Restoring Capitalism in China




Note from the Editor: Below we reprint a resolution published by the predecessor organization of the Revolutionary Communist International Tendency (RCIT) - the League for a Revolutionary Communist International (LRCI). It was originally published in 2000. This resolution provides a useful analysis of the process of capitalist restoration in China in the 1990s.


The RCIT has published a number of works on capitalism in China. They are collected in special sub-page on our website. A comprehensive analysis can be read in chapter 10 of Michael Pröbsting's book "The Great Robbery of the South. It can be read online here.


Michael Pröbsting is the International Secretary of the RCIT.




* * * * *




At its Fifth Congress this summer, the LRCI concluded that capitalism had been restored in China by 1996 and that this was made possible by changes in the class character of the state in 1992. But why has the triumph of capitalism in China not been accompanied by the same political upheaval as in Eastern Europe and the former Soviet Union?


Capitalism was restored in China by 1996. The fact that this was carried out relatively smoothly under the continued rule of the Chinese Communist Party was made possible by two principal factors.


First, nearly two decades of “market reforms” had created powerful capitalist sectors within China, and secondly, the crushing of working class political opposition in the aftermath of the 1989 massacre in Tiananmen Square had removed the most important social obstacle to capitalism’s return.


The key to understanding the Chinese pattern of restoration lies in the bonapartist character of the political regime established after the revolution of 1949 – a regime sufficiently detached from the pressure of the main classes in society to pursue a determined policy in the face of determined resistance.


The Chinese Communist Party’s own bureaucratic-military rule was assembled during the war against Japan after 1937 and this became the basis of the new administration after 1949.


With its social basis in the peasant majority, high prestige amongst the small urban working class and a bourgeoisie that had lost most of its wealth under Chiang Kai-shek, the CCP faced almost no social constraints when it decided to adopt the Soviet model of bureaucratic command planning to modernise China.


But from the outset factional struggles and the consequent shifts in policy rocked society. Three years of famine with twenty million dead resulted from the voluntarist experiment of the Great Leap Forward and the People’s Communes, while the Cultural Revolution closed down all education.


The decisive turning point in the succession of factional battles came with the return of Deng Xiaoping from internal exile in 1978. By this time, growth rates in both agriculture and industry were declining, not fundamentally because they were subject to centralised planning but because the dictatorship of the party suffocated the initiative and denied the creativity of workers and peasants themselves.


Deng’s solution in agriculture was to encourage the movement away from the communes and allow the peasants to decide for themselves what to grow and how to grow it. Releasing the peasantry from bureaucratic control led to immediate improvements.


In industry, however, Deng’s reforms were unsuccessful because they could not address the inherent limitation of the Soviet model of planning.


Although it is possible to construct and operate the basic industries by bureaucratic command, it is not possible either to raise productivity or to dynamise consumer goods production without the creativity and enthusiasm of the workers themselves. But this required democracy in the planning process – the one thing the Stalinist bureaucracy could not contemplate.


Instead, Deng relied on greater autonomy for the enterprise managers. Throughout the 1980s, a series of reforms were introduced to allow them to retain profits, seek new markets, reduce the workforce and increase production.


However, the overall mechanisms of the command planning system could not accommodate factory level decision-making. An important basis of support for the whole regime was the planning bureaucracy it had itself created.


Time and again the reforms were delayed, diluted and even derailed by the powerful and entrenched interests within the state sector.


Quite apart from factional opposition to reform, the actual structure of the planned sector militated against change. Managers often wanted to introduce greater financial stringency or new product lines.


But it was impossible to evaluate costs, obtain raw materials or invest in newer technology in a system where all resources were allocated from on high and prices were laid down by Beijing.


The only way in which the system could increase production was by building new capacity and taking on new workers. As a result, although productivity stagnated, output continued to grow in the state sector.


