'Is the East still red?' Answering those that deny China is capitalist

The Morning Star, the political mouthpiece of the Communist Party of Britain, is praising and promoting two new books analysing China, China’s Great Road by John Ross, and The East is Still Red by Carlos Martinez. As you can tell from the titles, both books present the modern day Chinese economy and Communist Party as genuinely Marxist, which in their eyes obliges all communists to actively support them. Both books argue that China is blazing a trail towards socialism and ultimately communism. 

If this were true, then the future of socialism would be in very good hands indeed. The tasks of communists the world over would be transformed: not only is capitalism in deep crisis, but the world’s second largest economy and rising power is leading the fight for its overthrow.

In this scenario, we could expect to receive invaluable comradely advice and immense material help in our struggle against our own ruling classes any day now, for these ruling classes not only are ripe for overthrow, but are busy trying to hold China down. Thus, it is in ‘communist’ China’s interests to bolster and hasten our struggle against the capitalist class. And yet, this precious aid is conspicuous by its absence…

Nevertheless, the question of whether or not the Chinese economy is socialist, and led by genuine communists, is a very important one that all communists must understand. 

Both books make essentially the same argument, which is: the Chinese economy has not only grown at a historically unprecedented rate, but in doing so has contributed more to lifting people out of poverty than any other economy in history. To the authors, this shows that there is something qualitatively different about the Chinese economy vis a vis western economies. That difference lies in the fact, they say, that the Chinese state plays the leading role in the economy, planning it as a whole by marshalling the powers of the market to meet certain development goals. This they contrast with western, capitalist economies, in which the state merely serves to aid the market, which is inherently anarchic and blind.

Both authors, but especially John Ross, claim that the post-1978 Chinese policy of opening up to the market is not only compatible with a communist policy, but is in fact exactly what Marx had intended, at least for the initial period after a successful socialist revolution.

Ross quotes Marx in his famous Critique of the Gotha Programme, in which Marx argues that in the period immediately after the workers have taken power, bourgeois norms of distribution would still prevail, i.e. workers would be paid a wage, just like under capitalism, and that those who work harder or with more skill will be paid more, as an incentive to increasing production to the point at which the basis for communism has been achieved.

In other words, market mechanisms to measure, incentivise and reward good work, can only be abolished after a period of transition. This will bring with it a certain amount of inequality, as those who work harder or better will be paid more.

Having quoted Marx regarding this, Ross then concludes “these passages from Marx immediately make entirely clear (!) that Deng Xiaoping formulated reform and opening up in strict Marxist terms” (Ross, 2021, p79). This meagre shred of theory from Marx, which only shows that money, wages and some degree of inequality would for a time exist after a socialist revolution, is the hook on which Ross’ entire claim that China’s economic policy is fully Marxist hangs.

If Marx truly believed that privatisation of most of the economy (as has happened in China) represents a transition to communism, then it is hard to see why Marx would not conclude that almost all modern economies are socialist and on the path to successfully building communism without the need for a revolution at all. Indeed, it is hard to see how China, as depicted in glowing terms in both books, is any different from any other successful capitalist economy.

There is an acute lack of qualitative, dialectical economic analysis in Ross’ book especially. He backs up his connection of China and the Critique of the Gotha Programme with a single piece of ‘evidence’, which boils down to this: the Chinese economy has grown very quickly. He points out that China “has achieved the greatest improvement in life of by far the largest proportion of humanity of any country in human history.” (Ross, p. vii). An inordinate proportion of his book’s 230 pages is taken up with different ways of using figures to say the same thing: China’s economic growth over the past 40 or so years is unprecedentedly large.

But this approach is extremely superficial. The speed of China’s growth in itself says nothing about the nature of the economy i.e. the social relations, the mode of production, that produces these large numbers.

CCP sign Image Rickard Törnblad Wikimedia CommonsThe speed of China’s growth in itself says nothing about the nature of the economy / Image: Rickard Törnblad, Wikimedia Commons

That this is the case is glaringly obvious here, because clearly the main reason that China’s economic growth has achieved “the greatest improvement in life of by far the largest proportion of humanity of any country in human history” is that China was the most populous country in the world.

It stands to reason that, should the country with the most people in it, experience the type of growth that many other, smaller countries have experienced, then it would raise the living standards of more people than all the other countries. The real question is: has China’s economic growth occurred because the economy is qualitatively different? Does it have a different mode of production?

