In the latest installment in our China Debate series we are reprinting, in a slightly shortened version, an article by LYNN WALSH which first appeared under the title, The Chinese Puzzle, in the March-April 1994 edition (No.56) of the Militant International Review, the predecessor magazine to Socialism Today. Written against the immediate backdrop of the collapse of Stalinism in Russia and Eastern Europe from 1989-1991 it not surprisingly anticipates that, at some stage, China too would decisively complete its transition to capitalism. Whether it has done so or not is still, of course, a point of contention today but, as a real time contribution from over thirty years ago, the article remains as a valuable insight into the roots of the complex phenomena of the state and economy in modern China.
China, it seems, is different. Since 1989 the advanced capitalist countries have been experiencing recession and only feeble economic recoveries. Most of the economically underdeveloped world has been plunged even deeper into crisis. The former Stalinist states of Russia and Eastern Europe are going through the deepest slump in modern times. Yet China continues to forge ahead. After a ‘pause’ (at about 4% growth) in 1990, following an average annual GNP growth of 8.9% during the 1980s, China has currently resumed growth of between 10% and 13% per annum. Politically, moreover, the leadership of Deng Xiaoping and his economic supremo, Zhu Rongji, appears to have been consolidated, despite conflict within the leadership following the brutal suppression of the Tiananmen Square democracy movement in 1989.
China, in other words, appears to be defying the laws of politico-economic gravity. This has prompted many commentators to speculate about a new ‘economic miracle’ in the East, or even internationally, led by a resurgent capitalist China. However, like the US-based Reagan boom of the 1980s, China’s rapid growth is the product of a particular conjuncture – a temporary combination of national and international factors – which will not last indefinitely.
The rate of growth and the pace of change in China has certainly been extraordinary, and in sharp contrast to the collapse in Russia and Eastern Europe. What explains this? Has economic planning, based on the nationalised industries, survived better in China? Or has the bureaucracy successfully managed a smooth transition to capitalism? What precisely have been the sources of growth over the last decade or so? To what extent has rapid economic growth brought about changes in the underlying social structure of the Chinese state?
Growth in the rural areas
The social demography of China is markedly different from that of Russia and other former Stalinist states like East Germany, Czechoslovakia, and Hungary, which are overwhelmingly urbanised, industrialised societies. At the beginning of the 1980s, 70% of the workforce were employed in agriculture (currently 60%) and agricultural output accounted for about 30% of GDP (currently 23%).
The opportunity of stimulating agricultural output, therefore, opened the possibility of the gradual introduction of market forces and of fostering capitalist elements, without the precipitate collapse which followed the ‘reform’ of state industries in Russia and Eastern Europe. As productive potential and consumer demand in rural China had previously been suppressed by the bureaucracy (in favour of the development of heavy industries), it was possible, through setting higher purchase prices for agricultural products, to stimulate rapid agricultural growth on the basis of existing capacity, without massive new investment. The increased profits, which largely (but not exclusively) went to the richer strata of farmers, were mainly channeled into new rural industries, which were geared towards the domestic consumer market.
As a result, enterprises at township level and below (a category which includes ‘collective’ enterprises as well as private and semi-private businesses) increased nearly ten times during 1980-90, compared with a 2.5 times increase for enterprises above township level. The output of individual businesses grew by more than a thousand times. The share in total output of enterprises at township level and below rose from 10.5% in 1980 to 31.8% in 1990. Millions of new jobs were created in the rural areas. This sector made a major contribution to the high growth rate of the 1980s.
It is extremely unlikely that this rate will be sustained over the next five to ten years. Farm production is almost certainly approaching the limits of what can be achieved without new investment in modernisation (requiring the diversion of capital from industries), which would involve, moreover, shedding 150 million plus surplus labourers from the land. The turn to the ‘household responsibility’ system and the dissolution of the communes (in effect, local councils) has led to a serious decline in the rural infrastructure (irrigation, roads, storage, etc) and a deterioration of educational standards. Rural poverty has undoubtedly declined, officially from about 33% in 1978 to 11.5% in 1990. But this has been very uneven, with most improvement in the coastal areas, leaving big pockets of extreme poverty in many inaccessible, inland areas.
Corruption is endemic among the state and party officials, while serious crime has been continuously rising. In 1993 more than 200 incidents of rural unrest were reported. There is a massive migration from the countryside to the cities, with about 100 million people streaming to and fro for temporary or seasonal work.
