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China: Stalinists draw near their capitalist goal

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The last five years have seen a major change of gear in the Stalinists‘ drive towards capitalism, argues Peter Main

Twenty years of market reforms in China have produced some of the highest economic growth rates in history as well as the bloody massacre of Tiananmen Square. Both the growth and the massacre have been carried out in the name of “socialism with Chinese characteristics” by the ruling Stalinist bureaucracy.

Neither the economy nor the repression have anything in common with socialism, with or without “Chinese characteristics”, unless socialism is to mean nothing more than state ownership of ailing heavy industry and finance, and a jealously guarded monopoly of political power.

The real reason for the reforms was that “paramount leader”, Deng Xiaoping, hoped that by reforming the economy he would forestall the kind of mass mobilisations that had marked the fights between the factions of the bureaucracy in the 1960s and 1970s.

At the outset there was no agreement on overall goals nor on the means of achieving them.

The official Chinese policy was expressed in the phrase “crossing the river by feeling for the stones”, meaning a policy of pragmatism and experimentation. The only objective of the Chinese Stalinist bureaucracy was to remain firmly in control.

Now after nearly 20 years of pro-market reforms in agriculture, rurally based industry and coastal enclaves, measures taken over the last five years to “reform” the labour market in the cities and to restructure the hitherto dominant state industrial sector and banking have brought China to the verge of capitalism.

The Stalinist caste is determined to carry this process through to completion and to transform itself into a substantial part of the new capitalist class.

Stagnation and a legacy of failed experimentation
By 1978, economic decline across all sectors threatened the survival of the regime. Unlike the USSR, only 3% of the country’s 348,000 industrial plants were directly controlled by the central planning authority, the State Planning Commission. The remainder, though also subordinate to central planning decisions, were actually administered by provincial and city governments.1

True to Stalinist norms, the centrally directed plants were huge. Approximately 1,000 plants employed more than 5,000 workers each and between them employed some 14 million. Another 3,000 employed over 1,000 workers each and this sector as a whole had 64% of all fixed assets, produced a shade under 50% of all industrial output and employed some 20 million workers.2

For reasons of strategic defence, most of the giant plants were located deep in China’s interior. The giant iron and steelworks in Wuhan, for example, were over 1,000 miles up the Yangzi river from Shanghai. This dispersal of productive capacity had a dysfunctional effect on the national economy. Because of the distances involved and the inadequate development of transport, local, small scale plants tried to produce all their equipment needs themselves.3

This proliferation of small scale plants hindered technological advance. For example, 27% of China’s pig iron was produced in small plants which, on average, needed 400 tonnes of coke per ton of pig iron more than large plants and their product, “grey” pig iron, was highly unsuited to processing into high grade steels. 4

As in the Soviet Union, heavy industry had been the priority of China’s planners. It accounted for the lion’s share of investment because the never-ending demand for increased production was met by extensive development rather than intensive improvement of technique and labour productivity.

As a result, by 1978, returns on investment were very poor and declining. For example, in the First Five Year Plan period, 1953-7 for every 100 yuan of investment national income rose by 0.32 yuan, but in the Fourth Plan period, 1971-5, this had fallen to 0.16 yuan.5 Overall, “capital productivity” fell between 1957 and 1978 by an average of 0.8% per year. 6

Agriculture on the eve of reform

In the late 1970s, agriculture accounted for 70% of the national workforce and 10% of investment. Although radical collectivisation had been relaxed in the early 1960s to encourage private production to overcome the famine that followed the Great Leap Forward, from the mid-1960s, collectivisation within a stable administrative system based on the three-level commune had been re-established.

The commune was a very large unit, comprising many thousands of households and an entire rural district. Below the commune, the production brigade grouped together perhaps 100 households and, at the lowest level, the production team consisted of a handful of families with boundaries typically determined by pre-existing hamlets and villages.

Within this structure, work was organised and remunerated at team level but decisions over what to produce were taken at commune level in conformity with local quotas laid down by the planning authorities. In 1978, 90% of agricultural trade took place at prices laid down by the plan.

This system brought a number of advantages which ensured that food production kept ahead of the increase in population. Knowledge of improved techniques, fertilisers, seed strains, for example, could be disseminated rapidly and extensive irrigation works could be organised more efficiently at the commune level.

However, its bureaucratic rigidity also brought serious disadvantages. In particular, concentration on single crop production to meet quotas did not bring the expected economies of scale and militated against the optimum use of land.

Instead of each team producing a range of crops, taking advantage of local knowledge to specialise and producing most of their own immediate requirements, scarce resources had to be used to transport food crops between districts which could have produced all their own needs, and an inadequate range of crops was produced.

By 1978, 45% of arable land was irrigated and modern fertilisers were used routinely; there were few further advantages to be gained from this system. This could be seen in the fact that throughout the 1970s, the rate of growth of grain production failed to keep pace with population growth.7

Market socialism or primitive capitalist accumulation?

That the economy had to be revitalised by the late 1970s was not in question and new measures were introduced by the third plenum of the Central Committee in December 1978. The leaders of the CCP had every reason to favour a very cautious approach to economic “reform”. After the convulsive disasters of the Great Leap Forward of 1958-60 and the “Cultural Revolution” of 1964-74, the majority were agreed on the need to proceed on the basis of compromise and consensus. After these failed experiments in Stalinist economic adventurism a degree of pragmatism prevailed.

As one Chinese official noted, “the first law of liberalisation, [is] first establish the practice, then declare the policy.”8 Small-scale experiments were first carried out and then those policies or techniques which increased output were adopted as national policy and generalised across the country.

