the last remaining dinosaurs of socialism in China, soon to die out. But the industries of the “rust-belt” stubbornly refuse to do just that. A discussion paper with the title Explaining the Persistence of State Ownership in China7 shows that in the past 10 years the number of SOEs has declined dramatically from 84 397 to 29 229, but the share of the SOEs in the industrial sector has hovered steadily around 33-34 percent, rising slightly in 2003 and 2004 to 35.5 and 37.0 percent respectively. Considering that industrial production as a whole has increased a lot during period, this actually represents a big expansion of the SOEs. Employment in SOEs fell by 40 percent from 1998 to 2003 at the same time as they maintained their share of GDP.9 This represents a considerable increase of productivity in the SOEs, especially considering that GDP leaped forward during this period. Nineteen Chinese companies, all of them SOEs, are in Fortune Global 500 list of the largest companies in the world in 2005.

The SOEs completely dominate the capital intensive industries. It is difficult to see how Chinese capitalists will ever be able to compete with the resources of the state in these areas. Not even foreign multi-nationals, with all the resources they have at their command, are able to do so. Even though managers of state firms have some independence in deciding how to dispose over the surplus created by the workers in their industries that does not turn them into capitalists. As Trotsky remarked: “The biggest apartments, the juiciest steaks, and even Rolls Royces are not enough to transform the bureaucracy into an independent ruling class.”

To fully understand the role of the state sector of the economy it is not enough to just look at what proportion they have of GDP, nor the degree of concentration. It is also important, if not more so, to look at what proportion of investments are channelled through the state sector, because investments are the driving force of the economy. And under capitalism, through the mechanism of the tendency of the rate of profit to fall, the cause of the boom-slump cycle. Fortunately, statistics about fixedasset investments (investments in buildings and machinery) are also much more accurate and uncontested compared to GDP statistics.

They are divided into four periods.

State Investments as Percentage of Total Investments

1981 – 1989 (the “roaring eighties”) 78.6 percent
1990 – 1992 (post-Tiananmen Square) 81.2 percene
1993 – 2001 (the restructuring of the SOEs) 86.7 percent
2002 – 2005 (post-reconstruction) 85.3 percent

These figures are truly astonishing. They show not only that state the plays an absolutely decisive role in the economy, but also that state investments as a proportion of all investments have increased substantially since the eighties, only to fall back slightly between 2002 and 2005. This confirms that rather than moving towards capitalism in the nineties, China moved away from it. The present financial crisis will certainly raise the state’s share of investments again, possibly to its highest level since 1978.

When an American professor of economics travelled to Shanghai in 1998 to do field research he asked a government official to introduce him to some private entrepreneurs. The official gave him a quizzical look and asked, “Are you a Harvard professor? As a Harvard professor why are you interested in those people selling watermelons, tea and rotten apples on the street?”13 Now that was probably an exaggerated view of the insignificance of the private sector, at least outside Shanghai, but it is not that far from the truth. Private Chinese companies produce things like pens, socks, shoes, toys, ties, and Christmas decorations. They are big in the building industry. They employ carpenters, plumbers and electricians, but the largest building industry, which is on the Fortune 500 list, is state owned. This company is called China State Construction and employs 294 000 people. The service sector is a much smaller sector than anywhere else in the world compared to manufacturing. Services, where 55 percent of all private companies are found, take care of tourists, catering and haircuts among other things. These are hardly sectors that would be nationalised even in a healthy workers state. The independence of private companies is limited, as many are to a certain extent dependent on the state for supplies, distribution and even customers. Symptomatic of this is that in a survey in 1995 of 154 private firms where the state had a minority stake of an average of 30 percent it still had an average of 50 percent of the seats on the boards of these companies. Unlike in the west, proxy voting is not permitted at shareholders meetings. This favours those that own many shares. In China, that is often the state.

