Can the Socialist Market Economy in China Adhere to Socialism?

1. Introduction

In 2009, two large cases of business reconstruction caught much attention in China. One was the takeover of the private Rizhao Iron and Steel Mill by the state-owned Shandong Iron and Steel Group; the other was the nationalization of small private coal mines in Shanxi Province. At the same time, while the recent global crisis heavily hit China’s private economy, China’s four-trillion-yuan ($585 billion) stimulus package has focused almost exclusively on the state sector. These events triggered a new round of attacks from the rightist elites on the state economy, followed by a wide-ranging debate among Chinese intellectuals, policy advisors, and government officials (Xie et al. 2012). The most sensational arguments against state-owned enterprises (SOEs) were put forward in a 2011 report on China’s SOEs published by the Unirule Institute of Economics, China’s most influential non-governmental economic think tank. The issues of contention were whether or not SOEs are efficient, monopolistic, and/or deteriorating the income distribution. People were sharply divided between the right and the left.

The debate intensified in early 2012, when the World Bank and a Chinese Cabinet think tank published a new report titled “China 2030,” which called for further downsizing the share of SOEs in industrial output from twenty-seven percent in 2010 to around ten percent in 2030 (World Bank 2012). This was, by no means, a new prescription. Fifteen years ago, along with the report titled “China 2020” also from the World Bank, China witnessed a full-scale privatization of SOEs and market liberalization. However, today the resistance against privatization has become much stronger than before. At the “China 2030” press conference, Du Jianguo, an independent scholar, stood up and denounced the World Bank policy with his leaflets titled “World Bank, Go Home with Your Poison.” This open protest has so far received enormous support from the left as well as denouncements from the right.

In what follows, we will consider the implications of the debate by focusing on three sets of questions. First, what is the nature of the debate, and how can we understand it in the context of Chinese reform? Second, what are the likely changes for SOEs considering the current political and economic situation? Third, how can we transform SOEs towards socialism so they can better represent the people’s interests?

2. The Debate as Continued Class Struggle in the Political and Ideological Superstructure

When Chinese leaders initiated the reform towards marketization in 1978, they claimed that the goal was to rejuvenate and improve the socialist system in China. Some important steps of the reform were developing private enterprises, attracting foreign investment, and offering private and foreign enterprises conditions more favorable than those given to SOEs and domestic enterprises. In the process of dismantling the planned economy—especially in price reforms, the establishment of capital and land markets, and SOE reforms—some party members and cadres in enterprises and government started to accumulate capital through both legal and illegal means. The weakening of central planning made the national economy increasingly reliant on market expansion and monetary incentives; various contradictions springing up during the reform were expected to be solved by further marketization. Under the name of reform, education, health care, housing, and the social security system, which were operated publicly as representatives of socialism before the reform, have been marketized continuously.

The objective of the reform was declared to be the creation of a socialist market economy. However, in the 1990s, the key issue changed into being the transition to a generally market-based economy. While the path and means of this transition became a priority of theoretical discussions and policy designs, the aftermath of this transition—the resulting economic model and its nature - was largely absent from discussions, consciously or unconsciously. In the thirty years since 1978, time has revealed that China’s “crossing the river by touching stones” was actually a move towards an American-style market economy. In this process, the socialist elements of the Chinese economy have been reduced only to SOEs and macroeconomic control. The state-owned economy has largely been regarded as the basis for state intervention, but has not functioned as models for other parts of the economy to follow (Song and Sun 2010). Worse, many SOEs were privatized or simply shut down.

During the mid-1990s, massive privatization of SOEs took the form of “grasping the large and letting go of the small” (zhuada fangxiao), under which all medium- and small-scale SOEs and part of large-scale SOEs were privatized. The beneficiaries included governmental officials, former SOE managers, private capitalists connected with government, and transnational corporations (Li 2011). From this process has emerged, unsurprisingly, a new capitalist class composed mainly of private proprietors and multinational capital and its related interest groups. As the size and wealth of this emerging capitalist class grew larger and their power grew stronger, they would necessarily demand abandoning the socialist legacy which might impede their further accumulation of wealth (Kotz 2009). Meanwhile, tens of millions of former state-owned and collective unit workers were laid off and impoverished. Besides the urban labor force, migrant workers from China’s rural belly have been the dominant source of labor supply for industrial sectors. The rising working class has organized a significant amount of petitions, protests, and strikes against the new capitalist class (Lee 2007).