Nonetheless, a combination of constant pressure from the Politburo, headed by Deng, and the consequences of other reforms such as those in agriculture, the Township and Village Enterprises (TVEs), the Special Economic Zones (SEZs) and the introduction of foreign direct investment, did begin to loosen controls and increase managerial autonomy from the mid-1980s.


Economically, increased contact with the TVEs allowed industrial managers to start making profits, “on the side” whilst more than fulfilling their quotas for the planning authorities.


At the same time, decentralisation of the planning authorities themselves strengthened provincial institutions, especially banks, which extended credit for the building of yet more new capacity, thereby adding indebtedness to the problems of the state sector.


Politically, tensions increased both within party and state as different factions proposed different courses of action. It became impossible to keep these arguments secret and by the mid-1980s a semi-public discussion over economic policy was under way.


Attempts by the authorities to suppress this movement only served to highlight the lack of “democracy” within China and thus the seeds of the “democracy movement” were sown which grew after 1987.


Popular discontent, however, was not confined to political issues.


Fuelled by inflation, which rose to 18 per cent in 1988, and the manifest corruption of the new rich and many officials, economic grievances drew in the working class. At first, the leadership of the party was slow to respond to the rising discontent. Its own ranks were seriously divided.


The “reformers”, supported by an increasing number of managers and economists who had already given up any hope of reforming the planned economy, tended to support the demands for greater openness and public debate but the defenders of the “old regime” sympathised with the anti-corruption demands of the masses.


However, when protests became huge the leadership began to close ranks. Zhao Ziyang, who was believed to be sympathetic to the demonstrators, was replaced by Li Peng.


Finally, when increasing numbers of workers’ delegations from around the country began arriving in Tiananmen Square in 1989, Deng and Li decided to send in the reliable troops from rural provinces.


Although the immediate consequence of this bloodbath was a return to power by the military and supporters of command planning, the destruction of the workers’ movement inevitably strengthened the pro-restorationist forces in the long run.


To regain stability, the regime not only froze prices and purged a number of conspicuously corrupt officials but also raised wages and restored many central controls over the economy.


In the short term the suppression of the Democracy Movement showed both the solidity of the regime’s support in the countryside and the continued strength of the factions opposed to the market reforms. However, over the next two years, it became clear that a return to the past was impossible.


Although inflation was brought under control and production in State Owned Enterprises briefly rose in 1991, by 1992 it was the southern provinces – especially Guangdong – which were the most market-dominated and which were growing fastest.


Having crushed and cowed the industrial working class and emboldened by the inability of the “old guard” to reverse earlier reforms, Deng and the “technocrats” around Jiang Zemin and Zhu Rongji decided the time was ripe for a decisive change of policy.


This was first signalled by Deng’s “Southern Tour” in January 1992 during which he praised the Shenzhen SEZ as the way forward for the whole of China.


This was then codified into a series of policy statements including the opening up of the border regions to trade, relaxation of foreign investment regulations in cities along the Yangzi River and in a further 18 provincial cities, the complete opening for foreign trade of a series of coastal cities and the abolition of the Production Office of the State Council and its replacement by the State Council Office of Economic Trade, under Zhu Rongji.


The change of policy culminated in the adoption of a new programme for a “socialist market economy” by the Fourteenth Party Congress in October 1992. At the time, Workers Power judged this programme to be similar in vein to the “market socialist” policies that had been adopted years earlier in, for example, Hungary and Yugoslavia.


These had weakened, but not destroyed, the fundamentals of central planning in those countries. In the light of the events in Eastern Europe and the former Soviet Union where capitalist restoration took the form of the so-called “big bang” strategy of closing down planning ministries, liberalising prices and, thereby, practically halting production, we concluded that Beijing had chosen to retain some modified form of central planning. We were wrong.


With hindsight we can now see that this was the point at which the character of the state changed. Whilst continuing to be a bonapartist regime that had to secure its own economic base and at the same time balance between the main social classes, it consciously decided to transform its economic base from a planned economy to a state capitalist one.