At the heart of the reform programme was the belief that relaxation of planning controls would stimulate production if linked to material incentives. Deng’s dictum, “To be rich is glorious!”, was most immediately put into practice in the countryside where it created the economic and social currents that have since become the single biggest influence on the direction of the economy.

At the outset of the reform process the major divide within the ruling stratum was between those who wanted to accelerate the marketising reforms and those who feared that this would end up unravelling the whole economic system and thus lead to the common ruin of all bureaucratic groups.

Time and again the tensions within the bureaucracy were resolved only through common subservience to the bonaparte Deng Xiaoping.

For all their apparent pragmatism, the adopted policies were the result of the competing forces within China, mediated through the party, army and state institutions.

By 1978 there was no prospect of turning the economy around via the existing bureaucratic administrative mechanisms and, like the Hungarian, Yugoslav and even Soviet leaders before them, the Chinese looked to market mechanisms to invigorate their flagging economy.

Unlike their European counterparts, the Chinese found that their economy was, perhaps uniquely, very well positioned to take advantage of the reforms. Unlike the Soviet Union, where the Liberman reforms of the 1960s were rapidly stifled by the resistance of entrenched bureaucratic satraps, the far more decentralised Chinese system provided a structure much better suited to local experimentation and initiative.

Most enterprises, for example, although subordinated to central planning decisions, were actually administered and directed at provincial, county or city level.

This much greater decentralisation resulted initially from the dispositions of party and army commands at the end of the civil war, when local self-sufficiency had been a priority, and partly from Mao’s support for decentralisation of production during the Great Leap Forward.

Above all, there was a growing recognition that the potential of China’s rural economy was being severely restrained by bureaucratic planning. This insight led to a fundamental change of strategy and a break with Stalinist orthodoxy. The primacy of the heavy industrial sector was rejected and agriculture was promoted as the lead element in the national economy.

Deng Xiaoping’s pragmatic shift was a response to political pressures mounting in the countryside. Peasants, especially in Sichuan and Anhui provinces, were already breaking up their production teams and brigades and taking their own decisions over what crops to grow.

That this immediately raised output should not have been surprising since, as in other degenerate workers’ states, Chinese peasants had generally retained their household plots, primarily for growing vegetables and raising poultry, and they knew that these were far more productive than the collectively farmed fields which were starved of the necessary technology to exploit their potential.

The agricultural reforms of 1978 legitimised such local decision-making without laying down any precise controls over land use. Within a matter of four years, however, one system had become almost universal, that of “Household Responsibility”. This was the most liberal of the various systems that developed after 1978.

Peasant families were granted control over a plot of land, decided upon at the old production team level. The land itself remained the property of the team (i.e. approximately the village) but how it was used was now the farmer’s decision. Obligations to the state were retained through mandatory sales of quotas of specified crops at fixed prices.

The benefit to the farmer was that all production above quota could be sold on local markets, or to the state at what were called “negotiated prices” fixed between the quota price and the local market price. The state, fearful of a shortfall in essential crops such as grain, guaranteed to buy all production above quota.

This reform produced an immediate increase in production both in per capita output and in terms of diversification; grain yields increased at an average annual rate of 3.7% between 1978 and 1984; cotton rose by 18% per year, meat by 8.9% and fish by 3.6%. Overall, peasant incomes saw an average 12.3% rise, per year, throughout this period.9

The visible success of the reforms encouraged further liberalisation in the early 1980s. In terms of their subsequent importance in facilitating moves towards capitalist restoration, the most important of these was the relaxation of controls over small scale industry, forestry, animal husbandry and local markets.

This not only stimulated production but also commercial activity throughout the rural areas where, at the time, some 75% of the total population worked. The number of rural markets increased from 38,000 in 1980 to 67,000 in 1993. Recent research suggests that cash income, as a percentage of total rural income, rose from 52% in 1980 to 68% in 1993.10

The long term economic significance of these reforms lies in the fact that they began to create market prices for foodstuffs and for many of the raw materials of light industry at the same time as increasing the income of farmers. This itself created effective demand for the products of small scale, locally owned, “industry”.

In addition, although the maintenance of the state’s powers of procurement at planned prices was designed primarily to ensure a dependable supply of essential produce, it also created the model of the “dual pricing system”. In the course of further development, as the state reduced the range of crops it controlled, and a steadily greater percentage of each was produced for, and sold on, the market, so the state brought its “planned prices” more and more into line with those of the market.

This process was by no means always smooth. In 1984, for example, oversupply of grain meant that state procurement prices were far above market prices and state warehouses were overflowing. Because the government was committed to relatively low sale prices for food supplied to urban industry, the state was, in effect, subsidising the rural grain producers to the tune of 22 billion yuan, 14% of total state revenues.11

It is significant that to rectify this, the state did not return to tighter controls but rather liberalised procurement still further to cover only wheat and rice.

Everything else, even cotton, would be bought either by the state at “negotiated prices” or could be sold on the open market at prices which would reflect demand. Very importantly, these higher prices for both food and raw materials were passed on to the industrial sector.

In the event, this reform over-compensated and the following year there were serious shortages of staple crops as farmers switched to the more lucrative “industrial crops”. The state then responded by re-introducing a range of compulsory quotas.

This episode shows that the social forces behind commercial agriculture were not strong enough at that time to force the state to relinquish its controls. However, the re-imposed controls were not as wide-ranging as the original system and market-oriented agriculture had been firmly established.