Similarly, the rural enterprises (mostly light industry and services) which mushroomed in the 1980s, filled a vacant niche. They supplied the undernourished consumer market, which had long been neglected in favour of heavy industry. This, too, is approaching its limits. Growth has depended entirely on increased investment (largely derived from higher farm incomes), and productivity levels have been extremely low. Moreover, the rural industries’ demand for manfactured equipment and inputs put increasing pressure on the dilapidated state industries, which were largely unreformed in the 1980s. As a result, accelerated growth led to supply shortages and a consequential rise in inflation. This reached a peak in 1988, when the government was forced to adopt austerity measures. Currently, the government is again trying to put the brakes on growth to curb inflation.
After postponing the issue for many years, the leadership is now attempting to apply decentralisation, privatisation, and marketisation to the state industries. In doing so, they will face many of the problems which are being experienced in Russia and Eastern Europe. China’s traumatic ‘shock therapy’ is only just beginning.
The influx of foreign capital
The inflow of capital from abroad, the key component of Deng’s ‘open door’ policy, has been a vital source of growth over the last decade. When the reform policies got underway in the early 1980s, foreign capitalists (from the US, Japan and especially the overseas Chinese of Hong Kong and South East Asia) began to invest on a big scale. The attraction was clear: exceptionally cheap labour, even by Asian standards, with no employment, health and safety, or environmental restrictions.
The growth of China’s trade, moreover, was largely determined by the flow of investment. Trade has grown massively, increasing by an average 9.2% per annum during the 1980s, compared with a 5.5% per annum growth of world trade. Exports rose from under $10bn in 1978 (with a trade deficit of over $1bn) to $61bn in 1991 (with a trade surplus of $22bn), accounting for about 2.5% of total world exports. China’s privileged access to the US market, as a ‘most favoured nation’, has been especially important (in 1992 China was running an $18bn trade surplus with the US). Again, this is in marked contrast to Russia and Eastern Europe, which (with some exceptions, like East Germany, absorbed by the West) have not benefitted from the massive Western investment previously promised.
A very high proportion of foreign capital went to the ‘open coastal provinces’, where most of the recent large-scale economic development has been concentrated. These provinces, which constitute less than 5% of China’s land area and 19.5% of the population, account for 40% of the gross value of industrial output and 33% of China’s GDP. Of this Foreign Direct Investment (FDI), about 50% took the form of equity in joint ventures, while another 18% was invested in wholly foreign-owned ventures. A significant portion of foreign capital was invested in large-scale state-owned enterprises, often on a profit-sharing basis, which was a vital prop for the state sector. Central government and provincial authorities also borrowed foreign capital for infrastructure projects.
The limits of managed marketisation
Up until the present time, this influx of foreign capital has had a surprisingly limited effect on the overall structure of the Chinese economy. The foreign-capital finance development in the coastal zones has been largely insulated from the rest of the economy. Capital goods and some raw materials have been imported into the coastal enclaves, worked up on the basis of cheap local labour, and then re-exported to the markets of South East Asia, the US etc. The leadership had a conscious policy of trying to compartmentalise this development, deliberately avoiding the strategy followed by many underdeveloped countries in the 1970s, where foreign investment was used to develop home production capacity to reduce the need for manufactured imports from abroad.
However, this policy inevitably has limits, which have now been reached. There is growing pressure from foreign investors and the much stronger indigenous capitalist interests which have developed to be allowed to enter China’s vast domestic market. The decentralization of economic management, which has now been taken a long way, makes it almost impossible to prevent the increasing interaction of the big coastal enterprises with the rest of the economy. This, in turn, will inevitably accelerate the general development of capitalist forces throughout the economy.
As the state sector’s dependency on foreign capital has grown, so the pressure on foreign capital has grown, so the pressure to privatise the state enterprises has also remorselessly increased. Many of the big foreign investors are now poised to take a controlling interest in those enterprises which they see as potentially profitable. Thus there will be a convergence between the extension of big business from the coastal zones and the accelerated big-business takeover of the state sector.