Politically, the old guard had to be ousted from all positions of decisive power but a thorough purging was not necessary because the two years after 1989 had proved that they were, ultimately, a spent force, especially as their only realistic basis of support – the working class – had been suppressed in 1989.


Economically, the shift in policy was possible because the planned sector was by now only responsible for slightly more than 50 per cent of production. Any serious shortfalls in production could be made good either from the private and TVE sectors or from the world market.


The crucial evidence that the government was committed to the destruction of the planned economy came at a Central Committee Plenum in November 1993 which adopted “Fifty Articles for a Market Economy”.


This laid down the strategy for systematically dismantling the planning controls over the state owned enterprises and their transformation into independent “trusts”.


At the same time, it proposed a radical reform of banking, a move towards convertibility of the Renminbi, removal of restrictions on where foreign investment would be allowed and the end of the “iron rice bowl” labour regulations which guaranteed urban industrial workers job security, education rights, housing, healthcare and pensions.


Similar proposals had been made before but had not been implemented and although, in 1993, the state sector for the first time produced less than 50 per cent of all industrial production, it continued to dominate the industrial core, the “commanding heights” and remained the single most important sector.


Since no actual dismantling of the planning system had yet taken place, we continued to characterise China as a degenerate workers’ state. We should have recognised it as a bourgeois restorationist state which was still preparing to push through its programme.


The next two years, however, saw a dramatic change in the Chinese economy under the impact of “trustification”, the first closures of planning ministries and a flood of foreign capital. In fact, a serious degree of economic instability developed as enterprise managers sought to take advantage of growth rates of up to 18 per cent .


Characteristically, many opted for extending their production facilities rather than improving the productivity of existing plant and equipment. As a result, the state owned sector continued to grow at an annual rate of some 8 per cent even though this left a majority of its firms in debt and unable to make a profit.


It was during this period that the basis of production shifted decisively in favour of capitalist methods. Figures for 1996 show state owned industry producing only 28.3 per cent of industrial production while the collectively owned, mainly TVE industry, accounted for 39.4 and, very significantly, production in private hands (15.5 per cent ) and foreign owned companies (16.6 per cent ) amounted to 32.1 per cent .


In subsequent years, state policy focused on the incorporation of the 1,000 biggest and most productive plants in the state sector, leaving some 49,000 smaller enterprises to find their own solutions in the new economic landscape.


The majority of them appear to have been privatised at give away prices to their own managers. Others have merged to form more viable units and the remainder have been closed altogether.


However, there is now a clear trend towards not just “corporatising” state owned enterprises, as envisaged in the mid-1980s, but towards full privatisation in the form of shareholding joint stock companies.


The Fifteenth Party Congress in September 1997 officially sanctioned such companies, justifying them by the remarkable argument that they were a form of collective ownership and, therefore, entirely compatible with its socialist principles. This represents an important shift towards the developing bourgeois class within China.


Since that Congress, Zhu Rongji has been made Premier by the People’s Congress and, as head of the first government that contains no military figures, has overseen the dismantling of the remaining planning ministries, the divesting of the PLA’s entire industrial empire and the negotiation of an agreement with the USA to allow China to enter the World Trade Organisation. This deal, which included the opening of China to foreign firms and banks, is likely to result in a further dramatic restructuring of the Chinese economy.


The prospect for China, therefore, is one of mounting instability. The imposition of capitalist norms in industry has already led, according to the World Bank, to some 10 million redundancies per year for the last three years and this has generated a wave of political struggles across China.


Two decades of reform, culminating in the restoration of capitalism have not only changed the face of China but transformed and massively enlarged the Chinese working class, now the biggest single working class in the world. Out of its experiences and its current struggles, that class will find its own political voice and create its own political organisations.


The task of revolutionaries everywhere is to ensure that these are won to a revolutionary programme that destroys for good the dictatorship of the bureaucracy, expropriates the new capitalists and takes power into the hands of workers’ councils and a workers’ militia.






