Primitive Socialist Accumulation in China: An Alternative View on the Anomalies of Chinese “Capitalism”

Abstract

China’s economic system has yet to be adequately explained by any models. China’s export-led industries were initially viewed as a source of cheap labor but its economy has now emerged as a serious competitor to advanced capitalism. However, after decades of market reform, China’s state sector, rather than disappearing or being marginalized, has become a leader in strategic sectors and the driver of its investment-led growth. Heterodox political scientists and economists have long argued that China is at best a variant within global capitalism. This paper discusses heterodox theories that position China as part of global capitalism or regard it as a variety of capitalism. It then examines the anomalies of Chinese “capitalism” and suggests that primitive socialist accumulation—operating in conflict with capitalist accumulation—offers a more appropriate theoretical framework for studying China’s development.

Keywords

Chinese capitalism primitive socialist accumulation Preobrashensky state-owned enterprises corporatism

1. Introduction

China’s market reform in 1978 is said to mark the transition from a planned economy to a market economy. China’s success is ascribed to the adoption of capitalism under the supervision of the Communist Party. China’s economy today is certainly very different to the pre-market reform era; nevertheless, the strategic industries, which Lenin called “the commanding heights of economy,” are still state-owned and have played a very important role in China’s economic development (Heilmann and Melton 2013; Xu 2017). While many mainstream economists and Western governments have become skeptical about China’s embrace of the market economy, as signified in the continued refusal of the United States, EU, and Japan to recognize China’s “market economy status” (Zalan 2016), most left-wing political organizations and scholars in the West do not hesitate to attribute China’s economic growth to its incorporation into the global capitalist system and to criticize this. Some see China as a rising imperialist power. However, the Chinese government has pursued investment-led growth and brought significant improvement to living standards, which stands in sharp contrast to the general trend of austerity. In addition, Chinese trade and overseas investment in developing countries, particularly through Chinese state-owned enterprises (SOEs) and banks, has improved the terms of trade of its trading partners, especially during the global recession in 2008. Both the China-led Belt and Road Initiative and the Asian Infrastructure Investment Bank aim to address infrastructure development shortfalls in the developed and developing world.

Despite clear differences with global neoliberal doctrines, some heterodox theorists still regard China as a neoliberal state. They argue that by making capitalism work, in the form of state intervention, China is supporting US hegemony and is complicit with global capitalism (Panitch and Gindin 2012; Harvey 2007; Hart-Landsberg and Burkett 2005). Some regard the differences as Chinese capitalism, a variety of capitalism which has the potential to rival Anglo-American capitalism (McNally 2012; Ten Brink 2014). Although these theorists differ on the possible outcomes, they see China’s capitalist development as the main reason for its adherence to, and differences from, the rest of world capitalism.

However, the anomalies in the Chinese political economy do not fade away but become more prominent, especially during the global recession. Dic Lo (2016b) tracks the changing trajectory of Chinese political economy during the market reform years and shows that it has a dual character: submissive-cum-resistant to the systematic dynamics of global capitalism. Lo (2016a) finds that China’s economic model has been, by and large, antithetical to the neoliberal model, although it has displayed a certain neoliberal orientation since 2008 with an increasing proportion of investment in non-productive activities. The Chinese state sector has not been marginalized; its influence in the economy has been strengthened and its international competitiveness increased. An overwhelming majority of the largest Chinese corporations are SOEs. In the 2018 Fortune Global 500 list, 111 Chinese firms made it on to the list, and among the top 100, twenty-two of them are Chinese, in which only one (Huawei ranking at 72) is privately held (BOFIT 2018). SOEs are also responsible for the majority of Chinese overseas direct investment; they accounted for 53.6 percent of China’s outward foreign direct investment (FDI) stock in 2014 (MOFCOM 2015). Their productivity has also increased exponentially. From being a drag on the economy in the 1980s, SOEs have transformed into market leaders with international competitiveness, and form a strong barrier to global capital in the twenty-first century. Although consumption as percentage of aggregate expenditure has decreased, the average annual growth rate of consumption was at 9.2 percent from 1978 to 2013 (Lo 2016a: 247). Lo (2016a) concluded that the twin targets of having sustained economic growth and compensation-enhancing employment expansion has largely been achieved thanks to the transition from labor-intensive growth to capital-deepening growth since the mid-1990s.

Both at home and overseas, the Chinese state sector has played an important role in breaking the neoliberal practices and adhering to state policy or planning. Its countervailing force to the neoliberal economic order has been overlooked by most heterodox theorists. This paper looks at the anomalies and traces their origin to primitive socialist accumulation. It argues that China’s embrace of market reform helped to build a strong non-capitalist state sector and signifies its fundamental difference to capitalist accumulation. These two incompatible tendencies exist in a political economy in which capitalist accumulation is a subordinate type of accumulation. Market reform is a strategic compromise, as explained in sections 3.4 and 3.5; China was close to the limits with its internal means for primitive socialist accumulation and the leadership decided to reach out to the United States for world trade, foreign technology and investment. Market reform including labor market liberalization facilitates domestic as well as international capitalist accumulation but also advances primitive socialist accumulation in the sense that the state sector has significantly increased its asset values, labor productivity, and competitiveness. Primitive socialist accumulation theory originated from Preobrazhensky’s approach to the New Economic Policy. It argues that after overthrowing the capitalist government, a transitional economy requires resources outside of its internal system to help lay the material basis for socialism, hence primitive socialist accumulation. Nevertheless, primitive socialist accumulation can only create the preconditions for socialism, it cannot automatically produce a transition to socialism as the outcome depends on the rivalry of the contending tendencies and social classes, not solely in China but on a global scale.

Following this introduction, section 2 of this paper examines the two main heterodox theories on China’s economic development, section 3 discusses the anomalies revealed by these theories, and section 4 argues that the theory of primitive socialist accumulation can explain the reason for the anomalies.

2. China as a Partner in the Global Capitalist System

This section discusses the main theories of China being incorporated into the global capitalist system: (i) as a partner to US-led neoliberal globalization, and (ii) as a variant model in the global capitalist system.