However, so far direct and violent capital-labor conflict has not been the dominant form of class struggle in China. First, the proletarianization of rural migrant workers is yet to be complete, because despite working in cities, the reproduction of their labor power still highly relies on the countryside where they own use rights of land and other productive resources (Pun et al. 2009). Second, although a rising tide of strikes has been conspicuous recently, most of them have been sporadic, localized, and focusing on immediate economic demands such as higher wages and better working conditions, hoping to draw attention and help from the government. These labor protests have shown that China’s new working class is still largely a class-in-itself, not a class-for-itself.

Instead, class struggle in the ideological sphere has been very significant. As Marx writes, “theory … becomes a material force as soon as it has gripped the masses” (Marx 1978: 1843). In the top-down reform led by the Communist Party, society was successfully inculcated with the reform ideology which soon became hegemonic in discourse. Moreover, because the economic structure is the basis of politics and ideology, the changes in ownership structure and class structure that have accompanied the rise of capitalist private enterprises have been inevitably reflected in theoretical, ideological, and policy levels. The capitalist class has also taken advantage of ideological tools, like higher education and new media, to advance their interests.

First, as the national economy has been geared to the American style, economics education in China has also been “Americanized.” Many economists trained in neoliberal economics in the United States have been invited to China and granted the power to reform economics education in top academic institutions. The popularization of neoliberal economics has worked along with the marginalization of Marxist economics, and a generation of young scholars with blind faith in neoliberalism has also been brought up (Cohn 2011). For them, the inefficiency of SOEs has become a tenet of faith, which indirectly negates the socialist elements in the market economy. In this process, socialism has been theoretically weakened and further reduced to abstract concepts such as “equality” or “fairness,” whilst capitalist features of the reform have been significantly strengthened.

Second, before 1978 socialism in China was generally equivalent to a combination of public ownership, a planned economy, and distribution according to work. As reform proceeds, a planned economy and distribution according to work have been replaced with a market economy and distribution according to factor (mainly capital) contribution; and the dominant position of public ownership has been replaced with the controlling power of state ownership. As a result, SOEs have become the last resort for socialist elements of the market economy. This is why denouncing or defending SOEs has become the focal point of theoretical and ideological debates in China since 2004.

Third, Chinese rightist elites are already experienced in transforming a topic into a public consensus via the media under their control. In this way, they have pressured the government to re-design policies in their favor. For instance, during the 2000s and 2010s, the rightist elites started a series of debates like the debate on SOE management buy-outs in 2004, on Chinese economics education in 2005, on the orientation of Chinese reform in 2006, on democratic socialism in 2007, on universal values and the “08 Charter” in 2008. Although topics differed, these debates all revolved around whether China should persevere with or give up socialism. Moreover, each was halted by party and state officials out of fear of challenging the legitimacy of the economic system too much; each was ended by the authority as a compromise to balance the left and the right. However, the way of compromise, in fact, always leaves the door open for further ideological manipulations by rightist elites who oppose socialism and embrace privatization.

As Michael Burawoy argues, “when struggle takes place on the terrain of ideology, the consequences of struggle must be understood through an examination of the actual relations behind ideology….Where interests are taken as given, ideology becomes a resource that people manipulate to advance their ‘interests’ or a cement that contains conflict or minimizes strain” (1979). Also as Marx suggests, through ideological forms people become conscious of the conflict between the productive forces and the superstructure, and fight it out (Marx 1978: 1859). At present, the debates on SOEs reveal the continuation of privatization and ongoing class struggle in China. Rightist intellectuals, policy advisors, and government officials, as well as the media, initiated these debates in order to influence the next leadership of the central government and policy making in general. Their ultimate goal is to eliminate public ownership, legitimize managers’ embezzlement of public wealth by privatizing SOEs, allow transnational capitals to control the Chinese economy, and thus eliminate all remaining socialist elements.