Restoring capitalism: Planting the seeds of capitalism





How the Chinese Communist Party brought more market relations into the fields


On the eve of the 1978 reforms, agriculture employed between 70 and 80 per cent of the total workforce. It was organised on the basis of the “People’s Communes” which embraced whole districts, the production brigade, numbering up to 100 households, and the production team which was essentially the traditional village or hamlet.


All decisions over production were taken at Commune level in keeping with the requirements of the central planning authorities. Although the system brought some advantages in spreading modern techniques and organising large scale projects such as irrigation, its disadvantages were beginning to outweigh these.


In particular, concentration on single crops not only ignored local variations but also required expensive transportation of products that could have been produced in all localities. Prices for agricultural goods were almost entirely laid down by the state.


By the mid-1970s, the rate of increase in food production had been overtaken by the rate of growth of the population. In several provinces, peasants were already turning away from the communes and returning to “family farming” and local party officials were turning a blind eye because the results were greatly improved harvests.


Faced with the choice of losing authority altogether or a second famine, Beijing sanctioned the break up of the communes


What emerged was the “Household Responsibility” system in which peasants decided their own land use but were obliged to deliver a quota of specified crops to the state at fixed prices. Production in excess of the quota could be sold on the free market or to the state at a “negotiated price” between the fixed prices and the free market


To ensure adequate supplies, the state guaranteed to buy everything above the quota output.


The result was an immediate increase in production; grain production rose by 3.7 per cent per year for the next six years, cotton by 18 per cent per year and meat by 8.9 per cent . Overall, peasant incomes rose by 12.3 per cent per year in the same period.


This increase in production and income stimulated other economic activity. The number of rural markets increased from 38,000 in 1980 to 67,000 by 1993. In addition, the agricultural sector was the initial stimulus to the development of local small scale industrial and commercial activity in the so-called TVE sector


It was a source of capital accumulation, not only in farming but in associated sectors, and a new developing indigenous capitalist class, a social force that had been eradicated for nearly four decades.




Restoring capitalism: Enclaves of capitalism




The role of Special Export Zones in China


Originally, the Special Economic Zones (SEZs) which were set up after 1979, were kept entirely separate from the rest of the Chinese economy. Their role was to attract foreign capital investment, high technology and to give China access to modern management techniques and foreign currency.


Their output was destined for export, not for the domestic market. In return, foreign companies were offered tax breaks, cheap labour and subsidised infrastructural development.


In the 1980s, the SEZs developed rapidly with double digit growth rates throughout the decade. As they grew, they shifted their emphasis from the original cheap labour assembly of toys and plastic goods to textiles and then to electronic and optical instruments.


By the 1990s production facilities of all sorts had begun to move away to lower wage areas such as the Pearl River delta between Hong Kong and Canton. The SEZs were increasingly concentrating on “service” industries such as real estate management, insurance and banking.


From this it is clear that, despite their character as supposedly sealed enclaves, separate from the rest of China, the SEZs began to have an impact beyond their borders within a decade of their foundation. Not only did they provide employment they were also a growing market for all kinds of goods and services, often supplied from the TVE sector.


Over the last ten years the influence of the SEZs strengthened as the barriers to the domestic market were lowered and foreign firms were allowed to set up elsewhere.


As sources of foreign trained management and legitimisers of, for example, short term contract labour and what has been called “frontier capitalism”, they have exerted an immense gravitational effect.


Especially in the coastal provinces, they have diverted resources from the state sector, pulled the TVEs into their own orbit and established economic links between the world market and the non-state sectors.


Today, their “special” status is being relinquished under the terms of the World Trade Organisation agreement signed last November. From the point of view of the restorationists, their job has been done.




Restoring capitalism: The role of foreign investment in capitalist restoration




What is the role of foreign direct investment (FDI) on China's path to capitalism?