2.1 China as part of global capitalism

As opposed to the mainstream view that the state no longer has a role to play in the age of globalization, some heterodox economists and political scientists (Jessop 2010; Wood 2005; Panitch and Gindin 2012) point out that national states are important in the making and maintenance of the contemporary global capitalist system. National states align themselves with the interests of global capital, adopt neoliberal reform, and actively choose to withdraw or drastically reduce the role of the state in the economy. At the same time, the state has taken on the responsibility to keep discontent under control and deal with the social, economic, and political problems created and intensified by deregulation and flexibilization. They help by “promoting the accumulation of capital in a manner that contributed to the US-led management of the international capitalist order” (Panitch and Gindin 2012: 8). The United States does not need to exercise direct colonial rule on other states, as the international institutions set up after the Second World War are powerful enough to keep the others in line and work according to the interest of finance capital, since the capitalist states have a stake in the success of capital accumulation and take it upon themselves to create the environment for capitalist accumulation (Panitch and Gindin 2012: 7, 11). They believe that the “internationalization of the state” and the “interpenetration of capital” make challenges to the American empire—“the ultimate guarantor of capitalist interests globally”—very unlikely, despite economic competition between “national capitals.” Panitch and Giddin argue that China voluntarily collaborated with global capital leading to global changes in the industrial structure and commodity prices:

The surge of capital investment after China’s entry to the WTO came from MNCs [multinational corporations] that wanted to use China as an export platform. . . China’s dramatic capitalist development affected economic activity everywhere, forcing industrial restructuring not only at home but also abroad and determining global commodity prices. . . China’s “open door” at the beginning of the twenty-first century was so utterly different from that of a century earlier because this time global capital entered by invitation. (Panitch and Gidin 2012: 293–6)

As the main purchaser of US treasury bonds, China’s capital outflow to the United States is an important source of income for US finance capital and helps to maintain the United States’ dominance in the global financial system. The path chosen by the Chinese government enforces US hegemony while severely impairing its domestic manufacturing and consumption capacity, as illustrated below:

The largest capital outflows from the developing world took the form of far larger purchases of US Treasuries. . . it was also a necessary condition of successful export-oriented capitalist development. . . Since the requirements of neoliberal free trade meant they could no longer protect their domestic manufacturing markets from foreign imports, the concern with restraining consumer imports while accelerating export competitiveness in turn required the limiting of working-class incomes. (Panitch and Gindin 2012: 286)

2.1.1 A neoliberal labor regime

The free flow of capital generated a global search for cheap labor. Labor is subject to international competition and a labor regime, in which wages are kept stagnant while gains for capital soar—one of the main characteristics of neoliberalism. Destroying gains the working classes made in the past underpins the doctrine. China’s opening enabled the new international division of labor and the relocation of the lower-end manufacturing sector to the developing world. This, combined with productivity growth in developed countries, resulted in falling employment in the manufacturing sector in developed countries (Smith 2016).

China’s market reform in 1978 heralded a dramatic change in the labor market. The rural workforce was no longer prevented from travelling outside of their registered area¹ and were allowed to find occupations in the cities, although their rural household registration remains and hence they are not covered by social services in the cities. The influx of hundreds of millions of migrant workers within China has become a major source of cheap labor on a global scale. The migrant workers have become a large reserve army of labor and they are more likely to accept low wages and poor working conditions as they have less rights and welfare provisions than formally registered urban workers. The national monitoring report of migrant workers shows that there were 277 million migrant workers in China in 2015 and 63.8 percent of them had no contract (NBS 2016b). For those with a contract, 12.9 percent were permanent contracts, 3.4 percent were less-than-a-year fixed term contracts, and 19.9 percent were more-than-a-year fixed term contracts (NBS 2016b). Only 1.1 percent of migrant workers had no education at all; nearly 60 percent had at least secondary school level and 8.3 percent had tertiary level (NBS 2016b). The largest group of the migrant workers (31.3 percent), i.e., over 86 million, worked in manufacturing industry (NBS 2016b). The restructuring of the labor regime is not confined to the private sector. The SOE reforms in the 1990s also led to the privatization and closure of a large number of small and medium-sized SOEs and millions of former state workers were made redundant in the process. As summarized by Andreas, the impact of SOE reform compounded by China’s acceptance into the WTO, meant that both private and state enterprises are subject to market competition:

China’s entrance into the WTO in 2001, which was followed by more systematic abolition of legal impediments to international trade and investment, added force to market reforms by more thoroughly subjecting Chinese enterprises to international competition. With few exceptions, all firms were compelled to reduce the cost of labor and of social encumbrances that did not directly contribute to profitability. . . As a result of the radical reforms carried out in recent years, the non-capitalist market economy that existed in the 1980s has been transformed into a capitalist economy. There is no longer a socialist sector and virtually all enterprises that employ more than a handful of people, whether they are publicly or privately owned, now operate according to capitalist principles. (Andreas 2008)

Many studies have shown that workers are losing out in the market reform. The global capitalism theorists argue that the “race to the bottom” on a global scale is made possible largely due to China opening up its labor market. A relatively skilled and educated labor force, inaccessible to capital in the past, formed a huge reserve army—so much so that cheap labor in China became a golden opportunity for foreign capital. However, it should be remembered that it is the law of profitability that drives capital outward, not cheap labor.²

2.1.2 “Go Global” as a symptom of overproduction

According to these heterodox theorists, Chinese enterprises’ increased investments overseas at the turn of this century seem to signify its further alignment with the global economic order and constitutes a worrisome replica of an imperialist power.

As the manufacturing powerhouse of the world, China needs to import raw materials to sustain its production level. China’s continued importation of primary commodities has been an important source of income for some developing countries, particularly during the global recession, and China’s imports have contributed positively to the terms of trade of the developing countries (Lo 2016b).

Despite that, some may find that China’s trading pattern with developing countries resembles an asymmetrical relationship, in which the developing countries are exporting primary commodities and importing manufactured goods. As a late developing country, it seems that China follows the mass production-low domestic consumption model, and hence will need foreign markets for resources and exports like everyone else. As Hart-Landsberg and Burkett (2005: 112) elaborate:

Mainstream analysts do not even pause to reflect on the coexistence of overproduction (as reflected in deflation and burgeoning excess capacity, especially in consumer durables industries) and the rising export-intensity of China’s growth as a possible symptom of some deeper malfunction, especially given the coterminous rise of inequality. In reality, as China’s experience so powerfully demonstrates, overproduction and export-dependency are twin outcomes of capitalism’s tendency to develop productive forces only in and through the exploitation of labor and its natural and social conditions, a process that constrains the growth of the mass market relative to productive capacity.

