Is China’s “Socialist Market Economy” Actually Just East-Asian Capitalism?

A great debate divides not only the Left, but also the Right, and it has to do with the extent to which China’s economy can be considered socialist. The Communist Party states that China’s economy is socialist because of the nationalization of the financial sector, the existence of state-owned companies, and the immense presence of worker cooperatives. Others, however, may state that due to free market mechanisms dictating economic output, imports, and exports along with state-owned businesses that operate for profit and national banks that operate overseas and charge interest, China is effectively state-capitalist. But to what extent is China’s economic model of the “socialist market economy” actually just East-Asian capitalism?  I argue that China maintains two distinct economies: one dominant East-Asian capitalist, and one smaller market socialist.

Different Forms of Capitalism and Socialism

First and foremost, it is important we first define our key terms and set benchmarks for effective comparison. For the purpose of this essay we will be working with four key terms: Socialism, Market Socialism, East-Asian Capitalism, and State Capitalism.

Socialism, according to the economist Włodzimierz Brus in “The Economics & Politics of Socialism”, is, “the predominance of the social ownership of the means of production.” This can mean ownership by the state as a representative of the people, or direct ownership by the workers. The Chinese “socialist market economy” model mainly practices the former, and the latter usually follows the principles of market socialism.

According to economist Phillip O’Hara, in “Encyclopedia of Political Economy”, market socialism is when the “Market mechanism is utilized to distribute economic output, to organize production and to allocate factor inputs. On the other hand, the economic surplus accrues to society at large rather than to a class of private (capitalist) owners, through some form of collective, public or social ownership of capital.

Economist Seung-Wook Baek suggests that East-Asian capitalism includes “state control over finance, direct support for state-owned enterprises by the government, import substitution industrialisation in heavy industry, a high dependence on export markets and a high rate of domestic savings.” This form of capitalism is very closely related to state capitalism and, China adapts the East-Asian Capitalist model and enhances the feature of State Capitalism within in it.

Marxist academic Raymond Williams, in “Keywords: A Vocabulary of Culture and Society”, defines state capitalism as an economic system in which the “state undertakes commercial (i.e. for-profit) economic activity and where the means of production are organized and managed as state-owned business enterprises, or where there is otherwise a dominance of corporatized government agencies (agencies organized along business-management practices) or of publicly listed corporations in which the state has controlling shares.

Based off of these definitions, this article will now evaluate the role of collectivization, SOEs & private enterprises, and worker cooperatives.

Collectivization of Agriculture

Mao Zedong led collectivization of agriculture in China.

Collectivization of agriculture in China began slowly in 1950 when Mao called for the organization of ‘Mutual Aid Teams’ to adopt collectivization in a “step-by-step” process. He further emphasized this in a speech in 1955, however, only 18 months later, that Chinese agriculture had completely collectivized. Official data suggests that by 1956, 87.3% of all farms were “Higher-Stage Agricultural Producer Cooperatives” and 8.5% were “Lower-Stage Agricultural Producer Cooperatives.” During the Great Leap Forward, Mao went a step further and organized these collective farms under larger ‘People’s Communes’ which became a level of local government under the jurisdiction of the central state. The communes contained not only agriculture but also small steel & industrial units. Judging by the definition of socialism we can see that Chinese agriculture during the Maoist era can be classified as socialist: the land was controlled by the state and any management of the land was done by collectives. Any grain produced was for the state with compensation to the farmers made in the form of fixed wages.

After the death of Mao and the end of the Cultural Revolution, things changed. Following experiments since 1979, Deng Xiaoping adopted the “Household Responsibility System” in 1981, according to the journal article “Signal Left, Turn Right: Central Rhetoric and Local Reform in China.” Under this system, farmers living in a collective would divide plots of land amongst themselves for individual farming which resulted in greater productivity. When Deng institutionalized this practice, farmers were allowed to work their piece of land for profit in return for delivering a set amount of produce to the collective at a given price, and were subsequently allowed to sell the remainder of their produce on the market.  Those on the Left may point to the fact that since the land is still owned by the state and managed as a collective (even though farming is done individually), it technically isn’t decollectivization. However, as we see that farmers had the individual liberty to use their portion of the plots as they wished, and sell a major portion of their grain in the free market, The Household Responsibility System resembles more to East Asian Capitalism with an infusion of State Capitalism, since the land is still owned by the state and the state does take some produce from the farmers while allowing them to sell in the free market. Hence, we can see that in terms of agriculture, China resembles East Asian Capitalism as it is now decollectivized.