3. The Foreseeable Future of the SOEs

The serial debates have greatly influenced government policies on SOE reform. For example, in March 2010 the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council required 78 central SOEs to quit the real estate sector if real estate was not their major business. Two hundred and twenty-seven enterprises were affected and state-owned assets involved totaled 99.1 billion yuan ($15.2 billion). In The Proposals of the State Council on Encouraging and Leading Private Investment to Develop Healthily (May 2010), it was suggested that the government should enlarge the scope and scale of private investment; encourage and guide private investment in basic industries, infrastructure, and financial sectors; and allow privately-owned real estate corporations to build affordable housing, public rental housing, and other policy-based housing. The proposals were largely accepted in Premier Wen’s government work report in March 2012 and thus became the target of future reform (People’s Daily, March 16, 2012).

It is undeniable that, under current conditions, socialism with Chinese characteristics tends to develop into capitalism. As the Chinese market economy develops, economic interests have been increasingly diversified, and thus the ideological discourses are also changing. There will be further theoretical and policy-related debates over whether or not China should adhere to socialism. Rightist elites will undoubtedly wage new wars against SOEs and propose furthering privatization. How, then, will the position and function of the state-owned economy change in the foreseeable future?

We argue that, in the relatively longer term, as long as the CPC remains the ruling party, socialist legacies and rhetoric will not become extinct, and some socialist elements will still be functioning, such as giant SOEs, the state-owned banking system, public ownership of land in the Constitution, and the implementation of national economic plans. In general, without radical policy changes, the proportion of the economy under state ownership, in spite of some fluctuations, will remain relatively stable over time.

First, the CPC continually insists on maintaining the dominant role of the state-owned economy in the socialist system with Chinese characteristics, the necessity of which has already been realized among the top leaders. Jinping Xi, the Chinese vice president, pointed out that SOEs were strong forces for building a moderately prosperous society in all respects, the major pillars for building socialism with Chinese characteristics, an important basis on which the CPC can retain leadership, and an important area where the CPC’s basic theories can be implemented and put into practice (Xi 2009). In the Fourth Session of the 11th National People’s Congress in 2011, Bangguo Wu, chairperson of the Standing Committee, stated firmly that China would not adopt a system of multiple parties holding office in rotation or adopt pluralization of the guiding dogma. He ruled out the possibility of separating powers among the executive, legislature, and judiciary or adopting a bicameral or federal system, and also clearly declared that further privatization was not under consideration (Wu 2011). Serial reports published in Guangming Daily recently emphasized the importance of SOEs in consolidating and developing public ownership, promoting advantages of the socialist system, strengthening economic and defense power, increasing national coherence, curbing income inequality, maintaining social fairness and justice, promoting general prosperity, consolidating the state’s political power, and increasing social harmony. ¹

Second, it is unreasonable and also difficult to further privatize the current state-owned economy. Most of the SOEs either have already gone through an initial public offering (IPO) or are huge in scale. Their major businesses involve capital- and/or technology-intensive industries. Eighty percent of the central SOEs’ quality assets are concentrated in listed companies and are of high market value. The property-rights exchanges of the unlisted ones must be conducted through a designated special market by public auction. In practice, Chinese private investors so far cannot afford to buy out or operate these SOEs. Also, since the debate over SOE management buy-outs in 2004, the whole society has been cautious about the complex manipulations through which managers of SOEs turned public assets into private ones, thus the state-owned assets cannot be grabbed as easily as before.

Third, public attention, social pressures, and rising economic nationalism have made further privatization more difficult. First of all, the Chinese state-sector working class has accumulated class experiences in the pre-reform era and has developed a substantial degree of socialist consciousness. Once they realized that their class interests were invaded by the new capitalist class and its supporting government officials, they strongly opposed further privatization of SOEs (Li 2011). For instance, in July 2009, the proposal for privatizing Jilin Tonghua Iron and Steel Group triggered massive and violent self-organized worker protests, in which seven blast furnaces stopped working and one high-ranking manager was beaten to death. This event forced the Jilin provincial government to stop its initial plan of privatizing the enterprise. Similarly, the privatization of Henan Linzhou Iron and Steel Group was halted due to massive worker protests, in which Puyang SASAC’s vice director was placed under house arrest by workers for 90 hours. Both cases imply that in order to avoid further capital-labor conflicts and maintain social stability, the government will be more cautious on SOEs’ further reform. In addition, many nationalists argue for SOEs because SOEs are the major force against foreign capital. One study has shown that among twenty-seven major industries, wherever SOEs do not take a large share, foreign capital occupies the dominant position (Gao 2010). Thus if the SOEs retreat, it is likely that transnational monopoly capital will come to dominate Chinese domestic resources and markets.