In addition to the need for foreign markets and resources, the outflow of capital is seen as another sign of capitalist overaccumulation. According to Harvey (2007: 140), China’s external outlets for the internally accumulated surpluses are either funding US debt and thus the US market for Chinese goods or investing overseas to secure their position in foreign markets. According to a United States-China Economic and Security Review Commission report, most of the Chinese foreign exchange reserves are invested in US Treasury bonds (Salidjanova 2011: 14). Although the China Investment Corporation (CIC) created in September 2007 aims to diversify the holdings of foreign reserves, the majority of its global investments are still in public equities, and US equities took up the largest share of all equities held by the CIC at 46.32 percent by the end of 2015, only slightly improved from 49.2 percent in 2012 (CIC 2012; 2015).

In contrast with the sovereign wealth fund, by the end of 2014 the majority (82.5 percent) of Chinese outward FDI stock, was invested in the developing world and SOEs made 53.6 percent of these investments (MOFCOM 2015: 20, 26). The large-scale construction and infrastructure building involved in these investments in the developing world requires long-term capital commitment and has a relatively low yield compared with portfolio investments.

Chinese investments in financial markets and in large-scale construction and infrastructure projects signify the existence of two conflicting tendencies in accumulation. In an economy where there is capitalist accumulation, the pressure for private Chinese capital to accumulate would be the same as any private capital, and hence it follows the trend of financialization. Overaccumulation can be a reason for capital flight and the search for foreign markets and resources. However, as is argued in the latter part of this paper, capitalist accumulation may not be the only kind of accumulation in China; if overaccumulation is not driving outward investment, then what else could be? With the growth of productivity, can the product surplus to domestic demand be used to facilitate the accumulation of the state sector? Can foreign trade be part of a socialistic economic plan?

In his thesis Is China Still Socialist? A Marxist Critique of János Kornai’s Analysis of China, Heiko Khoo (2018) argues that in a mixed “commodity-socialist economy” in which capitalist production is not the dominant mode of production and is competing with the collectivised economy, there is necessary interaction between the private sector and the state sector. Accumulation for the state sector is based on unequal exchange within its production process at the expense of the private sector, although the latter would resist vigorously to prevent optimum accumulation for the state sector. While capitalist accumulation takes place in the private sector, the state sector would need to produce surplus products for consumption and for expanding existing state enterprises. The new resources required for such expansion is not confined to the state sector but has to be drawn from the private sector domestically and externally, especially in economies where “internal disproportions and industrial backwardness” require imports to alleviate (Khoo 2018: 198). Under such a circumstance, “[p]lanned imports of means of production become ‘an automatic regulator of the entire process of expanded reproduction’” (Khoo 2018: 198).

The “Go Global” (zou chu qu) policy was first introduced in China’s Tenth Five-Year Plan in 2001. Its four objectives were clearly spelt out in an official circular in 2004 to encourage Chinese enterprises to invest overseas particularly in (i) primary resources which are lacking in China, (ii) areas which can enable the export of Chinese goods and technology with comparative advantages, and (iii) areas which can enable the development of Chinese R&D with modern technology and management skills (NDRC et al. 2006).

To the critics such as Harvey (2004), China’s state economic planning, does not differentiate itself from the principle of capital accumulation. The presence of the state in the process of capital accumulation only shows the difference in the paths of new forms of capital accumulation. They see China as a modern version of Bismarck’s Germany or Meiji Japan where the state was heavily involved in the creation of domestic conglomerates (Harvey 2004), even though the Chinese conglomerates are mainly state owned.

2.2 China as a variant to the contemporary global capitalist model

While some of the heterodox theorists believe China is an indispensable partner in sustaining and enforcing US-led global capitalism in the twenty-first century, some recognize this emerging power as a variant. They believe the differences lie in the form of capitalism.

2.2.1 Sino-capitalism

Christopher McNally (2012) describes China’s economic development path as Sino-capitalism which “is a hybrid consisting of several interrelated codependent compensatory institutional arrangements” (McNally 2012: 749). It is “a new form of capitalism that draws on Western, Asian, socialist and historical and modern Chinese elements” (McNally 2012: 748). There are three main characteristics of Sino-capitalism: (i) the heavy use of interpersonal relationships (guanxi) to form and proliferate informal business networks even with global reach, (ii) the state playing a leading role in fostering and guiding capitalist accumulation, and (iii) some absorption of the Anglo-American institutions and values to form a hybrid a “market-liberal form of state capitalism” (McNally 2012: 750).

McNally explains that Sino-capitalism sees markets as “merely tools in a broader state-guided strategy of creating an internationally competitive political economy” (McNally 2012: 766). The Chinese state has not only retained control over the commanding heights of the economy throughout the reform period but has also had an effective Communist Party personnel appointment mechanism (nomenklatura) to encourage cadres to improve local economic performance. There are also institutions to implement central industrial policy. There may not be a fixed formula in Sino-capitalism as the Chinese leadership has taken a cautious and experimental approach in what McNally calls “neoetatist” planning with explorative and innovative policy experimentation (McNally 2012: 760). Although it is generally successful, policy implementation is not as straightforward because there are intense rivalries among state agencies as well as among local governments (McNally 2012: 754). However, he makes clear that this is not anti-capitalist: “Certainly, a system as a whole can be capitalist while guided by state influences, such as indicative state planning, public ownership of the commanding heights of the economy, and the strategic use of state fiscal incentives” (McNally 2012: 747).

Such a view is shared by those who accept that the Chinese system is very distinct but who believe it is nevertheless only a variant of capitalism. Ten Brink (2014: 222) believes there are some legacies from the bureaucratic command economy which explain the extensive state intervention in pursuit of market-led development. Ten Brink (2014: 221) says it is “a competition-driven variation of heterogeneous state-permeated capitalist development.” Therefore, state intervention or state property do not negate capitalist relations. The restructuring of capital valorization may challenge the “established power constellations within international institutions” but China’s pragmatic alignment has aimed for both normative and political integration which is not an open-ended contest over new development policies (Ten Brink 2014: 230).