Ironically, Ross himself provides the facts which strongly suggest there is nothing fundamentally different from China’s growth to that of many other capitalist countries. He shows that China grew faster not only in absolute terms, but also relatively, i.e. its rate of growth has been higher than for any other country. “Between 1978 and 2017 China’s economy expanded at an annual average 9.5% growth rate [sic]”. (Ross, p56) He then compares this figure to other countries to show that China’s growth exceeds them all, listing Taiwan at 8.8%, South Korea at 8.3 percent, and Japan at 6.7 percent a year.

The reader will notice that, whilst China’s growth rate is higher than the others, it is hardly fundamentally different. If China’s higher growth rate than Taiwan’s is what proves it is socialist, is Taiwan ‘more socialist’ than South Korea, and South Korea ‘more socialist’ than Japan? Why is China’s incremental improvement proof of a qualitative difference, but not the others?

In fact, many of these East Asian economies share similarities. All arrived late on the scene of capitalist development, and could import the latest technique and infrastructure in toto. All had low wages, which attracted foreign investment from the advanced capitalist countries, where wages were higher and the rate of profit lower. And China was not alone in seeing heavy state assistance in the development of private capital: the state intervened heavily in Japan, Taiwan and South Korea to assist the capitalist class. No one would argue that this thereby made them ‘socialist’ economies. China had the added advantage of developing later, and having access to vast human and natural resources.

Ross himself points to the first of these factors in explaining the real reason for this league table:

“Each lead economy in a period of economic development had a higher proportion of fixed investment in GDP than the one before”, which “produced successively faster growth rates… China’s high level of fixed investment is therefore merely the logical culmination of a centuries long pattern of the rising proportion of fixed investment in GDP – each associated with faster growth rates”. (pp. 110-111)

There we have it: China’s growth is not a product of a planned economy operating in a fundamentally different way to a capitalist one, it is merely a product of late development (combined with other factors). Like Japan and South Korea, it has been able to implement the latest technologies at large scales, thus skipping over many generations of incremental improvements, and thus realising a higher rate of growth than those who made the incremental improvements before.

There is a great deal of analysis of China’s economic growth in Ross’ book, but none of it to suggest that it is a planned economy. He spends a vast amount of words showing the reader that China’s economic growth is in line with Marxist theory, because it has increased its organic composition of capital in relation to variable capital, i.e. the amount of technology harnessed by its working class has grown.

But this is what Marx described for capitalist economies, so this only suggests that China has experienced the same laws that define capitalist economic growth. He then phrases this to make it sound as if this makes the Chinese state Marxist, by saying that China is “in line with Marx”. Given that Marx’s economic theories accurately explain capitalist development, one could just as well say that the USA is “in line with Marx”. All that this proves is that China has developed, a fact that no one disagrees with.

Once again, Ross practically admits there is nothing communist about all this, when he astonishingly says that “it is also possible to explain China’s economic policy in terms of Western ‘Keynesian’ economics” (p4), and “one has now arrived at a ‘Chinese’ economic structure – although approaching it via a Keynesian and not a Marxist framework… China’s economy is not being regulated via administrative means but by general macro-economic control, including centrally of the level of investment – as Keynes advocated” (p139, our emphasis).

He is quite right that China’s economic policy is in line with Keynes, but most certainly not that it is in line with Marx. Ross is attempting to water down and bowdlerise Marx for a philistine academic audience that is unconcerned with theoretical accuracy, but is concerned with respectability. He cherry-picks parts of Marx and of Keynes in a crude attempt to present them as more or less the same, as if Marx was nothing but a preacher of economic development and management through state intervention in the market. Marx and Lenin would recoil in horror at this mixing of banners, at this casual disregard for scientific accuracy and sloppy blurring of Marx and the bourgeois economist Keynes.

Not content with turning Marx into a Keynesian, he is also at pains to blur over the differences between Marx and Smith, telling us that “instead of ‘Marx vs Adam Smith’ it is far more correct to speak of ‘Marx and Adam Smith’.” (p92). Everyone knows that Marx studied and learnt from Smith (and especially Ricardo), but he also negated his ideas when he introduced the concepts of class exploitation and surplus value, and hence also the necessity of capitalist crises. These developments from Smith are very important insights for understanding China’s capitalist economy, but Ross has nothing to say about this because his analysis has no Marxist understanding of the class nature of the Chinese economy.