Privatisation of the state sector
During the 1980s the largely outdated, inefficient state sector was propped up by the leadership of the bureaucracy. While they implemented self-financing for many enterprises and introduced the ‘management responsibility system’ (taking economic management out of the hands of CCP leaders), the top leadership time and again postponed radical decentralisation and privatisation – fearing the political consequences of undermining the job security and living standards of millions of industrial workers and their families. However, as a result of the growth of largely private-operated rural industries and big business in the coastal zones, the share of the state-operated industry declined steadily from 75.5% of total industrial output in 1980 to 48.5% in 1990. The growth of state sector output lagged way behind the collective and private sector, and even the limited growth of the nationalised industries was only achieved on the basis of a big increase in capital investment (relying heavily on foreign capital) without any significant improvement in labour productivity. According to some estimates, subsidies to this sector consume about 10% of GNP.
Since consolidating their position in 1990-1992, however, the Deng leadership has launched a new round of reforms aimed at the state sector. The government is now planning to ‘corporatise’ between 50 and 100 of the main state industries. This would turn them into autonomous, independently-managed enterprises – as a preliminary step towards full privatisation. As in Russia and Eastern Europe, this will mean a massive loss of jobs, reductions in wages and conditions, and a loss of the housing and other welfare benefits previously attached to employment in the state sector. As yet, there is no state ‘safety net’ capable of replacing lost employment-benefits. At the same time, the government is planning to reduce the state bureaucracy by about 25% or over two million employees. These threatened job losses will come when prices are continuously rising, as price controls are lifted from more and more basic commodities.
By beginning to dismantle the state sector the Chinese leadership will be entering the same white-water rapids which have recently buffeted the governments of Eastern Europe. For the working class and agricultural labourers, the next period will mean a widening polarisation of wealth, intensified exploitation, great insecurity, and the prospect of prolonged turmoil.
Socialism with Chinese Characteristics
Deng Xiaoping has pursued his policies under the slogan of ‘Socialism with Chinese Characteristics’. What does this coded formula really mean? ‘Chinese characteristics’ clearly means marketisation and capitalist methods. After all, according to Jiang Zemin, CCP general secretary, Deng’s ‘decisive contribution’ has been that an emphasis on planning or on the market is not an essential distinction between socialism and capitalism.
So what does ‘socialism’ mean in Deng’s formula? Because of the profound legacy of the 1949 revolution, from which the CCP still claims to draw its legitimacy, the leadership cannot openly abandon the banner of socialism. The recently revised constitution still proclaims socialist aims. “The essential nature of socialism”, it states, “is to liberate and develop the productive forces, to eliminate exploitation and polarisation, and ultimately to realise common prosperity”. Policy statements still refer to the ‘dominance’ of the public sector, but the definition of ‘public ownership’ becomes ever wider, now envisaging corporations in which the state will hold as little as 20% of the shares.
In reality, ‘socialism’ means upholding the political rule of the CCP. The criteria of ‘socialism’ for Deng and company is that the ruling elite in the form of the CCP leaders and the state apparatus retain power, together with the accompanying privileges.
When the economic reforms were launched in 1978, there were no immediate moves to dismantle the state industries. Yet the reformists around Deng were forced to recognise that the bureaucratic command economy was in an impasse. After the upheaval of the ‘Cultural Revolution’ (1966-1976), initiated by Mao and his ultra-left allies within the bureaucracy, there was over a decade of economic stagnation. The reformists recognised that without improved growth and raised living standards, they would face social upheaval and a threat to their rule. Growth would not be achieved, however, simply by exerting more bureaucratic pressure on the existing economic structures. As in the past, the leaders turned again to market methods, but to a far greater extent than before.
Deng has always been a loyal apparatchik, an organisational man who executed whatever policies the top leaders believed would best secure their position, a consummate pragmatist. There is no reason to suppose that Deng and company had a clear vision of where their policies would lead them. As always, Deng moved empirically. They may even have had illusions, similar to those of the ‘Old Bolshevik’ Nikolai Bukharin in the Soviet Union in the 1920s, that the market could be contained indefinitely within the framework of a centrally planned economy. But marketisation in the countryside and the opening up of China to international trade and capital investment appeared to be the only way out of the impasse. The bureaucracy would never consider the democratic involvement of the working class in the economy.