Finally, it is fallacious to exaggerate the monopoly of the state-owned economy, a central argument made by the right elites. First, monopoly is an inevitable outcome of the increasing degree of socialization of production. As a market phenomenon, monopoly is not necessarily related with forms of ownership. Due to technical and resource advantages, economy of scale, and policy reasons, both SOEs and private enterprises would develop into monopoly. Additionally, under globalization SOEs mainly compete with large transnational corporations; therefore the problem of the SOEs is not being too large, but instead being too small to compete. Also, financial statements have shown that SOEs perform well in many aspects, so it is ungrounded to implement privatization by accusing them of low efficiency (C. Zhang and Y. Zhang 2011). Thus, the current problems in China’s SOEs are not associated with bad performance at all, but something else. In this regard, privatization, rather than being the first solution, will only make them worse (Chang 2007).

4. Proposals for the SOEs towards Socialism

Although state ownership is not equivalent to socialism, we believe that it has the potential to represent true ownership by the people. At present, workers in SOEs not only enjoy greater bargaining power, but also earn higher compensation. National statistics have shown that average wages for workers in SOEs are significantly higher than those of private enterprises in general. (See appendix 1.) Also, when breaking down the economy into nineteen major sectors with different value-added and skills involved, the advantage of SOEs in terms of compensation is still evident. (See appendix 2.) Thus state ownership appears to be more beneficial for workers in terms of distribution relations, and thus shall be preserved in the course of reform. However, the problems of the current SOEs, we argue, mainly lie in the lack of participatory democracy, which do not appear fundamentally different from those in the private sector (e.g., both adopt some features of Fordism).

It is first worth noting that this problem hindering SOEs from representing true ownership by the people is actually a direct consequence of neoliberalization, especially managerial reform starting from the 1980s. Carrying the policy prescription from the World Bank, China’s SOEs had to bear high interest rates, lay off their workers, give up their welfare responsibilities, and most importantly establish hierarchical labor-management relations in the workplace. When SOEs have to behave under the logic of capital under market competition, they refrain from the workers’ participation which used to be the core of the Angang Constitution during Mao’s era. ²

Notwithstanding, defending SOEs at present will still contribute to protecting workers, motivating labor movements, and safeguarding the remaining socialist elements in China. Historically speaking, to nationalize and turn a private economy into a state-owned economy appears to be one of the most efficient ways by which a public economy can be established. If the percentage of the Chinese economy under state ownership were to be lower than 15 percent, then it would be extremely difficult to restore socialism in China, even for a leader who believed in socialism.

It should equally be noted that state ownership is not equivalent to public ownership; only under certain conditions can the former be turned into the latter. These conditions include at least: (1) regarding the relations of production, the means of production should belong to the society and people should hold equal positions in ownership. In the concrete labor process, there should be no antagonism such as that between capital and labor. (2) Regarding the relations of distribution, within enterprises, every laborer, including enterprise managers, should get paid only according to their work; within the whole society, the profits and gains from differential rents resulting from the monopolistic position SOEs occupy should be used to benefit all of the people. (3) Regarding management and planning, the state, in charge of the national economy, should manage state-owned assets effectively according to the will of the society. It should make them represent the people’s shared interests, which should be prominent when balancing among different types and sizes of enterprises, and between central and regional plans. Within individual enterprises, laborers and other stakeholders should be able to participate in the management of the enterprises effectively and democratically.

Under socialism, it is necessary to reform and perfect the management system of the state-owned economy according to the requirements of public ownership: the revenues of SOEs must be submitted to the state, the salaries of SOE leaders must be adjusted, the trend of pursuing self-interests in the SOE reform must be forbidden, and, in particular, economic democracy within SOEs must be established. Only by following these steps can SOEs be turned into units truely representing laborers’ rights and interests. These steps also reflect the requirements and advantages of the socialist system. It is worth emphasizing here that this is not simply a battle on an ideological question. In a practical process tangled with the issue of whether or not to give up the basic socialist elements of the economic system, confrontations between economic powers are very real. Theoretical studies and propaganda are important; nevertheless, ideological rhetoric will be useless if the socialist campaign has no real power. With the deepening of the worldwide capitalist crisis and the awakening of the Chinese working class and their rising level of organization, the changes in Chinese socioeconomic structures may light the way to a socialist future.