The NEP

NEPman Image public domainThe longer the NEP continued, the greater the danger it posed to the workers’ state and the planned economy / Image: public domain

Both authors see China’s post-1978 economic policies as in line with the New Economic Policy (NEP) applied by the young Soviet state under Lenin and Trotsky from 1921 onwards. The NEP allowed peasants to sell their surplus grain freely on the market, and allowed traders to make profits. Ross and Martinez present this as the correct Marxist policy in general, supposedly in line with the above-quoted comments from Marx. But what they hide is the fact that Lenin saw the NEP as a tactical retreat born of necessity. It was a retreat brought about by the setbacks and defeats the revolution suffered. By making market concessions to petty-bourgeois layers, most notably the peasantry, they hoped to buy time and breathing space for the young and isolated workers’ state.

As such, it was fraught with dangers. The longer it continued, the greater the danger it posed to the workers’ state and the planned economy. In a speech entitled ‘Communist tasks in the second year of the New Economic Policy’, Lenin quotes the Russian emigre capitalist Ustryalov as saying: “I am in favour of supporting Soviet power because it has taken the road [i.e. the NEP] that will lead it to the ordinary bourgeois state.”

He adds the following warning to these remarks,

“We must say frankly that the things Ustryalov speaks about are possible. History knows all sorts of metamorphoses. Relying on firmness of convictions, loyalty, and other splendid moral qualities is anything but a serious attitude in politics. A few people may be endowed with splendid moral qualities, but historical issues are decided by vast masses, which, if the few do not suit them, may at times treat them none too politely… Smena vekh adherents [i.e. the likes of Ustryalov] express the sentiments of thousands and tens of thousands of bourgeois or of Soviet employees whose function it is to operate our New Economic Policy. This is the real and main danger… the fight against capitalist society has become a hundred times more fierce and perilous, because we are not always able to tell enemies from friends” (our emphasis).

The contrast in attitude is very stark indeed. For Martinez and Ross, assurances from the Chinese bureaucracy that they have the best interests of the Chinese people at heart is enough. For Lenin, relying on ‘splendid moral qualities is anything but a serious attitude in politics’.

How did Lenin think the workers’ state could defend itself from the very real danger of capitalist restoration posed by the NEP? Martinez seeks to reassure us by quoting Lenin on the NEP in 1921: “We must not be afraid of the growth of the petty bourgeoisie and small capital. What we must fear is protracted starvation” (p21). But as we have seen, this is dishonest. Lenin was very worried about the dangers, highlighting that the NEP meant the Bolsheviks were “not always able to tell enemies from friends”, i.e. that capitalist restoration may come via infiltration and corruption of the Bolshevik party thanks to the NEP.

In 1922, Lenin was very explicit on how capitalist tendencies within Russia were corrupting the workers’ state to the point where it was out of control:

“the state is in our hands; but has it operated the New Economic Policy in the way we wanted in this past year? No… The machine refused to obey the hand that guided it. It was like a car that was going not in the direction the driver desired, but in the direction someone else desired; as if it were being driven by some mysterious, lawless hand, God knows whose, perhaps of a profiteer, or of a private capitalist, or of both. Be that as it may, the car is not going quite in the direction the man at the wheel imagines, and often it goes in an altogether different direction…

“If we take Moscow with its 4,700 Communists in responsible positions, and if we take that huge bureaucratic machine, that gigantic heap, we must ask: Who is directing whom? I doubt very much whether it can truthfully be said that the Communists are directing that heap… Have the 4,700 Communists (nearly a whole army division, and all of them the very best) come under the influence of an alien culture?” (Speech to the 11th Congress of the Bolshevik Party, 1922)

This is the real position of Lenin. It cannot be emphasised enough that these fears were raised in a situation of genuine workers’ democracy, which was the only antidote to the dangers of capitalist corruption. As Lenin said in the same speech, “ours is a proletarian state; it rests on the proletariat; it gives the proletariat all political privileges” (our emphasis).

That is to say, Lenin could clearly see the danger posed by “Soviet employees whose function it is to operate our New Economic Policy”, which he said was “the real and main danger”. This is because such bureaucrats are fundamentally careerists interested in their own privileges and prestige; they are not dedicated proletarian revolutionaries elected by and accountable to their class. Such a bureaucracy is inherently prone to corruption. If they are responsible for administering concessions to the market within a planned economy, they will inevitably seek to use their position to gain a share in the profits being generated, and therefore have an interest in the extension of these market measures.

This is why Lenin emphasised the proletarian character of the state, the ‘political privileges’ given not to bureaucrats, but to the working class. Only the democratic control of an active, class conscious working class could resist the corrupting influence of ‘small capital’ and the ‘petty bourgeoisie’ under the enforced retreat that was the NEP.