In some areas the contribution of private companies can appear to be impressive. 70 percent of the world lighters are made by private Chinese companies in the city of Wenzhou. (Wenzhou, not Shanghai or Beijing, is the real capital of Chinese capitalism.) However, these lighters are produced by 3 000 small firms, some specialising in components, some in final assembly. Their specific weight in the Chinese economy does not amount to much. 90 percent of private companies employ less than eight people. Companies like that cannot compete for influence with the giant SOEs. Shanghai is often presented as the shop window of capitalism in China. But this is nothing more than a successful advertising campaign on the part of the bureaucracy to attract large foreign multinationals for joint-ventures. Although Shanghai is the richest area of China, the indigenous private-sector is among the smallest. Wage income is high in Shanghai, but asset income (income from shares, property, land, bank accounts) is the lowest in the country. Fixed asset investment by the indigenous private sector peaked in 1985 in Shanghai and has declined every year since then. By 2004, it was back to the same level as it was in 1978, in absolute terms.

This is not surprising if one knows that there are many political, regulatory, and financial restrictions on private enterprise. A few examples: Professors, civil servants, SOE managers, and workers for non-profit organisations were not allowed to start businesses on the side; the Shanghai government rigorously enforced zoning arrangements about what areas are allowed to be used for businesses and tightly controls land transactions; in critical infrastructure projects private companies are forbidden.17 It is because of this, not despite it, that Shanghai with its 17 million people has managed to reach a GDP per capita similar to Portugal.

The Shanghai and Shenzhen stock markets have exploded (and then declined), but this does not either represent a transition to capitalism. An overwhelming proportion of companies traded there are SOEs.

It is also worth noting that Chinese shares are peculiar animals quite different from those in the capitalist world. Chinese shares do not entitle the owner to a share of a company’s assets.18 Thus, even if 100 percent of the shares in a Chinese company were privately owned, the share owners could not move the machines out of the factories and sell them, as they still belong to the state. No wonder Stephen Green of the Royal Institute of International affairs comments: “The stock market has been used to support national industrial policy, to subsidise SOE restructuring, not to allow private companies to raise capital.”

One of the largest parts of the private sector is agriculture, 12 percent of GDP. This consists of hundreds of millions of peasants that have tiny plots that they lease from the state. The state is their biggest customer and distributor. In 1998 the state tightened its control over agriculture.

Foreign direct investment, FDI, is also a part of the private sector. Isn’t that eating its way into the planned economy? Already in the early eighties foreign capital began to arrive from Hong Kong, Taiwan, Macau and to a lesser extent from Malaysia, Indonesia and other parts of the Chinese Diaspora. Some of the capital also came from mainland China to be re-circulated via Hong Kong to take advantage of the privileges offered to foreign companies.

Companies in these zones enjoy tax incentives and greater independence.20 Many of them import components from abroad, put them together in China, and export them. The whole process bares very little relationship to the development of the rest of China. The technical level of production is not particularly high. They come to the SEZ’ because labour is cheap and because the government builds an excellent infrastructure for them.

In practice they have a license to exploit at will. They employ mainly migrant labour fleeing from poverty in backward rural areas. Many of these migrants are not allowed or do not want to officially register as urban dwellers and therefore have very few rights. They lead a semi-legal existence. They work long hours, and sleep in the factory or in barracks and are subject to all kinds of abuse and harassment by the employers. This is pure imperialist exploitation, with only a limited benefit for China.

Guangdong province, the province around Hong Kong and Macau, has the largest concentration of SEZ’ and is also the area where they have existed the longest. So bad are conditions there that life expectancy has actually declined from 73.9 years in 1981 to 73.27 years in 2000. By comparison the average life expectancy in China as whole has increased by 3.2 years in the same period.21 There are several reasons why the Chinese bureaucracy has allowed these investments, none of which have much relevance to Chinese workers whose needs the bureaucracy is prepared to dispense with.

It is no accident that the SEZs are concentrated around Hong Kong and Macao and the area across the straits from Taiwan.22 The Chinese bureaucracy wanted to integrate these areas economically into China as a preparation for political integration. Above all this reflects the need to complete the formation of an integrated Chinese nation-state.

This foreign capital has been used to build factories in China’s Special Economic Zones, SEZ.

Companies in these zones enjoy tax incentives and greater independence.20 Many of them import components from abroad, put them together in China, and export them. The whole process bares very little relationship to the development of the rest of China. The technical level of production is not particularly high. They come to the SEZ’ because labour is cheap and because the government builds an excellent infrastructure for them.