SOEs & Private Enterprises

A state-owned enterprise (SOE) is a business enterprise where the state has significant control through full, majority, or significant minority ownership; in contrast, a private enterprise is a business unit established, owned, and operated by private individuals for profit, instead of by or for any government or its agencies. During the Maoist era of consolidation, private enterprises were eliminated and were replaced in major portion by SOEs which operated in a largely closed economy. This meant any revenue collected was given straight to the state, which then gave wages to its workers, implying that Maoist SOEs were socialist in nature. However, the counter-argument exists that since the revenue was not being redistributed to the workers, and the workers earned wages instead, China was state-capitalist from the beginning, but in a closed economy. This follows in large part from the definition of state capitalism.

Deng Xiaoping was responsible for opening up China’s closed economy by introducing the notion of free-market competition.

Under Deng, China opened up its economy and allowed SOEs to not only compete with domestic companies, but also foreign companies in China and foreign companies abroad. In Maoist times, the economy was closed and competition was strictly limited. The state, over the course of time, began conducting management buyouts (allowing managers to buy shares) for SOEs that were inefficient under government control and/or started selling shares to raise more revenue while still retaining control. SOEs may be small in number at just 3.1% of total enterprises in China, but they account for close to 30% of assets in the manufacturing & service sectors in China, highlighting their major role in the economy. Their asset size has risen 589% over the last 9 years, compared to 67% for other enterprises, thus highlighting the presence of state capitalism in China. This led to Chinese state capitalism being adapted to the East Asian capitalist model as SOEs were allowed to compete in the international market, much like what was done in other Asian Tiger countries that promoted domestic companies. Critics mention how the financial system is nationalized and under complete state control, as it should be under socialism. However, Chinese banks operate as SOEs, still charge interest, and operate for profit, even in overseas markets, thus debunking this claim.

As SOEs were opened to competition, domestic and foreign private enterprises sprung up and began challenging these SOEs. These private enterprises outperformed SOEs and reduced their value added as a total share of industrial value from 57% to 34% between 1998 and 2008. This practice follows in line with the definition of East Asian capitalism as there is an explicit use of the market mechanism and private competition. Hence, it is confirmed that SOEs and private enterprises in China do not pertain to socialism or market socialism, but instead to state capitalism as an element of East Asian capitalism.

Worker Cooperatives

China has an abundance of worker cooperatives, which are businesses owned and self-managed by their workers. This definition falls under the tent of market socialism, as here, workers control the means of production while producing goods and services in a market for distribution. By encompassing a third of the rural population and handling a quarter of the agricultural produce of China, these companies flourished before the Great Leap Forward nationalized all land and converted them to state collectives. However, they began to re-emerge and grow and now boast 160 million workers producing close to $320 billion worth of produce for the economy. These worker cooperatives are completely autonomous from state ownership.

Cooperatives may be agricultural, industrial and service-related, and are represented by the All-China Federation of Supply and Marketing Co-operatives (ACFSMC). These examples clearly reflect the case of market socialism within China and how it operates as a private entity within the free market, but separate from the East Asian capitalist model of the majority of the economy.

Although the numbers show that these cooperatives have considerable labor and financial strength, workers in cooperatives make up only ⅕ of the workforce while contributing only 3.3% of economic output, thus highlighting the dominance of the East Asian capitalist model.

Conclusion

China runs two distinct economies: one larger East-Asian capitalist economy, and one smaller market socialist economy. While the East-Asian capitalist economy dominates its market socialist counterpart, there is nonetheless evidence that China is heading towards market socialism slowly and steadily, especially when Xi Jinping announced that China would seek to achieve socialism by 2050,” and especially when worker cooperatives have recorded massive growth rates of 29%.

Until China can set in legislation and mechanisms to help the domination of the market socialist economy over its East Asian capitalist counterpart, China’s economy will continue to be classified as predominantly East Asian capitalist with a smaller market socialist economy running in tandem.

Edited by Luca Brown