Deng SEZ Image public domainUnder Deng, beginning in 1980, the state monopoly was relaxed, first in the Special Economic Zones / Image: public domain

More than this, Lenin insisted that this proletarian state could only maintain control of the situation if it maintained a firm monopoly on foreign trade, to prevent the homegrown class of capitalist NEPmen from linking up with imperialism. But under Deng, beginning in 1980, this state monopoly was relaxed, first in the Special Economic Zones, which were the centre of economic growth, and then increasingly across the whole of China after it was accepted as a member of the WTO in 2001.

Martinez admits, “modern China has gone much further than the NEP, in the sense that private property is not limited to ‘the petty bourgeoisie and small capital’; there are some extremely wealthy individuals and companies controlling vast sums of capital” (p21). We might add that this situation, far from a temporary retreat, has become the norm over several decades. And, crucially, all of this has been administered by a highly privileged bureaucracy with no democratic oversight from the working class whatsoever. 

If Lenin was worried about the bureaucrats in his midst after one year of the NEP, what would he think of China’s vast bureaucracy after decades of administering not small, but ‘vast sums of capital’? Would he have confidence that these were friends and not enemies, and that China was securely on the road to communism?

The State Owned Enterprises

The argument of both books depends entirely on the notion that the 40 percent or so of China’s economy that remains in state hands can guide the economy towards socialism. In their eyes, the large private sector is a necessary evil for developing the economy, but this evil will be safely steered towards laying the basis for socialism thanks to the state-owned sector.

For the state-owned sector to master the enormous private sector, to harness this wild beast with its blind, insatiable thirst for profits regardless of the social consequences, is no mean feat. The problems of doing so are certainly not to be taken lightly. The theoretical questions posed are great, and answering them ought to take up a very large portion of both books. 

But this is not the case. Martinez simply quotes Xi Jinping, who assures us that the “pillar” of China’s “socialist market economy” is the “state sector” which “must not change” (Martinez, p. xi). But as Lenin said, “relying on firmness of convictions, loyalty, and other splendid moral qualities is anything but a serious attitude in politics”.

Martinez tells us that the Chinese state “maintains tight control over the ‘commanding heights’ of the economy’”, such as the banks, the leading ones being state owned and therefore “primarily accountable to the government rather than private shareholders” (p. xii, our emphasis). In other words, there are private shareholders of the state owned banks. All this “means that capital isn’t able to seize control of the overall economic course, and that the economy is directed in order to benefit the people as a whole”.

But what does it mean to ‘benefit the people as a whole’? Who decides what is of benefit to ‘the people’? What counts exactly as ‘the people’ (all Chinese people, equally, regardless of their class?), and how is the state able to ‘direct’ the private sector in this way? Martinez elaborates:

“The fundamental defining characteristic of socialist society is not the relative proportions of public and private ownership, but the consolidation of political power in the working class and its allies. A socialist state can clearly incorporate market mechanisms, as long as these operate under the guidance of the state and introduce some benefit for working people; so long as capital is not allowed to become politically dominant. As Deng insisted: ‘If markets serve socialism they are socialist; if they serve capitalism they are capitalist.’”

But still, we are none the wiser as to what counts as ‘serving socialism’ by producing ‘some benefit for working people’, and what does not. Surely Martinez would admit that markets have an inherent tendency to ‘serve capitalism’ rather than socialism? Are there not any dangers in this tendency? Are there no dangers of corruption, of the state saying it is ‘serving the people’ whilst in reality just lining its own pockets?

Martinez goes on:

“The top priorities of the Chinese government in the present era are very much consistent with the demands of the Chinese people [how does he know what their demands are?], in particular: protecting China’s unity and territorial integrity; improving living standards; clamping down on corruption; protecting the environment; eradicating poverty; maintaining peace and stability; protecting people’s health and wellbeing; and re-establishing China’s national prestige” (p. xvi)

The inclusion of ‘protecting unity and territorial integrity’ and ‘re-establishing China’s national prestige’ sound suspiciously like the priorities of a ruling class, rather than of ‘the people’. Of course, a government may claim to have pleasant sounding ‘top priorities’, but whether they’ve actually eradicated poverty, corruption and environmental degradation is another question entirely. And wouldn’t the ruling class of any successful capitalist country happily reel off a very similar set of ‘priorities’? Would not the Japanese, South Korean and Taiwanese capitalists claim to have ‘improved living standards’, ‘eradicated poverty’, ‘clamped down on corruption’, etc., etc.? 