In subsequent years, against a background of generally steady increases in agricultural output12 further reforms were introduced which allowed different sectors of state industry to buy agricultural raw materials at market prices, rather than obtaining them only from the state’s procurement agencies.

In the early 1990s, a further relaxation of controls on grain allowed local government authorities to phase out both compulsory deliveries and the provision of grain rations to urban areas.

By 1993, 90% of China’s provinces had dropped rationing altogether and, although many maintained mandatory contracts for producers, the prices for these deliveries were now determined by the market.

However, even as recently as 1995 the state could still intervene to “correct” market-induced disequilibrium when serious reductions in grain deliveries led to the reimposition of nationwide mandatory deliveries.

The transformation of local industry
The reforms introduced in the agricultural sector began to alter the role of public administration from provincial level down to the village and, consequently, the role of the Communist Party officials who ran it.

In China, local government had always had a greater degree of autonomy than in the USSR. The institutions of central planning were never as developed as those in the Soviet Union. This played an important role in institutionalising party and state involvement in economic decision-making at local and provincial levels.

As has already been noted, much of the state sector was administered at local level, and here the CCP’s traditions of local self-reliance reinforced the tendency to interpret central instructions in the light of local priorities. Into the bargain, the inevitable inadequacies of bureaucratic planning required constant resort to local solutions. In all of this, the role of the party cadres was central in achieving not only a balance between local and central priorities but also in co-ordinating policy at all levels.

This degree of self-reliance in pursuit of centrally determined policy objectives was officially recognised long before the advent of Deng’s reforms. From 1972, for example, county level administrations were allowed to retain 60% of profits from State Owned Enterprises (SOEs) within their jurisdictions in order to fund development, diversification and infrastructural improvements.

Such retained funds in the hands of counties were the equivalent of 35.6% of the state budget, a figure which points to a very significant sector of the economy being operated, if not entirely separately from the central planning institutions, at least at arm’s length.13

After the introduction of the reforms of 1978, it is not difficult to imagine how government and party officials adapted this culture, developing local small-scale industry, improving transport provision, establishing markets and utilising their connections within state and party further afield to open up trade and commerce.

With the development, after 1978, of the Township and Village Enterprise (TVE) sector, such “entrepreneurial activity” became the norm for all officials, not in counterposition to the central government’s directives, nor even as a means of making good the insufficiencies of central directives, but with full official encouragement as the means of implementing central directives. The roots of this sector lay in the communes’ local workshops and local industrial enterprises which produced or processed the everyday needs of the communities.

The removal of the stranglehold of the commune, after more than 20 years of Maoist austerity, and a sudden increase in incomes from commercial farming, opened up a vast range of possibilities for development. The increase in marketing created a demand for motorised transport that individuals could not afford but a community could; rising incomes stimulated demand for new housing, furniture, textiles and a higher level of meat consumption, which itself required slaughterhouses and so on.

Indeed, some of the biggest businesses in China are now found within the TVE sector. For example, the Far Eastern Economic Review recently reported on the history of the “Sunshine Group”, a textile manufacturer set up as a township enterprise in 1986. It has become China’s leading producer of worsted wool, using the most advanced machinery available to produce cloth up to the standards laid down by the International Wool Secretariat.14

Financially, every level of government had an incentive in what became the fastest growing sector of the Chinese economy, because each was entitled to retain a percentage of the funds generated in its jurisdiction as it passed on revenues to its higher authority. At the same time, each unit had only limited resources at its disposal so every investment decision had to be carefully considered. Each had to calculate how to allocate its resources between its social and welfare responsibilities and the development of “industry” and infrastrucure.

The close links between state, banks, industry and agriculture, personified in the form of the party secretary, meant that welfare spending could be subsidised out of retained funds. Investments in one sphere were funded by transfers from existing enterprises, losses were made good from other enterprises’ profits and so on in a system that could be called “local corporatism”.

All of these enterprises remain, officially, “collectively owned”. In statistics they are referred to as “non-state” because they are not owned by the central state. However, many commentators suggest that behind the formal “collective” ownership, many have become, in reality, private businesses operating on a share-holding or co-operative basis.15

The authorities that control the decisions within TVEs know that they can only increase their income by realising a profit on that part of their investments which has been put into production. Other considerations, including the provision of local welfare, for example, continue to have a significant influence but, throughout the reform period, the tendency has been towards the transformation of this “non-state” industry into capital.

The inputs to TVE industry, for the most part originating in deregulated, family-based agriculture, are themselves bought at market prices that have to be passed on in the final product. It is true that for many years energy costs were kept low by virtue of state subsidies to the coal and fuel industries but, since 1994, even these have generally been allowed to rise to market prices, or “scarcity prices”, as they are known. All these inputs to production, then, conform to capitalism’s norms.

Finally, although much of the infrastructure of production and much of the original fixed assets of bigger enterprises were the product of investment undertaken before the reform period, this cannot any longer be the case. By 1992, the TVE sector accounted for 38.2% of the value of industrial output.16

Its products were traded not only beyond the boundaries of the towns and villages where they were produced but beyond the shores of China. The scale of increase in output suggests that most of the now existing fixed assets must have been funded by retained profits generated during the reform period.

What remains true is that this sector does not conform to the capitalist norm of private ownership of individually identifiable and legally autonomous enterprises.

This, however, does not disqualify it as capital. In any economic system developing towards capitalism from within a centrally planned economy such a norm would not be expected. On the contrary, transitional forms of ownership with a high degree of “public” supervision could be expected.