In practice they have a license to exploit at will. They employ mainly migrant labour fleeing from poverty in backward rural areas. Many of these migrants are not allowed or do not want to officially register as urban dwellers and therefore have very few rights. They lead a semi-legal existence. They work long hours, and sleep in the factory or in barracks and are subject to all kinds of abuse and harassment by the employers. This is pure imperialist exploitation, with only a limited benefit for China.

Guangdong province, the province around Hong Kong and Macau, has the largest concentration of SEZ’ and is also the area where they have existed the longest. So bad are conditions there that life expectancy has actually declined from 73.9 years in 1981 to 73.27 years in 2000. By comparison the average life expectancy in China as whole has increased by 3.2 years in the same period.21 There are several reasons why the Chinese bureaucracy has allowed these investments, none of which have much relevance to Chinese workers whose needs the bureaucracy is prepared to dispense with.

It is no accident that the SEZs are concentrated around Hong Kong and Macao and the area across the straits from Taiwan.22 The Chinese bureaucracy wanted to integrate these areas economically into China as a preparation for political integration. Above all this reflects the need to complete the formation of an integrated Chinese nation-state.

They have also used these zones (together with other exports) to acquire a huge foreign exchange reserve. By September 2008 the reserve topped 1.9 trillion US dollars. This is far more than any other government in history. In other words, the reserves are being used as a crutch for US imperialism. This is in the interest of neither Chinese nor American workers. But this is not decisive for the Chinese bureaucracy.

Again it is clear that the existence of a bureaucratic dictatorship wastes human and capital resources. A healthy workers’ state would never have allowed FDI in the SEZ on these conditions. And that would not have been much of a loss to the economy as a whole. If workers come to power in China they would immediately transform conditions in the SEZ factories and use the foreign reserves for socialist industrialization.

But investment by the Chinese Diaspora in the SEZ since the early eighties only tells part of the story of FDI in China. Those investments that the Chinese government considers of importance for the Chinese economy as a whole, and not only as a source of foreign currency and political prestige, are subject to much greater control.

Since the mid-nineties the vast majority of the world’s largest companies have established themselves in China, most as joint ventures with the Chinese state. However, despite all the hype, a lot of foreign companies have encountered problems in China. “Currently, the central government of China, as well as provincial governments, do regulate entry of FDI closely or at least attempt to do so. Entry of foreign firms is often conditioned on the achievement of industrial policy goals as laid out by the state. Foreign firms are most welcome when these goals cannot be fulfilled by domestic firms. The entry of a foreign firm can be subject to numerous conditions, for example, such performance requirements as having to use local suppliers, often designated by the government, or locating in certain areas, or setting up the local operation as a joint venture.”24 The international monopolies have to accept a rate of profit in China that is lower than anywhere else. “A study of American Commerce Department data conducted by a research publication, China Economic Quarterly, showed that direct and indirect profits made by American affiliates in China amounted to $2.8 billion in 2001—less than the $4.4 billion made in Mexico, with a population of just 100 million. Although profitability has undoubtedly improved, many companies are not even covering their cost of capital, much less getting a proper return on their investment. Norman Villamin at Morgan Stanley says that some multinationals deliberately lower the required rates of return for their China operations to wave through projects that would not usually qualify, and charge costs to head office to make the China arm seem more profitable than it is.”25 They simply can’t afford not to have a stake in China – the world’s fastest growing market. The Economist remarked “All too frequently, a short-sighted government seems to regard foreign investment as cash cows to be milked.” What is worse for many foreign companies is that they are being out-competed in China by Chinese state companies. As independent private companies, present day state companies might not stand a chance, but as part of a planned economy and with the backing of cheap credit from the state banks, they are doing well. Ningbo Bird and TCL, two state-owned mobile phone producers, have overtaken both Motorola and Nokia in China, despite China being Motorola’s second largest market (and Motorola being the biggest foreign company in China). Procter & Gamble had a good start to their shampoo sales, but were soon undercut by Chinese rivals. P & G’s market share dropped from over 50 percent in 1998 to 30 percent in 2002. Whirlpools’ Chinese adventure ended up with them ending production of their own brands in China, instead a Chinese state-owned company, Kelon, outsourced to them.