Once set in motion, however, such policies inevitably have a momentum of their own. The reforms led to remarkable growth and raised living standards, especially in the countryside. But the inability of the state industries to meet the increased demand from the agricultural sector and rural industries led to rapid increases in the price of agricultural supplies (for example, fertilizers, plastic sheeting, implements) and basic foods, producing high inflation at the end of the 1980s. This inevitably fuelled discontent and opposition.
Tiananmen Square and its aftermath
The orgy of corruption within the bureaucracy and an upsurge of crime provoked widespread outrage. The student protest movement, with mass demonstrations against corruption and demanding democratisation, reflected the grievances and democratic demands of wider layers of society.
The sharpening social tensions produced a split within the bureaucratic leadership. The conservative wing demanded a halt to the reforms. They called for a reversal of some measures and the reinforcement of central control over the economy, and especially a clampdown on criticism and opposition. Deng favoured a continuation of the marketisation policies. But he felt that his protege, Zhao Ziyang, was going too far in raising the need for political liberalisation. Encouraged by the apparent disarray of the top leadership, the democracy movement gathered strength, with massive demonstrations and the occupation of Tiananmen Square. This movement, moreover, coincided with the crisis in the Soviet Union and Eastern Europe (especially East Germany), which aroused the Chinese CP leaders’ fears of a catastrophic collapse of their authority.
Faced with this crisis, Deng abandoned Zhao Ziyang, who was dismissed from his post and imprisoned. Deng made common cause with the aging hard-line ‘veterans’, like Yang Shangkun, chairman of the Central Military Commission, and the leadership carried through the violent repression in Tiananmen Square and the brutal suppression of the subsequent uprisings which swept through China’s main cities.
After this, Deng’s reform policies marked time for a while. The leadership evidently concentrated on stabilising the situation. But Deng’s alliance with the ultra-conservative wing of the bureaucracy was only temporary. Essentially he continued to push the economic reform programme, but under the exclusive direction of the CCP, without any concessions to political liberalisation.
Class character of the Chinese state
Once again, the drive for marketisation was stepped up, with plans being drawn up for the privatisation of the big state industries, banking, etc. By their deeds, the Deng leadership has made it clear that they are prepared to abandon state planning based on nationalised industries, which laid the foundations of a modern industrial economy in China, provided they retain political control of society.
This course, however, will face them with a new contradiction. The decentralisation of economic decision-making and the growth of autonomous market forces has steadily undermined the central government’s levers of economic control. The old control mechanisms of the command economy have been eroded, but the array of policy instruments generally deployed in capitalist economies (such as taxation, public expenditure, money supply, legislative regulation, etc), which are in any case of limited efficacy, are still rudimentary.
The next phase of economic reform will inevitably mean big cuts in the workforce in the heavily over-staffed state sectors – and an end to the ‘iron rice bowl’, the job security, housing provision, and welfare services long provided for workers in the nationalised industries.
If Deng’s current plans are carried through, there will be a further massive shift in the balance of ownership, with a qualitative increase in the private sector. Such a shift would mean a qualitative change in the class relations within Chinese society. It would entail the completion of the capitalist counter-revolution, which has been gathering pace since the early 1980s.
How, therefore, can China’s fundamental social relations currently be classified? Is it still a ‘proletarian bonapartist’ state? In other words, is it a society in which the ruling bureaucracy (based on a privileged elite) presides, with an economy dominated by its centrally planned, nationalised sector, that is, a form of ownership of the productive forces which corresponds to the historical interests of the proletariat. Or has China become a capitalist state?
The answer, for the time being, is that China is in a process of transition between the two. At the moment, it cannot be neatly fitted into either social category.
The socialised property relations established by the revolution, on the land (with collective farming) and in the decisive urban, industrial sector, have been drastically undermined – but not yet completely dissolved. Capitalist forms of production are growing apace, and private property rights over land and productive forces are crystallising rapidly. But the process is far from complete. As in any profound social transformation, elements of different productive systems coexist. They are still intertwined in a peculiar hybrid, and may not be completely separated out for some time. As yet, we cannot say that there has been a decisive, qualitative transformation of social relations.
‘Proletarian bonapartism’ has itself been a transitional formation, an historic break from capitalism but (lacking the conscious, democratic rule of the working class) not yet socialist. For as long as these regimes were able to develop the productive forces and improve social conditions, they were developing in an historically progressive direction, despite the crimes of the Stalinist dictators. Moreover, in the post-second world war period these transitional state-formations in the Soviet Union, Eastern Europe, Cuba, and China were unexpectedly prolonged and stablised because of their economic progress and the prevailing balance of class forces internationally.