2.2.2 State corporatism

The state corporatism theorists hold a similar view to those who believe that China is an integral part of global capitalism, but the authoritarian state can put national interest over the parochial interests of each sector and is able to enforce discipline. China is able to become a corporatist state because of its authoritarian Communist Party regime (Unger and Chan 1995: 32). According to Unger (2008: 7), a corporatist state is a state which “dominates the associations [in the ‘public sphere’] and sometimes even plays a major role in establishing them. The state’s grip on the associations can potentially make them vehicles for squeezing out any capacity for a civil society to operate effectively, independent of the state.”

Unger and Chan (1995: 37–38) find that the industrial unions and peasant associations set up in the early Mao era were intended for a “two-way conduit between the Party center and the assigned constituencies” and were already part of a corporatist structure. During the 1980s, thousands of associations ranging from science and technology to economic sectors in different industries were set up as additional mechanisms for the state to control society in the liberalized economy. They argue that China shares many characteristics of the East Asian corporatist states like Japan, South Korea, and Taiwan in terms of the active involvement of the state in securing a competitive edge for industry, the pursuit for export-oriented growth and the subordination of all social classes to the common good of economic growth. However, in contradiction to the East Asian corporatist states that shift in a societal corporatist direction, it remains an open question whether or not China will become a liberal or societal corporatist state with further liberalization (Unger and Chan 1995).

However, some scholars (Pringle 2014; Luthje 2015) argue that the Chinese working class is not entirely incorporated into the establishment, even though the Communist Party-led All China Federation of Trade Unions is the only legal labor organizations in China. Pringle (2014: 199) shows that in some cases the official union has been put under pressure by workers to “improve its capacity to represent workers,” including the nineteen-day strike in Honda’s car-parts plant in Foshan in 2010 and the thirty-three-hour stoppage at the Yantian International Container Terminals in 2007. Luthje (2015: 32) finds that the structure of collective actors in labor relations remain “confined to their traditional role as de factor state agencies and cannot act as representatives of group or class interests in the basic sense of industrial relations theories” and thus China fails to copy German corporatism, i.e., to make a tripartite mechanism for government, trade unions and employer organizations to collaborate in regulating basic labor standards. He finds that Chinese labor is a relatively independent force and describes workers as a “fourth party” which “exerts considerable moral or political pressure on state agencies by individuals or groups of individuals taking action through lawsuits, strikes, protests, and petitions” (Luthje 2015: 32).

Despite the differences in positing the Chinese working class in Chinese political economy among the above scholars, all agree that the forces of labor depend on the freedom of association and the growth of civil society and actors. However, the corporatism debate focuses on the type of institutional framework to regulate labor relations under capitalism. It shows the theorists’ preference for a social-democratic tripartite set-up but has no explanatory power on what is happening in China. The state corporatist model observed the dominance of the state over different classes during the accumulation process. Such dominance is perceived by these theorists as apparently independent, but actually on the side of the capital against labor, as all accumulation is equated with exploitation.

However, Lo and Zhang (2011) argue that Chinese SOEs constitute an important and egalitarian part of China’s systemic features with a market-supplanting character. The most noticeable difference is that “the institutions of SOEs have significantly deviated from principles of the market economy, notably individualistic property rights” (Lo and Zhang 2011: 47)

While Unger and Chan (1995: 43) predict that the profitable SOEs “will be better positioned to collectively assert themselves and that top-town state corporatist controls will steadily diminish,” the Chinese state’s response to the global recession from large-scale infrastructure projects to the Belt and Road Initiative has shown that the state is still largely in control of the SOEs and and banking sector.

3. The Anomalies of the Chinese Path to Economic Growth and Development

The theories above evaluate the anomalies of the Chinese political economic system to different degrees. They all believe that the variations do not deviate fundamentally from capitalist accumulation, whether competing with or complementing US-led global capitalism. While these scholars have drawn attention to the human cost of China’s market reform and the domination of the capitalist order and ideology on a global scale, they have ignored the selective nature of China’s integration and participation in the system, and more importantly, the role of primitive socialist accumulation and state planning.

3.1 State investment in infrastructure

Although Harvey (2007: 140) describes China as a “neoliberal state,” at the same time he agrees that China departs “glaringly from the neoliberal template, particularly in its massive infrastructure investment, however unsustainable that may or may not be. Lo (2012, 2016b) suggests that China’s investment in capital formation is not unsustainable but rather that it is the key to its continued resistance to the systemic dynamics of global capitalism. It is this productive investment and the rise in productivity that permits China to move away from labor-intensive growth and thus super-exploitation.

Lo (2016b) also argues that China has had a positive impact on the developing world. Its productive investment does not follow the norm of financial speculation in the age of globalization. The cheapening of capital goods such as machinery and equipment, which are crucial for industrialization, also contributes positively to the terms of trade for developing countries. Chinese infrastructure investment has continued to grow for decades and the trillion-yuan stimulus package announced by the government in the face of the global recession in 2008 pumped further investment into infrastructure. In 2016, the government pledged another RMB 4.7 trillion for 303 infrastructural projects including railways, roads, waterways, airports, and metro systems (Lockett 2016). The sustained rapid growth in productive investment is far more important than cheap labor in driving exports and economic growth. Thus China is a dissenter in the age of financialization (Lo 2016: 13). China spent US$3.6 trillion on infrastructure in 2015, equivalent to the total spending of North America and western Europe, the leading advanced capitalist trade blocks, according to a report by the McKinsey Global Institute (Woetzel et al. 2017). This is not transient or tentative but a consistent characteristic of Chinese economic development.

3.2 China not mainly dependent on exports for growth

With the rise of consumption, it is no longer accurate to describe China as an export-led economy. China’s per capita disposable income has grown from 14,551 to 21,966 yuan from 2011 to 2015. The average annual real growth rate of disposable income for permanent urban households is 6.6 percent and 7.5 percent for rural households in 2015 (NBS 2016a). In research quoted by The Economist (2016), it is expected that China’s consumer economy will expand to US$2.3 trillion over the next five years, which would be bigger than the entire consumer economy of Britain or Germany today. A special report in the Financial Times also shows that China’s household consumption has grown from 13 percent of United States levels in 2007 to 34 percent in 2017, and the gap is closing (Wolf 2018). Household consumption has made up over 70 percent of the final consumption (which consists of household consumption and government consumption) since 1978 (e.g., 78.8 percent in 1978; 73.1 percent in 2016) and has an impressive annual average real growth rate of 9.3 percent from 1978 to 2013 (Lo 2016a: 247). At the same time, China has seen an increase of gross fixed capital formation as a percentage of GDP (from 30 percent in 1978 to 43 percent in 2016) (NBS 2017b).