This is particularly so in the rural economy, where the prevalence of single surname villages underlines the continued importance of pre-capitalist, clan-based social formations. Hence, the question of individual private ownership is not necessarily of central importance in a period of what is essentially primitive capital accumulation.

What matters is that within this sector, no longer restricted to a role within the nationally dominant command economy, hundreds of thousands of production units are increasingly basing their operations on the dictates of the market: the law of value.

Crucially, this hybridised capital is now sufficiently established to reproduce itself spontaneously. Whereas the market reforms introduced to avert the famine of 1961-63 could be reversed when Beijing decided the danger was past, the TVE sector is now too strong for such a reversal.

Millions of decision makers, prominent among them the cadres of the Communist Party, are adjusting their expectations, their assumptions and their decisions in accordance with market criteria. Capital, as Marx observed, can only exist as many capitals, and many capitals have come into existence in China.

However, while reproducing themselves on a capitalist basis they do not yet constitute a “system”, because they are not yet integrated through the mechanisms of capitalist regulation, above all the discipline of having to compete for most of their investment needs on a national or international capital market. Moreover, property rights in the TVEs are often still nebulous and investment flows are influenced by local political considerations.

Thus, the TVEs and the “non-state” collective sector, significant as they undoubtedly are, do not constitute the heart of the Chinese economy and do not determine the class character of its dominant property relations.

Their importance within the analysis of the Chinese economy as a whole is twofold; they have created the raw material of an indigenous capitalist class and they have established market criteria and market forces that could in time transform the heavy industrial core of the economy.

Special Economic Zones
At first sight, to suggest that the generally small scale and unglamorous TVE sector could generate the forces necessary to transform the heavy industrial core of the economy might seem perverse when the whole world has been marvelling for many years now at the astronomical growth rates and the physical transformation of the Special Economic Zones (SEZs) such as Shenzhen, adjacent to Hong Kong. This is to misunderstand the role that such SEZs have played in China’s economic development and their relationship to the domestic economy.

The first four SEZs were set up between 1979 and 1981 to attract investment from Chinese capitalists in Hong Kong, Macao, Taiwan and South East Asia. It was hoped that by providing infrastructure and cheap labour, together with attractive tax concessions, China would be able to gain foreign exchange, transfer of high technology and access to foreign management techniques.

The zones were certainly successful in attracting foreign firms and in less than a dozen years Shenzhen went from a small fishing village to a huge conurbation with a population of millions and a physical appearance akin to any of the financial centres of the western world.

Double digit growth rates were the norm and economic activity steadily shifted from the original cheap labour, low-tech assembly of plastic toys, through textile manufacture, to assembly of consumer electronics. Then, as labour costs rose, they increasingly focused on the service sector: real estate management, insurance and banking.

However, the greater part of production was for re-export, and foreign firms were not enthusiastic about transferring technology that would obviously be used to create future Chinese rivals. China maintained very high import tariffs, averaging 35%, to protect its own industries and, therefore, foreign firms, even within the SEZs, had little access to the huge domestic market.

In addition, although Chinese workers in the SEZs remitted earnings back to their families, China had to bear the cost of providing infrastructure and the demands for energy and construction materials, in particular, produced serious shortages in the internal economy.

Consequently, although China was certainly influenced by the SEZ’s in terms of knowledge of foreign markets, quality standards, management techniques, access to foreign exchange and remitted earnings, the zones did not have much impact on the structure of the Chinese economy as a whole – at least in their first decade of operation. It was experience such as this which prompted the World Bank itself to conclude:

“Special foreign investment regimes create enclaves that benefit the rest of the economy little. These may be useful at the beginning of transition if they send the message that the country is serious about reform but special tax breaks, exemptions from customs duties and other incentives for foreigners can put domestic investors at a disadvantage and cost governments much-needed revenue.” 17

There is no doubt whatsoever that production within the zones was capitalist production, although not a chemically pure form of it since there were considerable subsidies from the national economy, but this was part of the circuit of capital in the international economy, not part of a new circuit within China as a whole.

What has been said about the SEZs could also be said of Foreign Direct Investment (FDI) in general until the last few years. Once again, this is an apparently surprising conclusion because much has been made of China’s success in attracting FDI and the steady increase in her role as an exporter of manufactured goods. By 1994, China was second only to the USA as a recipient of FDI with inflows reaching US$33.7bn, and was the world’s eighth largest exporter.

However, for most of the 1980s, FDI amounted only to hundreds of millions of dollars per year and was permitted only in very tightly controlled areas outside of the SEZ’s. Once again, it was largely concentrated in enterprises which were assembling or processing imported materials for re-export and at this time, therefore, had only a limited impact on the Chinese economy itself. In 1992, earnings on exports from the SEZs were actually less than the cost of imports in the late 1980s.18

But the growth in exports from foreign owned enterprises has been rapid in the 1990s, from 8.3% of total exports in 1989 to 28.7% in 1994.19 Trade on that scale does have an impact on the domestic economy not only directly, in terms of foreign exchange earned, but also in more fundamental ways.

Since the late 1980s, restrictions on where FDI can be located in China have been greatly relaxed as have the limits on which sectors of the economy can receive foreign investment. Thus, practically every county in China now has some foreign invested enterprises (FIEs) and sectors such as retailing and electricity generation are now open to foreign investment. The biggest shift came after 1992 and Deng Xiaoping’s “Southern Tour” after which the Party Conference in November of the same year agreed to accelerate liberalising reforms throughout the country.