By the beginning of the 1980s, however, it became clear that the Stalinist bureaucracy in the USSR and Eastern Europe had become a malign cancer on the planned economy. Its capacity to develop the productive forces was exhausted, and the Stalinist regimes disintegrated, opening the door to capitalist restoration.
A new phase of counter-revolution
The economic forces unleashed by the decollectivisation of agriculture and the ‘open door’ have gathered a powerful momentum over the last decade. The collapse of the Stalinist regimes in Russia and Eastern Europe could only reinforce the direction taken by the Deng leadership. The ignominious collapse of the ‘Stalinist’ coup in Russia in August 1991 reinforced the isolation of the old guard ‘Stalinists’ within the Chinese bureaucracy. Under these circumstances, there can be no resurrection of Mao’s ‘Stalinism with Chinese characteristics’. Moreover, the ever-increasing pressure from Western capital inevitably reinforces all the forces within China generating capitalist relations.
Over the last decade, it is the embryonic elements of capitalism which have been the most dynamic economic forces within the Chinese economy. The state sector, on which the economy still relied for heavy industrial goods, could not keep up with demand from burgeoning private industry. Outdated technologically and overmanned, it had to be propped up by heavy state subsidies. For many years now, it has been the private or semi-private sectors which have been the locomotive of growth and determined the direction of the economy, not the state sector.
Needless to say, there is remorseless pressure from the World Bank and other bodies representing imperialism for rapid privatisation. It is difficult for the leadership to avoid this problem any longer. Yet they undoubtedly run the risk of provoking serious upheavals, as privatisation may well meet with strong resistance from sections of the workers. Against this, however, the workers (as in Russia and Eastern Europe) lack independent trade union organisations and leaders with a programme capable of mobilising mass opposition to privatisation – that is, for the overthrow of the bureaucracy and the establishment of workers’ and peasants’ democracy. Elements of the political revolution appeared in the heroic resistance to the suppression of the Tiananmen Square movement, which involved wide layers of workers, especially young workers. Given the present world situation, however, it is unlikely that the Chinese working class can, at this stage, reverse the counter-revolutionary tide which is sweeping over China. This certainly does not rule out working class struggle against the counter-revolutionary attacks on their living standards and to win democratic rights.
The reality is that an ideologically bankrupt leadership has betrayed the social gains achieved by the epic revolutionary struggle of the workers and peasants which led to the victory in 1949. For four decades the bureaucrats were content to preside over a nationalised, planned economy – for as long as it provided a secure base for their power and privileges. But as the base began to crumble, as a result of bureaucratic atrophication, the more adaptable, reformist leaders concluded that preservation of their power apparatus was more important than preservation of the planned economy – and they began empirically to seek a new economic basis. This unavoidably entailed collaboration with foreign capital and with all the heterogeneous nascent elements of capitalism within Chinese society – the richer farmers, small manufacturers, traders, money lenders, commercial agents, and so on. At the same time, the development of the market more and more strengthened the ‘private-enterprise’ elements within the apparatus itself, either through corruption or growing involvement with business activity.
A layer of the bureaucracy is already well on the way to reconstituting itself as the core component of a new capitalist class, as yet heterogeneous and only partly formed. Yet the state itself will undoubtedly continue to play a significant role of its own. Historically, the Chinese state has always had an enormous weight in society, and the Maoist state itself incorporated many of the features of the former imperial state bureaucracy. In the next period, there will be a restructuring of the state, as the apparatus is adapted to the requirements of capitalist development.
Will the bureaucracy succeed in carrying through a relatively smooth transition to capitalism, while maintaining its own political control? Given the current international situation and the balance of forces within Chinese society (especially the political weakness of the working class), the counter-revolutionary transition to capitalism appears unstoppable. The bureaucracy, however, will face considerable problems in the next period.
Within China, because of long-suppressed productive potential, it was relatively easy to stimulate high growth through increased incentives. Now continued growth requires more radical changes, which will inevitably lead to a greater polarisation of incomes and high unemployment. A minority will gather the golden fruits of capitalist growth, but the majority will face greater insecurity and hardship. Social upheavals and political struggles will be the inevitable result.