Taking the distribution of GDP composition into account, there appears to be a consumption squeeze, but this can be misleading. In table 1, the year 1955 shows the highest household consumption share of GDP at 64 percent, but this does not mean that general living standards, or household consumption, were higher in 1955 than in 2016. In fact, recent data from the China Statistical Yearbook 2018 show that there has been a continuous growth in both urban and rural household consumption from 1978 to 2017, as shown in figure 1 (NBS 2018). China’s life expectancy at birth has also seen a significant increase from 43.7 years in 1960 to 76.25 years in 2016, according to World Bank data. The data for contribution share to GDP growth³ further prove that final consumption has been the main driver of economic growth from 2014, surpassing gross capital formation and net exports of goods and services, as shown in figure 2.

Table 1.

China GDP figures and composition of select areas.

	GDP in yuan at current prices	Final consumption as percentage of GDP	Household consumption as percentage of GDP	Gross fixed capital formation as percentage of GDP
1955	93,490,000,000	77	64	16
1960	150,800,000,000	62	49	31
1965	162,920,000,000	71	58	21
1970	220,700,000,000	66	55	25
1975	295,040,000,000	64	52	30
1980	459,290,000,000	65	51	29
1985	907,670,000,000	66	52	29
1990	1,934,780,000,000	62	49	25
1995	6,321,690,000,000	58	45	33
2000	9,874,900,000,000	62	46	34
2005	18,869,210,000,000	52	38	41
2010	41,070,800,000,000	48	36	45
2015	69,910,900,000,000	52	38	43
2016	74,631,500,000,000	54	39	43

Source: China Compendium of Statistics 2009 and China Statistical Yearbook 2017, my calculation.

Figure 1.

Household consumption growth.

Figure 2.

Contribution share of the three components of GDP by expenditure approach.

Bramall (2009: 276) suggests that although talk of export-led growth may apply to Guangdong, it does not even apply in provinces such as Zhejiang and Jiangsu, as domestic factors were critical there. Exports of goods and services as a percentage of GDP in China hit the salient point of 36 percent in 2006 and dropped since then. Only between 2002 and 2008 did this percentage in China exceed the world average, see figure 3 (World Bank 2016).

Figure 3.

Exports of goods and services as percent of GDP.

Although part of China’s industrialization path overlapped with some of the East Asian developmental states, such as the reliance on cheap labor and foreign investment, there is also a significant difference, as China’s industrialization path is not entirely dependent on foreign capital or foreign markets. In the process of integration with the regional as well as world economy China has managed to achieve import substitution and industrial upgrades and maintain a relatively independent financial policy (Lo 2012: 92). As Lo (2016b: 13) highlights, “measured as the ratio of net to gross exports, the ratio of domestic value-added of processing trade steadily increased from around 20 percent in the mid-1990s to reach 45 percent by 2009.” This is also different from US client states like Japan and South Korea which enjoyed preferential treatment until the Cold War ended in the late 1980s, after which they had to liberalize their markets including external finance. As a result, South Korea suffered serious current account deficits by the 1990s (Lo 2012: 90–94).

3.3 The labor regime in context

The remaking of the Chinese working class has been the focus of the heterodox economic debate in determining the nature of the Chinese political economy. The composition of the total workforce changed as the number of workers employed in the non-state sector overtook the state sector, and workers in the state sector seem to face similar problems of casualization and intensification of labor (Lin 2015). Although there is evidence of a neoliberal labor regime since the market reform in the 1980s, the situation is more nuanced.

As argued by Lo (2016), China did not adopt the neoliberal labor regime fully, nor does the Foxconn model provide an accurate representation of the labor situation in China. Between 2000 and 2014, the average annual growth of the real wage rate was 11.2 percent for urban-registered employees and 10.3 percent for migrant workers, both of which are higher than the average annual growth of the real per capita GDP of 9.2 percent (Lo 2016a). Most noticeably, the Labor Contract Law, which provides greater protection for workers, particularly migrant workers, came into effect in 2008 at the pinnacle of the global recession and in the face of objections by foreign capital (Li 2008). Lo and Zhang (2011) analyzed the composition of Chinese manufacturing exports in 2007 and found that mechanical and electronic products accounted for 61 percent of the total, an increase from 30 percent in 2006. These are not labor-intensive industries⁴ and their increase in the export basket indicates that China is moving away from the race for cheap labor. Lo and Zhang (2011) show that China’s economic growth over the last decade has actually been driven by a rise in productivity rather than a race to the bottom on labor costs. The 2018/19 Global Wage Report published by the International Labor Organization (ILO 2018b) shows that China (8.2) had a much higher average real wage growth from 2008 to 2017 than most East Asian countries and the rest of the BRICS countries (Brazil 2.2, Russia 2.5, South Africa 2.4, India 5.5).

Critics who regard wage labor in SOEs as proof of China’s capitalism have provided observations but have not offered any suggestions or explained the conditions for doing away with wage labor. They compare the pre-reform-era labor regime with the liberalization during market reform and believe it represents a sharp change of direction toward super-exploitation. However, was the labor regime before market reforms better and less exploitative? The majority of the workforce before 1978 was in the rural sector (in fact until 2014). The rural sector has been a very important source of accumulation for China’s industrialization program, particularly before the large-scale FDI inflow. The prioritization of industrialization requires surplus transfer from the rural sector to the urban sector. This is reflected in the peasant-labor regime in the countryside in which wage levels remained stagnant for over two decades and the price of agricultural produce was artificially suppressed to ensure the cheap supply of food, as explained in the next section.

3.4 Primitive socialist accumulation through the peasant-labor regime for industrialization

As Lin Chun (2006: 62–70) points out, the international situation, including the blockade led by the United States and later the Sino-Soviet split, pushed China to prioritize industrialization almost at any cost to prepare for foreign invasion and to minimize economic dependency. This contrasts with the newly-industrialized Asian economies, which benefitted from huge inflows of FDI from the United States and unprecedented access to the US market. China did not even have access to loans from the advanced economies let alone the ability to accumulate foreign reserves. The primitive accumulation of capital for rebuilding the country after decades of war and devastation was “through sacrificing rural development and exploiting the peasantry” (Lin 2006: 66). The agricultural surplus was transferred to the state’s industrialization projects through a policy that resembled the unequal “price scissors” in which the prices of agricultural produce and industrial goods were artificially manipulated in favor of the latter through a state procurement monopoly (Lin 2006: 67). As explained by Chris Bramall (2009: 279):

In order to achieve that growth [for rapid industrialization], it was necessary to raise investment in the industrial sector. This in turn required the maximization of industrial profits, and the best way to achieve that was to keep costs down. . . the main cost item was that of labor, and the easiest way to hold down labor costs was by ensuring that food was cheap for the urban workforce. The upshot of these considerations was a deliberate policy of biasing the internal terms of trade—the price of agricultural relative to industrial goods—against the agricultural sector.