By and large, foreign investment outside the SEZs has gone towards the TVE sector because its smaller scale is easier to develop, equip and supervise than are the enterprises of the “state owned” sector, primarily heavy industry, fuel and energy. This means that it is within the expanding TVE sector that international standards of management, production, marketing, design and investment are most integrated.

By definition, management in this sector is entrepreneurial and operating completely outside the remaining constraints of the planning ministries.

Some indication of the financial sophistication already achieved within this sector is given by a World Bank calculation that as much as 25% of the FDI flowing into China in 1992 was actually capital recycled by (mainland) Chinese firms who transferred funds offshore in order to gain the concessionary advantages accorded to foreign investors when it was re-invested within China!20

This also demonstrates the developing integration of the indigenous capitalist class into the world market. What is more, the expansion of this sector provides the Chinese state with criteria by which to judge the performance of the sector that is still centrally directed.

Both the SEZs and FDI, then, played a minimal role within the Chinese economy in the 1980s but they have now become an important adjunct and stimulus to the most dynamic sector, the “non-state”, “collectively owned” but increasingly capitalistically organised and oriented TVEs.

State owned industry
The process of capital accumulation and penetration in China has both deepened and accelerated over the last five years. Its final phase lies ahead, the capture and transformation of the hitherto decisive economic sector – state owned industry. For the first ten years, economic reform made little impact here. An emphasis on plant and managerial autonomy had little meaning in the context of a system within which investment levels, product mix, prices and “profits” were laid down by the State Planning Commission.

Nonetheless, although production was largely unaffected, the new orthodoxy did draw attention to performance at enterprise level. Differences in efficiencies between plants were highlighted and loss-making enterprises were identified. But, at the same time, managers could legitimately defend themselves, and their plants, by pointing to the illusory nature of their supposed autonomy within the system. Such arguments led to proposals for further reforms in 1983-84 which promised to alter the fundamental relationships within the state sector.

Initially, these centred on the creation of managerial incentives to increase production and profitability. Previously, profit margins were built into the pricing structure of an enterprise’s products by the central planners. As in the original USSR model, the key regulator in planning was achieving the designated physical output targets (“the materials balance”) and prices were essentially an accounting mechanism that passively reflected the movement of goods through the system.21

Consequently, the “profits” earned from production were very poor indicators of actual productivity in the plant and in any case were remitted directly to the state and were not retained by the enterprise that had earned them. Virtually all fixed investment, and most of the working capital of state industry, was simply funded out of state revenue as direct grants. This revenue itself was largely derived from the earnings of state industry.

From 1983, however, this system was dropped in favour of a form of enterprise income tax. This echoed the incentives offered in agriculture and the TVE sector. Management could retain a percentage of the income earned and was also encouraged to find ways of raising the level of income.

This illustrates a general point about the whole reform period; marketising measures in one sphere influenced procedures in other spheres, legitimising themselves and, in the process, creating imbalances elsewhere which appear to be correctable only by a further extension of the market.

Thus, SOE managers, seeking to increase plant earnings, looked for cheaper sources of raw materials within the TVE sector, as opposed to traditional centrally planned suppliers, and saw the possibilities of changing their own product lines to take advantage of demand from TVEs.

This tendency was strengthened by an experiment introducing management incentives into the 300 “joint ventures” which were allowed to receive foreign investment before 1985. As in agriculture, these enterprises were allowed, indeed encouraged, to expand production beyond the plan “quota”. They could choose to contract with the planning ministries for a certain percentage of their output as their contribution to centrally determined targets.

Beyond that, however, the choice of what to produce, how to produce, where to obtain supplies, and where to find markets was left to management. Various tax incentives ensured that profits earned in this way benefited the enterprise. 22

However, even in these select enterprises a central obstacle to greater profitability was the initial impossibility of shedding “surplus” labour under the legal code and norms of the Chinese degenerate workers’ state. Reforms introduced between 1978 and 1981 then gave management the right to advertise for new labour and select by examination.

At the same time, voluntary labour mobility was encouraged through the establishment of labour agencies to help workers find jobs that suited them. The same reforms were also intended to give management the right to dismiss workers for reasons other than violation of the labour or criminal codes, but the balance of forces within industry ensured that this was rarely put into practice.

As a result, a potentially much further reaching reform was introduced in 1982. Its significance was emphasised by the fact that it was championed by Zhao Ziyang, the Premier and, at the time, Deng’s chosen heir apparent. This was the “contracted labour” system under which workers were to be employed for specified lengths of time, by contract, after which they could be dismissed on the grounds of their work record, the completion of the project on which they had been employed or if the labour requirements of the enterprise had changed.23

In the event, the new system remained a dead letter for the greater part of industry, only really being implemented in the construction industry where the idea of limited contracts was relatively compatible with the character of the work.

The underlying reason why the contract system could not be enforced was that society as a whole lacked the means to support its operation. Workers’ hostility to the scheme was widespread and found extensive support throughout society, including within management, because losing your job meant losing all the “welfare” services provided through the enterprises – housing, medicine, rations, pensions, even children’s education in the very large plants. Consequently, although one study in 1983 suggested that up to 30% of labour in the SOEs was “surplus to requirements”24 dismissals remained rare.

The problem with all such reforms was that they could not tackle the source of the malaise within large scale industry. In agriculture the existing levels of technology and technique were best suited to family-based farming. Consequently reorganising production on that basis could, virtually by itself, lead to considerable increases in productivity, even if these were one-off gains.