Until 1979, foreign investment in Chinese enterprises was simply forbidden. Given the country’s political instability, it is doubtful whether there would have been many volunteers even without the ban.


FDI was very slow to take off to begin with. Until 1984, only 250 state owned enterprises were allowed to take in foreign partners as “joint ventures”. Between 1979 and 1984 only US$1.8bn was actually invested, although the state borrowed some US$11bn as well.


Although the figures did increase for the rest of the decade, before falling back sharply in the aftermath of the Tienanmen massacre, it was not until the fundamental change of policy in 1992 that the floodgates opened. By 1994 China was second only to the USA in terms of FDI – attracting US$33bn that year.


Enterprises were dropped and all provinces were allowed to invite in foreign investment. By 1995, according to the official industrial census, there were 59,000 firms in China with foreign investment. They employed nearly nine million people, 13.6 per cent of the industrial workforce and produced 13.1 per cent of total industrial output.


Investment on this scale clearly has implications for the character of the economy. While loans to the government are guaranteed a return, investment into joint ventures on a shareholding basis, or into wholly owned companies, is obviously investment in production and foreign capitalists will want to ensure their profits by influencing, if not controlling, production.


Consequently, the availability of huge volumes of foreign capital acted as a solvent of the production and distribution linkages established under the planned economy and accelerated the creation of new ones determined by the pursuit of profit.


This is particularly important with regard to the scrapping of controls on foreign investment into the large scale industry of the state sector after 1992.




Restoring capitalism: Let a thousand enterprises bloom




How is capitalism growing in China?


The Township and Village Enterprise sector (TVE), as it has come to be called, was a direct product of the agricultural reforms of the late 1970s and 1980s.


When the communes were formally dissolved, in 1994, the workshops and small scale industries which they had developed passed into the hands of the local authorities, de facto the party secretaries.


In keeping with central demands for initiative and economic growth, they were then developed to respond to increased farm incomes by supplying building materials, tools, transport, slaughterhouses, food processing plants and similar products.


From these humble origins, and often using the networks of contacts of the state and party officials, the TVEs grew rapidly in the 1980s to become not only an important source of manufactured goods (32 per cent of industrial production by 1992) but also the provider of employment for 130 million rural workers (30 per cent of all rural workers, 1996 figures).


According to official statistics for 1995, the TVE sector as a whole produced 44 per cent by value of total national industrial output.


The precise status of the TVEs has caused considerable confusion because they are listed as “collectively owned” in Chinese statistics. As a result, western commentators, particularly those who wish to deny the progress of capitalist restoration, have added them to the “state sector” to show that some 70 per cent of the economy is "not capitalist".


They make a double mistake. The first is terminological. Despite the characterisation as “collectively owned”, 90 per cent of the total number of TVEs in 1994 were owned by individuals, although these were very small scale and accounted for only 30 per cent of output by value.


More importantly, whether these enterprises are capitalist or not is not primarily a matter of legal definitions of property forms. The point is that these are all independent enterprises, not part of any planned system of production.


Two-thirds of output is produced by wage labour, all production is for the market and their investment funds originate either in retained profits or commercial credit. They are, in a word, capitalist.


Numerically, the majority are very small capital formations but the development of the sector as a whole follows a predictable pattern from small, local and labour intensive operations to increasingly larger, more highly capitalised firms which are capable of operating not only across the whole home market but even abroad on the world market.


As the TVE sector has grown and become more capital intensive, the sector has been unable to absorb labour at the same rate as it could in its early days and adds to mounting rural unemployment.


The importance of the TVE sector when assessing the character of the Chinese economy is not simply its percentage of total industrial output, significant as this is. Production is still in small units and the sector could not be said to dominate the national economy as a whole.


However, it does employ a growing percentage of the working class, it is a source of capital accumulation and it is the basis of a new industrial bourgeoisie and petit bourgeoisie able to take advantage of the privatisation drive of the state since the mid-1990s.