As Bramall (2009: 73) sums up, “low levels of human capital, the underdeveloped state of infrastructure, the extent of poverty and inequality (which demanded immediate action) and low productivity in agriculture inevitably constrained the pace of economic growth in the 1950s.” China’s underindustrialization was reflected in its employment distribution, as shown in figure 4. The urban-rural gap actually increased during the Maoist era even before the market reforms, despite some attempts to speed up rural development such as shangshan xiaxiang (“up to the mountains and down to the countryside”) and Third Front programs (Bramall 2009: 163). Bramall (2009: 268–69) shows that some Third Front centers in the western provinces and the mountainous interior of the coastal and central provinces such as Tianshui and Panzhihua achieved outstanding growth and raised industrial production in the late Maoist period. However, these were very small projects in a predominantly agrarian economy with over 70 percent of the workforce in the primary sector at the time (Bramall 2009: 272). Figure 4 shows the distribution of employed persons in urban and rural areas from 1952 to 2016, while figure 5 shows the distribution in the three sectors. The number of people employed in urban areas only starts to overtake those in rural areas from 2014 (NBS 2017a). It is thus problematic for some critics to generalize the remuneration and conditions for urban workers as the norm for the working population in the pre-market reform.

Figure 4.

Distribution of employed persons in urban and rural areas.

Figure 5.

Distribution of employed persons in sectors.

There was a long period of wage restraint and consumption squeeze in the Maoist period and the household registration system was firmly enforced to control the growth the urban workforce. Qi Hao’s study of the incentive system (Qi 2018: 413) has shown that from 1952 to 1978, the average annual real wage of workers in the urban sector remained largely the same throughout the period. To reduce the pressure from the growing urban population, the government started the xiafang (transferring middle-school and university students, and industrial cadres and technicians to the countryside) program as early as 1960s with hopes of raising agricultural production and promoting Third Front construction⁵ (Bramall 2009: 163). When the program ended around 1977–9, about 18 million people were said to have experienced shangshan xiaxiang (Bramall 2009: 164).

Many construction projects were undertaken by peasant labor recruited on a project-by-project basis, and with the xiafang workforce they formed a large pool of de facto casual labor for infrastructural construction. Nickum’s figures cited by Bramall (2009: 224) suggest that “40–60 million peasants were involved in labor accumulation in the mid-1960s, rising to 120–40 million by 1976–7 as the program intensified and focused increasingly on supra-brigade and commune water conservancy projects. On average, a peasant engaged in labor accumulation for thirty days per year.” Labor accumulation is the process of “utilization of wintertime labor in the creation of land-augmenting fixed capital” and in return the laborer received work points or deduction of corvée-style obligatory labor (yiwu gong) (Nickum 1978: 273, 275). As Bramall (2009: 242) calculated, further ideological and political motivation had a limited effect in raising labor productivity as many peasants became disillusioned by the mid-1960s. Furthermore, the priority for industrialization over agriculture led to a lack of investment in modern inputs for agriculture. The price structure, which was designed to ensure the cheap supply of foodstuffs for urban workers and agricultural inputs for the industrial sector, also hampered incentives to raise productivity (Bramall 2009: 247).

This is the background of the labor regime before the market reforms in 1978. Surplus from workers and peasants was transferred to the state to carry out industrial policy but the accumulation through internal means was still not enough to meet demand. Prior to the SOE reform in the 1990s, many of the SOEs were in debt and had to rely on state support. According to Renmin Ribao (1986, 1988) cited by Kornai (1992: 490), over 25 percent of SOEs made a loss every year, and more than 40 billion yuan, equivalent to one-half of the total profit of Chinese industry, was spent on these SOEs to keep them afloat. As shown in figure 6, government subsidies to loss-making enterprises outstripped the income tax generated from the SOEs in 1989 (NBS 2003). With limited external funds and the lack of investment in the countryside, the losses of the state sector only added to the burden of accumulation on workers, urban and rural. Diversifying investment funding became important not only for economic but also political stability. Opening to foreign investment alleviated the situation, as foreign investment made up 13 percent of total actual funds for investment in fixed assets (excluding rural households) in 1995. However, the percentage of foreign investment decreased sharply over a short space of time, to 5.8 percent in 2000, and less than 0.37 percent in 2016 (NBS 2017a).

Figure 6.

Income tax of SOEs and subsidies to loss-making enterprises.

3.5 Bottleneck of primitive socialist accumulation through agricultural surplus transfer

The increase in industrial productivity was not sufficient. As Bramall (2009: 273) points out: “On the one hand, absolute productivity levels were well below world levels. More importantly, however, the industrial sector was simply too small to support China’s economic and political ambitions, and in that sense its industrial sector was inefficient in a broader macroeconomic way.” To increase the size of the industrial sector, however, would exert further pressure on the rural sector, which had already been overstretched for years. China was also under additional pressure due to an international blockade and had to ensure self-sufficiency. This is why Lin Chun (2006: 64) commented that it was much more difficult for China to achieve modernization in comparison to the “dependent development” in the capitalist peripheries: “The contrasts between a socialist accumulation structure and a capitalist developmental state are many, and are played out in China against a background of the greater adversities confronted by socialist accumulation in a world dominated by capitalist political, economic, financial, military, and cultural institutions” (Lin 2006: 68).