In industry, the existing techniques of production (not simply manning levels but the division of labour, failure to specialise, lack of economies of scale, duplication of production etc.) could only increase output by expansion of existing technology. Effective demand for industrial goods did rise as the TVE and SEZ sectors developed but this was met by increased investment into industry, extensive, rather than intensive, development. K. C. Yeh has contrasted the difference between managements in the SOEs and those in the TVEs:

“In the private and rural industries, the predominant motive [for increased investment] was clearly profit. [But] for state enterprises, the emphasis remained on the growth of output as the main performance indicator, with the tendency to increase output through investment.”25

The failure of all these early reforms to make any impression on the SOE sector was already apparent in 1984 and led to a reappraisal of the entire planning system. Supporters of the most radical reforms argued for a programme that linked the transformation of the People’s Bank of China (PBC) into a body independent of the State Planning Commission, issuing funds to industry on commercial criteria, with a rapid liberalisation of prices within the industrial sector. This, they argued, would redress the balance that had traditionally favoured heavy industry over light industry and agriculture.

However, the powerful entrenched interests within the heavy industrial sector opposed this unless the PBC was prepared to guarantee compensation for their resulting loss of revenue. When the bank refused such an open ended commitment, the proposal for price liberalisation had to be shelved.

Instead, increased powers were given to provincial level government to decide upon investment priorities for the SOE sector within their jurisdictions in the belief that:

“. . . this would extend the reform coalition into the provinces whilst simultaneously removing power from the conservative bastions of central planning and finance.”26

Changes in the status and role of the PBC were adopted. In 1984 it became, at least in formal terms, a fully fledged central bank, charged with overseeing both monetary and financial policy. Its previous role as the supplier of funds to industry under the plan was transferred to a new Industry and Commerce Bank which was responsible for issuing funding in the form of loans which were repayable with interest.

The intention was that such interest rates would be varied in order to influence industrial development policy to conform to central government plans. The package of reforms was completed by devolving a lot of decision-making responsibilities to local branches of the bank.

To match these changes, other measures were adopted which gave much greater autonomy to enterprise managers. This was expected to complement the financial changes because the managers would be held responsible for profit and loss and their success would be a function of the efficient use of the loans extended to them by the banks.
Factions in the bureaucracy

The fate of this ambitious reform project illustrates the contradictions with which Chinese economic and political policy makers have grappled ever since. Much of the reform package was not implemented because it fell foul of the factional combat within the party and state. This was, in part, fuelled by the same inter-departmental antagonisms that have been seen in other centrally planned economies when similar “market socialist” reforms have been proposed.

Ideologically, the battle lines have been drawn between “conservatives”, typically associated with heavy industry and the armed forces, and “modernisers” anxious to expand light industry, consumer products and overseas trade. In China, however, these were exacerbated in the mid-1980s by serious economic instability resulting from the market reforms already undertaken in the agricultural and TVE sectors.

Two aspects of this were particularly important. First, as noted above, greater decision-making powers had been devolved to provincial governments and these proceeded to use their powers to expand industrial investment in their regions. Through a combination of grants, retained profits and pressure on banks to extend “soft” credits, these governments responded to increased demand from light industry (predominantly in the TVE sector) by simply increasing the size of existing plant.

Viewed on a national scale this was both highly irrational, duplicating capacity, creating bottlenecks and shortages, especially in the construction materials industry, and highly inflationary.

Second, the decision to extend finance to industry only in the form of interest-bearing credit was negated almost immediately by the escalating price of agricultural produce. This rapidly fed through into increased “subsidies” to SOEs which the switch to greater autonomy now made more visible.

Food rations, supplied via the workplace, were a central element in the income of the urban workforce and enterprises were legally obliged to maintain supplies. To pay for them required ever greater subsidies from the state or, (which is the same thing) ever decreasing revenues remitted to the state.

Since the TVE sector did not have to carry this burden, the contrast between its profitability and the losses of the SOEs was exaggerated. For the conservative wing of the bureaucracy this simply proved that market reforms were unravelling the entire economic system while, for their opponents, it was more evidence of the need to disentangle the web of the planning system so that the “real” costs of production in the different sectors could be accurately gauged.

Characteristically for a Stalinist state, this debate was suppressed and carried on via coded exchanges and elaborate metaphors. The inflation that resulted from the imbalances, however, could not be kept secret and these were the circumstances which led to the political instability in late 1986. Hu Yaobang was eventually blamed for this was sacked from his post as General Secretary of the Party in January 1987.

Although this showed that the conservatives were still a force to be reckoned with, the fact that Hu retained his seats on both the Politburo and the Standing Committee underlined the fact that the factions were relatively evenly balanced. The following two years, up to the fateful days of May and June 1989, witnessed increasingly open calls for further reforms but no substantial changes in the economic system.

In the aftermath of the Tiananmen Square massacre and the countrywide crackdown that followed it, the conservative wing of the bureaucracy really did become dominant and this had consequences on the economic front as well as the political.

The State Planning Commission, in particular, benefited from the new political climate as relatively independent economic institutes, which were regarded as having contributed to the political instability, retreated into the background. It is an indication of how much had altered in the previous years that in seeking to re-establish greater central control over the economy, the planners no longer operated via the central allocation of materials.

Rather, they pulled various macro-economic financial levers such as setting aggregate quantities of budgetary investment in conjunction with the Ministry of Finance, allocating grants for capital construction and bank credits for fixed investments.27

By 1993, only 10 light industrial products were subject to central plan orders, whereas in 1978 there had been 158. In heavy industry less than 100 centrally allocated products remained from an original figure of over 1,000.28

This use of financial measures, while maintaining central controls over the statified industrial heart of the economy, was already a long way from the original system of Stalinist “command planning”. Political priorities still determined the objectives to be pursued but, in addition to greater managerial autonomy and the increasing influence of the “competitive sector” in setting market prices for many of the inputs even to state-owned industry, the planners were no longer hegemonic.