Are we just to take Xi Jinping’s word for it that he represents the ‘consolidation of political power in the working class’, has their best interests at heart, and is able to remain free from the corrupting influence of the vast amounts of capital and inequality in China? 

This is the sum total of Martinez’ and Ross’ analysis of the problems and dangers of the long-term use of market mechanisms – it’s all fine, because the state sector remains (quite) large and the state has the same priorities as ‘the people’.

Now, if the state owned enterprises were dominant and directing the economy towards socialism and communism, the state owned enterprises would naturally strengthen over time, in such a way that the economy would gradually become more planned, more harmonious, and society more equal. Is this what we find?

Interestingly, Martinez himself approvingly quotes Martin Jacques when he boasts that “the Chinese government has sought to make the numerous state owned enterprises that remain as efficient and competitive as possible. As a result, the top 150 state-owned firms, far from being lame ducks, have instead become enormously profitable, their aggregate profits reaching $150 billion in 2007” (p. xiii, our emphasis). 

These enormous profits are enormously significant. But Martinez insists that the state directs these companies to invest in less profitable, but more socially useful ends, such as railways to remote provinces, and this is what proves they are laying the basis for socialism. And yet, he also wants to boast that they are ‘enormously profitable’ and that the source of China’s economic success lies precisely in harnessing this profitability.

XJP Image China News Service Wikimedia CommonsUnder Xi, there has been a certain strengthening of the state owned sector, but these enterprises have come under more pressure to make profits / Image: public domain

Although it is true that under Xi, there has been a certain strengthening of the state owned sector, at the same time, these enterprises have come under more pressure to make profits and thus operate according to market logic:

“Over the past three years, Beijing has brought in financial targets for SOEs including for return on equity or net profit growth. But this year, the government took an important additional step, telling SOE management it would start assessing them based on stock market performance. “Compared to the previous rounds of reform, this reform is going to have greater impact because it directly ties financial market indicators with [performance evaluation] for senior managers in SOEs,” said Robin Huang, a law professor at the Chinese University of Hong Kong.” (Financial Times, 17 April 2024)

So whilst giant state owned enterprises occupy an important position in the economy, it is not the results they achieve from the point of view of some economic plan that are deemed significant for the CCP bureaucracy, but how they perform in the market. In other words, the market dictates to the state, not vice versa.

It is true that, after a revolution, not everything would be nationalised. It would not be technically feasible to plan the entire economy, and so, to one degree or another, the private sector would be allowed to operate and make a profit, so that these profits could be taxed and fed back into the planned sector of the economy. In this way, the planned sector would be built up to the point where the needs of society can be fully met by the public plan, and the profit motive dies away. It does not at all follow from this that the state owned section of the economy should also operate according to the profit motive!

What are the real consequences of the state owned enterprises being granted a certain amount of autonomy to make profits, as took place in the 1980s and 90s? The explosion of indebtedness, speculation, corruption and obscene inequality not just from the private sector, but also the state sector. The Chinese state, whilst retaining far more influence over the economy than most western states, has in fact lost control of the economy and of its own state owned enterprises.

For example, in 2011 the mouthpiece of the CCP, China Daily, reported that

“China placed limits on salaries in 2009 – 2.8 million yuan [about $440,000] for executives of State-owned enterprises – but the policy seems to have been ignored... The highest paid CEO at a State-owned enterprise is Han Junliang, who was paid 8.58 million yuan by Sinovel Wind Group Ltd this year… ‘The payments of CEOs do not just depend upon their performances. It’s also decided by the market,’ says Jennifer Feng… The government has allowed State-owned enterprise executives to hold and sell a small percentage of their companies’ shares since 2005.”

The fact that the state has lost control of the economy also reflects itself in the fact that China is once more subject to the laws of capitalist crisis. Ross and Martinez laud China for avoiding the 2008 crisis, which they see as proof of its planned and not capitalist economy. But they are very light on explaining how China avoided a recession at that point.

In 2009, at the peak of that crisis, Chinese Premier Wen Jiabao stated the following: “The current crisis has inflicted a rather big impact on China's economy. We are facing severe challenges, including notably shrinking external demand, overcapacity in some sectors, difficult business conditions for enterprises, rising unemployment in urban areas and greater downward pressure on economic growth… We mainly rely on expanding effective domestic demand, particularly consumer demand, to boost economic growth. We have made timely adjustment to the direction of our macroeconomic policy, swiftly adopted a proactive fiscal policy and a moderately easy monetary policy” (our emphasis). 