Like many underdeveloped countries, which rely on foreign industrial goods and machinery for the renewal and upgrade of industrial equipment and technical capacity, China faced the same problems. At the end of Mao’s era, the technical potential of industries introduced by the Soviet Union⁶ in the 1950s was exhausted. Bottlenecks in productivity growth demand the introduction of advanced equipment and techniques. Deng Xiaoping is often perceived as the terminator of autarky and inventor of foreign trade, but it had always existed throughout the Maoist period (as shown in figure 7). For example, China imported more value in goods from Japan and western Europe than from USSR as early as 1965 (Bramall 2009: 362): “The most significant change in terms of economic policy-making in the early 1970s was the growing reliance on imports of modern producer goods from Japan and from the West. Nixon’s 1972 visit led to a gradual thawing of relations and to significant increases in imports” (Bramall 2009: 166).

Figure 7.

Total values of Chinese exports and imports from 1950 to 1980.

After China and the United States formally restored diplomatic relations on January 1, 1979, China accelerated its imports ranging from arms, aircraft, steel-making plants, petrochemicals, mining equipment, and oil rigs to wheat (Cheng 1979). The import commitments experienced a tenfold increase over the previous year and quickly changed China’s trade surplus into a trade deficit. Including those under negotiation, the total import bill came to about US$60 billion in 1978 whereas the exchange reserves were only between US$2 billion and US$4 billion (Cheng 1979). Figure 7 shows the steep drop in the trade balance from a US$380 million surplus in 1977 to a US$1.1 billion deficit in 1978, and the deficit increased to US$2 billion a year later. The import of foreign goods may have temporarily relieved the pressure of industrial bottlenecks but it increased the reliance on foreign inputs as well as foreign loans in the long term. Trading itself would not create the domestic industrial bases.

3.6 The reform of state-owned industries

As shown in figure 6, the tax contribution from SOEs only started to exceed subsidies after 1990. The turnaround of the SOEs came after a series of reforms were introduced in the 1990s.

SOE reform seeks to “grab the large, let go of the small” (zhua da fang xiao) rather than undertaking wholesale privatization. Although the majority of small and medium-sized SOEs were privatised, one hundred and twenty large enterprise groups from capital-intensive industries, considered having strategic importance, were selected by the State Council in the 1990s to create a “national team” backed by preferential policies. Peter Nolan (2001) grouped these policies into three categories:

(1) Tariff and non-tariff protection. Average tariff levels were almost 25 percent in 1999; on vehicle imports 80–100 percent; on farm products 31 percent; non-tariff protection includes compulsory technological transfer with certain imported goods. The government matched domestic component suppliers to foreign investors, routinely excluded foreign firms from domestic distribution channels, and required foreign investors to set up joint ventures with selected domestic partners (Nolan 2001, 18).

(2) The 1994 Company Law enabled key state industrial concerns to become independent legal entities formally separated from the government and adopt shareholding corporate structures. SOEs were allowed to retain profits and make decisions on international trade. SOEs were given the right to set up internal finance vehicles, and to manage companies within the same SOE group. Many state-run R&D centres were transferred to them. The key SOEs listings led the formation of the domestic stock market, and later led the listings of Chinese companies in international markets. However, it was a tightly controlled process where the state still maintained controlling stakes, rather than a move towards privatization as some anticipated, this became a key mechanism for SOEs to absorb private capital (Nolan 2001, 19).

(3) Direct state financial support: the “big four” state banks made a concerted effort to support the national team. A simplified loan procedure was put in place in the late 1990s, hundreds of dedicated bank branches were set up to advise the top 120 SOEs and facilitate access to capital markets. Billions of loans have been made to facilitate the expansion and export of key sectors (Nolan 2001: 19).

Despite conflicting tendencies including tilts towards wholesale privatization, the outcome of the SOE reforms were transformative. In 2006, Premier Wen Jiabao reported to the 11th National People’s Congress that compared to 2002, the SOEs’ total profits rose by 223 percent and their tax contribution by 105 percent (Xinhua News Agency 2008). According to a Ministry of Commerce report, non-financial SOEs alone contributed to 34% of the state’s fiscal income in 2013 (MOFCOM 2014). If the financial SOEs paid the same amount of tax as the non-financial SOEs, together they would account for 68 percent of the state’s fiscal income (China Daily 2015).

The results of SOE reforms did not end up the way Nolan expected. While Nolan recognized the effort made by the Chinese government in creating the “national champions,” he was highly skeptical of its prospects as global competition in capital-intensive industries was extremely intense (Nolan 2001).

According to a Boston Consulting Group report cited by UN researcher Daniel Poon (2014), Chinese companies is among the top five global players in six out of the seven large-equipment industries (photovoltaic, wireless telecom, wind power, coal power, power transmissions, railing rolling stock, and civilian aerospace). Chinese SOEs became competitive with private corporations “in areas once perceived as the stronghold of FIEs [foreign-invested enterprises] such as brand recognition, marketing and sales capabilities and product quality” (Davies 2013: 30) and advancing into “core product markets of developed countries—such as in heavy equipment manufacturing like construction machinery and other capital equipment sectors—taking market share at the expense of western companies in non-OECD markets” (Poon 2014: 4). As Lo (2016b) argues, a most glaring departure from the neoliberal tendency happened in 2008, instead of practicing austerity like all other major economies, China massively increased productive investment through its state-owned banks and leaned on the SOEs to support economic growth. Barry Naughton, who follows Chinese market reforms closely and once argued that state planning was being ousted by the free market (Naughton 1995), has moved from this view. He pointed out that the size of the SOE workforce in relation to the total labour force does not directly reflect its weight in the economy, as state ownership/control is concentrated in capital-intensive and human-capital-intensive sectors; although the SOEs share of all productive assets is relatively small, it is substantial in strategically important or monopolistic sectors (land, natural resources, transport, communication, intermediates and production equipment) (Naughton 2017). In other words, despite the vicissitudes of the reforms, SOEs are still in control of the “commanding heights of economy.”

4. Primitive Socialist Accumulation as an Explanatory Model

As described, in contrast to most “developmental states” where state intervention created large private monopolist concerns that dominates the economy, the commanding heights of China’s economy have always been dominated by the state sector and the largest banks are still state-owned; the phenomenal emergence of a dynamic private sector after 1979 has not only not ousted the state from the economy as some expected, the persisting institutional set-up means that a good portion of its surplus is being absorbed into the state sector. This paper thus argues that the law of primitive socialist accumulation can be a useful explanatory model: “[I]f state industry is developing and becoming consolidated in opposition to the operation of the law of value, this can only be because some other law is counteracting the law of value, so that it is modified, caused to deviate or even partially suppressed.”(Preobrazhensky 1965: 139).