They were still the most powerful agents in shaping how the state sector developed, but they were no longer the only powerful agency.

For two years after the suppression of the democracy movement in Tiananmen Square, a very tight rein was kept on all financial policy. Price controls were re-introduced and new investment was kept to a minimum. The measures were successful in bringing inflation under control but this retrenchment was not in itself a solution to the underlying problems.

This period, in which the conservative faction was dominant, perhaps for the last time, ended with Deng Xiaoping’s symbolic Southern Tour in 1992. His public support for the most commercially minded provinces, summed up in his praise for the resumed high growth rates in Guangdong, marked the opening of a new round of even faster growth than that seen in the 1980s.

In retrospect, it is now clear that this was the point at which Beijing made a qualitative change of policy. The Fourteenth Party Congress removed one-third of the Central Committee, including an important grouping of conservatives around Chen Yun. Their places were taken by a stratum described as “technocrats” who favoured economic reform coupled with continued strengthening of the centre. These included General Liu Huaqing of the PLA High Command and Qiao Shi, head of party security. The most prominent, Zhu Rongji, became senior Vice Premier with responsibility for economic policy.

The policy documents of the Congress, while obviously including economic targets, were the first to make no mention of the plan, as such, and to identify the creation of a socialist commodity economy as the long term goal. Whereas previously policy had been intended to dynamise the planned economy through market stimuli, it now aimed to replace planned relations within the core of the economy with market relations.

The experience of the previous two years appears to have convinced the leadership that the reimposition of centralised planning controls was no longer a viable option. The available mechanisms had proved inadequate and, worse still, political stability was threatened by a return to very high growth rates in the “competitive sector”, especially in Guangdong. Although the mechanisms for “marketising” the core economy had yet to be defined, there was no longer an overriding need to hold back the “competitive sector” in order to protect the planned sector.

Internally, the green light was given to provincial and lower levels of government to expand production by all means possible. Externally, controls over the permitted sites for FDI were dramatically relaxed and it was made clear that there was now official support for forms of investment into the SOEs such as joint ventures. This was the beginning of the record breaking figures for inward investment. The export trade was also boosted by measures to bring the yuan closer to convertibility, but at a devalued rate.

This frenetic economic activity pulled into the whirlpool large areas of China far from the coastal provinces, placing the most severe strains on the ability of the government to steer the economy as a whole in the direction it wanted. This was felt most acutely in the financial and banking institutions.

The inflationary period prior to 1989 left the banks with legions of debtors in the state sector who had received subsidies in the form of loans but were in no position to repay them. After 1992, two new factors added to the banks’ problems. The first was an increase in pressure from local governments for soft loans to industry and the second was the rising numbers of SOEs which were making losses year on year. By 1995, this was the case with 40% of SOEs and their combined debt equalled 14% of GDP.29

At first sight this combination of political pressure and loss-making SOEs might appear similar to the problems experienced in Eastern Europe and the former Soviet Union after their “big bangs”. In fact the situation was quite different.

Much of the pressure from local government for funds for industry was a response to the boom conditions unleashed by Deng’s “Southern Tour”. Unlike credits to Russia’s rustbelt, which keep afloat firms which are barely capable of production, these are funding increases in productive capacity and the resulting increase in money supply is not necessarily inflationary.

Within the centrally administered SOE sector, however, the risk of inflationary pressures arising from credits simply being used to maintain the status quo is greater. In this period, after 1992, the share of total investment going into this sector actually increased30 but, given the long lead times in the kind of industry involved, whether or not this investment proves to be a further inflationary factor cannot yet be judged. What is clear is that losses in the SOE sector continued to rise, to Yn 36.9 bn in 1992, Yn 45.3 bn in 1993, Yn 48.3 bn in 1994.31

However, as the World Bank has recognised,32 even the losses in SOEs are not an entirely negative phenomenon since many of them result from more rigorous financial discipline and can, therefore, be seen as a necessary precondition for subsequent improvements in efficiency. It could also be the case that managers are maximising their losses to avoid taxation, thereby accumulating funds for an uncertain future.

The factor which was previously responsible for SOE debts – food subsidies – is no longer a significant problem. By 1993, food rations had been phased out and workers had to pay market prices for their food, thereby removing this significant drain on banking funds. Direct price subsidies amounted to only 1.5% of GDP in 1993, not a serious problem.33

At the same time, “planned prices”, for energy supplies and heavy industrial products, for example, were brought into line with the market prices that had been established in the “competitive sector”. This meant that some SOEs, for example petrochemical plants and electricity generators, became substantial profit earners.

After 1992, the new rounds of investment, an increase in prices and other factors such as increased consumer spending and a frenzy of buying novel financial products led to a rapid increase in money supply in 1992-93. As in previous bouts of inflation, the central authorities’ principal weapon was the introduction of price controls which were quite rigorously enforced and brought consumer price inflation down from some 25% in 1993 to nearer 15% in 1995.

However politically important, such measures do not deal with the underlying problems. Central government authorities recognised that they had still not achieved their objective of transforming the state sector via the creation of effective levers of financial discipline. Consequently, in 1995, they turned their attention to proposals for further reform of the banking system and rationalisation of the SOE sector.

The central objectives of the reforms in the banking system undertaken since 1994 echo those of ten years earlier, namely the creation of a genuinely independent central bank with the responsibility and the means to supervise the currency and maintain strict discipline throughout the country’s financial institutions.