In other words, China found itself suffering from the same classical symptoms of a crisis caused by the anarchy of the capitalist market: overproduction, although the Chinese bureaucracy uses the same euphemism as western, bourgeois economists, speaking of ‘overcapacity’. In a socialist plan of production, overproduction would be unheard of. Useful products would be produced and distributed according to a plan to satisfy need.

But under capitalism, production takes place for a market of unknown size and for profit. Periodically, as each capitalist tries to grab as great a part of that market as it can for itself, the system is seized by crises of overproduction – not because there is no need for such commodities, but because the market cannot absorb them. The result is crisis, bankruptcies, unemployment, and all the other vices of capitalism.

Keynesian methods can be used to temporarily attenuate such a crisis by boosting demand in the face of a classic capitalist crisis. China used its state control of the banking system to issue unprecedented amounts of debt in order to fund infrastructure and other projects, in the hope of staving off a crisis. But such Keynesian methods have their limits.

In the short term, this more or less worked, as is often the case with stimulus measures in a capitalist economy. But the scale of the stimulus – one of the biggest in history – was so great that it had untold repercussions for the Chinese economy, the full effects of which are still to be felt. Because China is not a planned economy, and even the state owned banks and other enterprises seek to make and retain profits, the stimulus had all sorts of unintended consequences. 

First and foremost, it caused a ballooning of state, corporate, and above all local government debt. This is preparing the way for even deeper crises in the future, as we will come on to explain. Notably, you also saw the explosion of ‘shadow banking’, i.e. illegal or semi-legal unregulated banking. Wen Jiabao may have hoped the explosion in lending from the stimulus would be funnelled to exactly the sort of socially useful, but less profitable, projects that Martinez claims state ownership is used for in China. But precisely because these were less profitable, this was not the case. According to the Financial Times in 2011:

“the most profitable activity by state-owned banks in the first half of this year was not lending to businesses but funding trusts and underground banks, bank financial reports show. Still, it is understandable that banks would wish to maximise profits, especially at a time when deposits are draining away. In the first 15 days of September, for instance, the ‘big four’ state banks suffered a net loss in deposits of RMB420bn – more than four times their lending in the same period – as savers fled to high-yielding shadow banks.” (our emphasis)

In other words, market pressure forced the hand of these state owned banks, and the desired socially-beneficial effects of the stimulus were not attained. The banks (state owned and private) acted in a capitalist  manner. Just like in other countries, the stimulus led to an explosion of short-sighted speculative activity. According to another article from the Financial Times in 2011:

“[shadow banking] allows the companies – some estimates say 90 per cent of the shadow lenders are state-owned – to make healthier returns than they could by leaving the cash on deposit [i.e. with the official banks]... [State owned] PetroChina has an asset management arm, a trust bank, a commercial bank as well as an internal finance unit. [State owned] Baosteel Group has a 98 per cent stake in Fortune Trust, one of the largest trust firms, while [state owned] Hunan Valin Iron and Steel Group has a 49 per cent stake in Huachen Trust.” (our emphasis)

It is very clear that the state does not ‘dominate’ the economy, although it does play a more influential role than in the economies of its western competitors. But the point here is that, even if the banks are “primarily accountable to the government rather than private shareholders”, both the banks and the government are powerless before the dictates of market necessity. The markets do not ‘serve socialism’.

factory Image G.Tech Technology Factory Zhuhai China Wikimedia CommonsIt is very clear that the state does not ‘dominate’ the economy / Image: G.Tech Technology Factory Zhuhai China, Wikimedia Commons

In fact, there is nothing particularly unusual about the scale of China’s state owned sector, especially when we consider the fact it makes its own profits and competes in the market. Most countries that have had success developing capitalism from the twentieth century onwards have had to do so with heavy state intervention, guidance and protection. This is because the capitalist class in such countries was both too weak to compete with the more established capitalists of countries like Britain, France and the US, and too weak to carry out a revolution against the feudal or pre-capitalist ruling class of their country.

In Japan, “the government played an important guiding role in the economy, developing and maintaining relations with the business world, and offering assistance in areas it favoured and to those companies it favoured… the government was reluctant to leave economic development to market forces. It still is.” (Kenneth Henshall, ‘A History of Japan, from Stone Age to Superpower’ (1999).