Working conditions are generally quite good and wages relatively high for employees of the big multinationals in China. The Communist Party exercises a great deal of control over foreign companies that are considered decisive for the development of China. Take the example of the giant American computer processor producer Intel’s experience. In a book by Harvard professor Tarun Khanna the work of an American employed at Intel’s lab in Shanghai in 2002 is described: “Work in the lab was rigorous, requiring continual interface with the government. The Shanghai government was not the slow bureaucracy he associated with federal jobs. In China, the government demanded performance and held to aggressive time lines. His boss said, ‘The head members of the local branch of the Communist Party set the deadline and they are reviewing the finished product. You won’t feel so good saying no to a Communist Party member.’

Township and Village Enterprises

The TVEs consist of small and medium sized businesses, some export oriented, mainly in rural towns and village. They have a ragbag of different ownership forms. Some are clearly owned and run by local governments and some are leased to managers who run them for the local government. Others are companies that have been privatised, but included among the TVEs are also many newly started household businesses and “alliance enterprises”, a euphemism for larger private companies. In 1996, when the TVEs employed the most people they ever have, 60 million people were in TVEs that were collectively owned. A further 51 million were employed in household businesses and only 25 million in other privately run companies. So, all in all, 67 percent worked in the private TVEs, but only 40 percent of output came from there, which reflects the small scale character of the private TVEs.

In China’s poorest and most backward agricultural areas, such as Guizhou, Henan, and Guangsi, TVEs have an important share of the economy (50-60 percent of gross output value, but in the rich industrial areas, such as Shanghai, Beijing, and Tianjin, they are insignificant (6-12 percent).29 A TVE typically employs around 25 workers in the village enterprises and 75 in the township ones. These workers have worse conditions than in the SOEs. As a whole, the TVEs are a half-way house between the planned economy and capitalism. Unlike the SOEs they do not have privileged access to credit from the state banks. And they are not formally speaking part of the state plan, although they are often dependent on SOEs as both buyers and sellers.

After the overthrow of capitalism there would be all kinds of hybrid companies that are neither purely capitalist nor purely socialist – not only of the multitudinous TVE types, but also cooperatives and other private companies with a high degree of workers control.

In conclusion: The Full Picture

If you put it all together the following picture emerges:

1. About one third of GDP is produced by the SOEs. They are highly concentrated and completely dominate investment. They run the decisive sectors of the economy.

2. About one third of the economy is private. However, the state has a considerable influence on this sector. Firstly a large part is agriculture, which is heavily dependent on the state, and is run by peasant households that do not want to break their dependence on the state.

Secondly, the state, although a minority shareholder, exercises a disproportionate influence over many private companies. Thirdly, the state through joint-ventures and other means has a high degree of control over foreign multinationals, and dispenses with them as soon as they can build up a domestic alternative. The residual private sector is very small.

3. About one third of GDP is produced by the TVEs. The majority of this is produced by larger TVEs controlled by local governments. The smaller ones are mainly private and are in the poorest and most backward parts of the country.

If the US government nationalised the 1000 largest manufacturing companies, they would have approximately the same control over the American economy as the Chinese state has over the Chinese economy. If in addition, the US state owned all the biggest banks and financial institutions (and almost only lent money to state companies), and a large slice of the service and building industries, not to mention all the land which farmers till, and introduced a five-year plan, almost nobody would deny that a planned economy had been introduced in the USA. The Economist, despite its panegyrics to private companies, concurs that the commanding heights of the economy are in the hands of the state.

“State-owned enterprises are much more concerned to maintain patronage and employment than to generate profit, and even the best are not globally competitive. China’s fledgling private businesses, by contrast, have shown astounding growth and produced the country’s first crop of wealthy entrepreneurs. But they are still too small to offer an effective counterweight to the state sector.”30 But to most people it appears that even if China is not capitalist yet, the economy is at the very least rapidly moving towards capitalism. And there seems to be a case for that. In the past thirty years there has been a dramatic increase in the number of private TVEs (both privatised and newly started ones), privatised SOEs, and economic free zones where both Chinese capital from the Diaspora and multinational operate. So what is the point in arguing about whether or not China is already capitalist, if it is just a question of time?

However, that is an incorrect view. China is not moving in the direction of capitalism, despite the increased private ownership of the means of production (for a period of time). Appearances can deceive.”

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