The Soviet economist Preobrazhensky (1965) called this “other law” the Law of Primitive Socialist Accumulation (LoPSA). The transition to socialism is said to be irreversible when this law supplants the law of value on a global scale. Until then, the Soviet economy would still be a transitional economy where elements of capitalism and what-could-become socialism compete for supremacy. For Preobrazhensky, capitalist accumulation had already become the dominant mode of production under feudal society before the revolutionary promulgation of its rule; whereas for a country where capitalism was underdeveloped when the proletariat took power, like Russia, the material basis of socialism had to be accumulated as a conscious political project, with rules rigged against the domestic and foreign private sector, hence LoPSA. Preobrazhensky raised this idea when the New Economic Policy (NEP) revived capitalist accumulation in town and country, leading to fierce debates on the direction of economy policy. Richard Day thus summarizes:

According to Marx, primitive capitalist accumulation had depended upon the expropriation of the peasant and the creation of “free” labor: “free” in the sense of being turned away from the soil and transformed into an exploitable commodity on the labor market. Only then could merchant capital grow and emerge as industrial capital. Reasoning analogically, Preobrazhensky saw the nationalized Soviet enterprise in a position roughly comparable to Marx’s merchant capitalist. The merchant had been surrounded by feudal elements, just as the nationalized enterprises had been cut adrift in a sea of capitalist relations under the NEP [New Economic Policy]. The merchant had accumulated the social surplus, transforming it into industrial capital and universalizing the new mode of production to the extent permitted by the inherent contradictions of the capitalist system. In like manner the socialist enterprise would accumulate the social surplus by means of monopoly prices—only with the critical difference that the socialist mode of production would achieve true universality by overcoming the contradiction between town and country. (Day 1975: 218)

Preobrazhensky showed that the expansion of planned socialized production in the Soviet Union required the absorption of resources external to the state-owned economy—from domestic petty production, domestic and international trade and inward foreign investment. The state would consciously plan to expand state industries. Capitalists could operate in the economy (within certain strictures) or would form joint enterprises with the state which function under the overall plan and subject to the state financial system. The fundamental contradiction between disempowered capitalists and a proletarian state they were forced to serve would be the source of all major conflicts in this transitional society.

The driving force of capitalist production is the striving for profit, its regulator the law of value. Capitalism satisfies the consumer needs of society by way of this mechanism. In particular, the worker receives his share from the fund of means of consumption through selling his labor-power. In what way is state economy different from capitalism on this point? On the one hand, it has already ceased to be production for profit, for surplus value. On the other, it is not yet production for the sake of consumption by the workers of the state economy, and still less by all the people in private economy. . . it [the state economy] can be overthrown in its mobile equilibrium if the necessary proportion of expanded reproduction dictated by the whole economic situation is not guaranteed by an adequately and steadily growing rate of accumulation of surplus product in material form, and this always means restriction of individual demand. The contradiction between these two tendencies within state economy does not take the form of antagonism between classes, but it exists nevertheless. This contradiction also fully characterizes the law of primitive socialist accumulation itself, where distribution is concerned. On the one hand, expanded reproduction in the socialist sector means automatic, quantitatively-increasing reproduction of socialist production-relations, together with the corresponding proportions every year in the distribution of productive forces. But, on the other hand, this quantitative expansion of socialist relations, since it requires alienation of a certain amount of surplus product from the state economy, and subordinates the growth of wages to the function of accumulation, limits the growth in the quality of socialist relations and maintains a gap between the wage level and the value of labor-power. (Preobrazhensky 1965: 72–73)

These contradictions apply to China today. The market reform has shown how China absorbs private capital and technology to expand its industrial capacity. The private sector which this necessitates is now increasingly in conflict with the dominant state sector. SOEs have also been transformed to integrate with the capitalist world market and hence heightened their subjugation on the law of value. Complete financialization of state assets is now being mooted by the government as the next step towards full integration with the world economy. However, production for profit is still not the dominant motive force in the state sector, as it is still being used to implement the state’s ambitious social and political objectives, such as the eradication of absolute poverty and the construction of the national high-speed rail network. This exists in parallel to powerful factions which advocate the full withdrawal of the state from the SOEs.

Rising productivity of the state industry and its connection with the world market have brought deeper trading relationships and integration as well as producing further contradictions between the two systems of accumulation. How this will end is still an open question. An economy in transition between capitalism and socialism cannot exist in perpetuity in a country immersed in a capitalist world market. The most striking difference between the Soviet Union of Preobrazhensky’s time and today’s China is that the former had declared and planned for the extension of workers rule worldwide, whereas the latter insists that it is a loyal defender of the existing world system.

Footnotes

Acknowledgements

The author wishes to thank the Review of Radical Political Economics editorial review panel for their comments and suggestions on the first two versions of this paper. The author has made substantial revisions to the manuscript based on their comments and constructive criticisms. The author also wishes to thank Dic Lo GMG and Heiko Khoo for their useful comments.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Sam-Kee Cheng

1

The hukou (household registration) system was firmly in place before 1978 during the Maoist period whereby Chinese citizens were not allowed to travel or work outside of their registered place of residence and workplace without permission.

2

As explained by Marx in Capital volume III, capital investing overseas is a strategy to counter the influences of the falling rate of profit (see further explanations in ).

3

According to the China Statistical Yearbook 2018, the definition of contribution share of the three components to the increase of GDP refers to the proportion of the increment of each component of GDP by expenditure approach to the increment of GDP.

4

Using the customary criterion of relative labor productivity, Lo and Zhang argue that the machinery sector is not labor intensive while the electronics industry is capital intensive as their relative labor productivity values (0.91 and 1.25 respectively) are higher than the value (0.9) used to define labor-intensive industry (: 43).

5

Third Front construction was a massive investment program between the 1960s and 1970s to develop an industrial base in the remote regions of south-western and western China for wartime self-defense (see ).

6

Soviet financial and technical assistance to China during the 1950s and 1960s, epitomised by the 156 key projects including twenty-five new coal mines, twenty-five new power stations, and twenty-four new machine-building plants, was considered “one of the largest transfers of technology in history” (: 100).

Author Biography

Sam Kee Cheng is a PhD student in Development Studies at the School of Oriental and African Studies (SOAS), University of London, UK. Her research focuses on the political economy of China’s economic development and the impact of China’s overseas trade and investment on developing countries.

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