In Italy, Mussolini created the Institute for Industrial Reconstruction, which meant the state directly developed industrial enterprises itself. Pietro Grifone wrote in 1940 that “as a whole, banking and large industries, especially the arms industry,  given that it was of such important public interest – are placed under the direct control of the State.” In 1936, “80% of imports and 60% of exports are under the control of state-monopoly organisations” (Emilio Sereni). As recently as the early 1990s, the state in Italy controlled 70 percent of the banking system, and large sections of the economy.

As we have pointed out elsewhere, the Taiwanese Council for Economic Planning and Development reports that “the private sector overtook the public sector in R&D spending for the first time in 1993”.

“Up to now, the state sector has accounted for a third of GDP and a quarter of total employment, more than in “Communist” China according to some statistics… in 1952 industrial production by the State Owned Enterprises (SOEs) in Taiwan accounted for 57% of the total”.

In South Korea, under the Park Chung Hee dictatorship, the state nationalised banking to a point in which it controlled 96.4 percent of the country's financial assets! Then, it instituted a series of ‘Five Year Plans’, run by an Economic Planning Board, in which the state directed the banks to lend to industrial conglomerates (chaebols) developing heavy industry, including shipbuilding, steel and chemicals.

From a rural economy based on the export of low technology products made with cheap labour, South Korea developed a sizable industrial base, with large numbers of people migrating from the countryside to the cities, and became an exporter of high technology products. The process is remarkably similar to the one China has experienced. It was described as ‘guided capitalism’, but no one thought of calling it ‘socialism’. 

In the cases of Japan, Taiwan and South Korea, the fear of Communism led the state to force the capitalists to invest heavily, sometimes against their own individual interests. For this reason also, the three countries benefited from US aid and preferential trade conditions. Nevertheless, the point remains that, in places where capitalism was developing much later and with a weaker capitalist class than in western Europe, heavy state intervention was necessary to protect and nurture this process. 

Of course, the Chinese case has important differences from these examples, most notably that the party that led the revolution in 1949 remains in power, and the Chinese ruling class is engaged in a power struggle with US imperialism. These factors make it much less likely that China will fully ‘liberalise’ its economy, much less its politics, any time soon.

What they do show is that what may appear at first sight to be an exceptional phenomenon, is in fact very normal. If we look past the labels, the rhetoric and propaganda, we find in China’s breakneck economic growth, in its lifting of millions out of poverty, and in its reliance upon state intervention, merely the typical features of a country that has developed capitalism successfully, but belatedly.

Xi Image UN Geneva FlickrWhat we have in China is a bourgeois Bonapartist regime / Image: UN Geneva, Flickr

One only has to listen to the CCP leadership to see this. Ross and Martinez like to show certain quotations from Deng Xiaoping and Xi Jinping which profess their Marxist vision for China. If you really examine these quotations, however, you will notice that they are always related to China’s long term development, its more distant goals. These quotations are always characterised by their abstractness. To be blunt, they are platitudes. 

There are plenty of other quotations that Ross and Martinez choose not to highlight. For instance, at the 2020 National People’s Congress in Beijing, Xi said that, “We’ve come to the understanding that we should not ignore the blindness of the market, nor should we return to the old path of a planned economy.” According to Xinhua, he noted that “China is committed to seeing that the market plays the decisive role in resource allocation”.

The Economist reports that on 6 September 2021, “Liu He, a deputy prime minister, tried to reassure private businesspeople, saying their endeavours were critical to the country’s economy.” Anxious to allay the fears of Chinese capitalists that the government does not have their interests at heart, the Propaganda Department of the Central Committee called a press conference. The entire purpose of this conference was to make it clear that the CCP has no intention of “killing the rich and giving to the poor.”

What we have in China is a bourgeois Bonapartist regime, that is, a capitalist mode of production in which the state, for historical reasons, is able to play a much more independent and powerful role than in countries such as Britain and America. Despite this fact, this regime rests on the basis of a capitalist economy, defends capitalist property relations, and is therefore obliged to accept the laws of capitalism.

Where is China going?

Our authors are China optimists. They are convinced that the Chinese economy will continue booming, expertly guided by state intervention until this boom carries it off into socialism. For them, China’s growth is free of contradictions. It will just go on lifting people out of poverty with no real interruptions. Ross tells us, over and over again, that “rising GDP has dramatic social and personal consequences – i.e. rising per capita GDP is not socially ‘neutral’ but is highly socially positive.” (Ross, p28)

There is not an ounce of dialectics in this. The argument is simply: ‘China has grown, and so it will continue to grow. Growth means workers have more money, and so growth is socialist.’ Yes, living standards have risen, but they also rose in western Europe, North America, and other East Asian economies. But the working class in these countries remains exploited, as they do in China. Marxism understands society in terms of social relations, not absolute wealth. 

China’s growth is based on class contradictions, and therefore it cannot last. According to The Economist in 2021, China had 698 billionaires, almost as many as the US (724). According to the Hindustan Times, China’s twenty richest ‘lawmakers’ are worth $534 billion.  

China’s inequality has grown so rapidly, that it has gone from being one of the most equal countries in the world, to one of the most unequal, with a Gini Coefficient (a measure of economic inequality) slightly higher than the USA and Britain. China’s big cities are some of the most unaffordable places in the world.

Now the chickens are coming home to roost. China’s boom has ended. Suddenly, the state no longer seems to have much control over the economy, and is zig-zagging from one policy to another in the hope of boosting economic confidence. The spark for the crisis that has engulfed the economy was a clumsy attempt by the state to deal with the excessive amounts of debt and property speculation.

Ross and Martinez argue that the state is able, through its control of the banks and other enterprises, to steer investment towards socially beneficial projects, instead of towards greedy speculation. The main examples of this are the colossal booms in infrastructure and construction. But because the economy, including the state owned enterprises and banks, is run according to profit, these projects have been speculative. They have been financed by debt. And debt must be paid back with interest

China Bank crisis Image Can Pac Swire FlickrThere comes a point when it is realised that a large amount of lending is unsound / Image: Can Pac Swire, Flickr

This interest represents a claim on the profits generated by the debt-fuelled investment. But, in a capitalist economy, profits cannot always be made. There comes a point when it is realised that a large amount of lending is unsound, that the debt cannot be paid back because profits have generally not been made. This is exactly what has happened with the property and infrastructure booms, which have now turned into crashes.

On March 13th 2024, the Financial Times reported that:

“Beijing has ordered a dozen highly indebted areas, many of them less-developed and far from the coast, to curb infrastructure spending as it tries to unwind a decade-long investment binge many believe is unsustainable… Guizhou province has sidelined so many infrastructure schemes that provincial outlays for major projects this year are projected to fall 60 per cent… “Governments of all levels better get used to belt-tightening and start to understand that this is not a temporary need, but a long-term solution,” finance minister Lan Fo’an told a press conference… “All of us Chinese people need to tighten our belts, not just local governments,” said Zhang Shuyang, a Guizhou NPC [National People’s Congress] delegate. “Living frugally is our glorious tradition as the Chinese nation”… Yuekai Securities estimates the province’s [Guizhou] infrastructure building spree has left it with total debt, including off-balance sheet liabilities, at 137 per cent of its gross domestic product.”

In other words, China is at the beginning of a classic capitalist crisis sparked by excessive speculation and indebtedness, but ultimately caused by the anarchy and contradictions of capitalist production. And the response to it is much the same as in the West post-2008: austerity. The state’s supreme economic control and planning for social need are nowhere to be seen.

If the Chinese Communist Party were a genuine communist party, and the ‘socialist market economy’ really were a means for it to lay the basis for socialism, surely the capitalist crisis that is clearly now engulfing China would mark the culmination of that process? The Chinese economy is now the world’s second largest. It has the world’s largest working class, which is also highly educated. Most of the population now lives in cities. It has world class infrastructure. It has a vast and highly advanced industrial capacity. In many areas, its technology leads the world.

The decades-long ‘experiment’ with market reforms has led to significant monopolisation. Rather than being composed of millions of small private enterprises with little capital, many Chinese industries are ‘mature’, i.e. large private monopolies such as Huawei, ByteDance, Ali Baba, BYD and CATL bestride the world market and employ thousands and thousands of workers.

Now the market these companies operate in has entered crisis. Surely, one could hardly imagine a situation more ripe for the expropriation of capital on a large scale in order to build socialism? Instead, the state is starting to employ austerity measures.

Strikes are already very commonplace in China, despite the Chinese ‘communist’ party’s best efforts to stamp them out. As the crisis unfolds in China, it will stir the working class into more action. This will increasingly take on a generalised and political character. For the past few decades the CCP has staked its reputation and legitimacy on its ability to deliver constant rises in living standards. Ross and Martinez also base their arguments on this fact. The end of this decades-long boom therefore spells a political crisis for the regime in Beijing. The bursting of the bubble also means the bursting of Stalinist cheerleading for Chinese capitalism.

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