It could be argued that the reforms also contain the same seeds of their own failure. The People’s Bank of China remains subordinate to the State Council and can be obliged to finance projects prioritised by the planning authorities, irrespective of commercial considerations. 34

However, much has changed in the decade that has passed. Control by state authorities is not in itself necessarily an impediment to the operation of a central bank. That depends on whether the policies adopted by the state are in themselves inimical to the objectives of financial discipline and monetary rigour.

Ten years of marketising reforms have created mechanisms for evaluating relative efficiencies as well as improved accounting systems. Although the lack of such things has been characteristic of the degenerate workers’ states, their creation does not in and of itself represent the decisive moment in the restoration of capitalism.

A revolutionary, non-bureaucratised workers’ state would also insist on real money, real prices and strict accounting. The question is, for what purpose are those mechanisms to be used? The reforms that have been introduced are clearly intended to complete the transformation of the economy back to capitalism.

The most important institutional reform within the banking system was the division between banks which were intended to operate on a strictly commercial basis – Industrial Commercial Bank, Agricultural Bank, Construction Bank, Bank of China (not to be confused with PBC, this one operates overseas) – and “policy lending banks”, such as the State Development Bank, which were to be responsible for non-commercial financing of prioritised projects.

A division along these lines would allow a distinction to be drawn between credits to the SOE sector for restructuring, re-equipping or even mergers and those which were simply subsidies to maintain loss-making production for policy reasons or very long term investments in, for example, infrastructure.

As in other spheres, this dual track policy was intended to create two visibly separate spheres of operation, not as an end in itself but as a means to eventually re-integrateing them on a transformed basis. Thus, while old debts are put to one side, new proposed investments within the SOE sector will be judged by commercial criteria. Any profits made will not be used to pay off historic debt but to pay interest on the investment loan or extend production, as in any capitalist corporation.

In the longer term, it is expected that means of dealing with the “historic debt”, plus any new loans from the “policy banks”, will be developed, varying from simply writing off at least a percentage to long term repayment at low interest rates or even nationalisation of the whole SOE sector’s losses as a “national debt”, following the experience of Eastern Europe.

A further fundamental reform which was intended to rationalise the financial system was the introduction in January 1994 of a new taxation system. Prior to that, the greater part of state revenues came from the earnings of the SOEs which were a declining source anyway. As we have noted, the system also allocated local government a share of revenues and these “extra-budgetary” funds35 were entirely outside the control of the central state and this severely limited the effectiveness of all attempts to regulate the economy via either fiscal or monetary policies.

The new system is based on VAT, the classic means of indirect taxation by which the working class and the poor peasantry are forced to bear the burden of financing the state machine. From Beijing’s point of view, its attraction is twofold: it extends the tax base beyond the SOE sector, thus securing revenues from the burgeoning non-state sector; and it removes a revenue source from the industrial ministries which, like local governments, were not averse to utilising revenues accrued from “their” industries for purposes which contradicted central government policy.

A share of VAT will still be retained by local governments but the new system should have greatly increased not just central revenues but, even more importantly, central control over funding. However, actually achieving the improvement depends on the successful collection of the tax and progress on this front has been slow, even though Beijing claims that it has improved during the transition period allowed for its introduction.

Figures for 1995 show an increase in tax revenue of 24% on the previous year but this has to be set against a GNP increase of 27%.36

The reforms proposed for the banking system were accompanied by reciprocal reforms within the structure of the state-owned industry sector. The content of the proposals, and the terms in which they were presented by Jiang Zemin, give some insight into the intended direction of this key element within the national economy:

“The aim of reform of China’s economy is to construct a socialist market economy, not a capitalist market. It is important to develop and consolidate state enterprises and other forms of public property in the economy, and also the basic role of state property. If the last two elements are lost, the construction of Chinese socialism will be impossible. Therefore, improving the situation at state enterprises, and especially at large and medium-sized enterprises, is both an important economic issue, on which the development of the national economy as a whole depends, and also the political issue relating to the fate of socialism in China. In the process of building a socialist market economy, the public sector and state enterprises must become stronger, and not weaker.”37

Since “socialist” in this context means little more than “state owned”, this plainly points policy away from privatisation as a solution to the problems of the state sector and towards a concentration on the bigger plants, “on which the development of the national economy depends.”

If current policy for these plants is implemented successfully, it will mark the creation of what could only be called a “state capitalist” sector. This does not mean a single block of capital competing against both domestic and foreign capitalist rivals but rather “many capitals”, each ultimately owned by the state but operating as autonomous entities.

The attraction for the Beijing Stalinists is obvious. They hope to remove the inefficiencies and rigidities of their inadequate and bureaucratic planning system while retaining a role for an important part of their own power base, the state bureaucracy.

Since Jiang’s speech in November 1995, it has become clearer what this means in practice. Beijing has taken as its model the conglomerate corporations, known as chaebol in South Korea and keiretsu in Japan. These group together in one corporate structure a huge range of subsidiary companies dominating entire economic sectors.

In China, these are to be created out of the component parts of the “centrally planned sector” which, as we noted earlier, includes the biggest industrial units which are still the “centre of gravity” of the whole economy.

Starting with approximately 100 which are already considered economically efficient, the government agencies previously responsible for implementing planning directives are being “incorporated” as shareholding companies which own all the assets of their industry.38 For example, the oil and petroleum sector is now owned by the China Petroleum Chemical Industrial Company (Sinopec). It has no responsibility for administering the plants and refineries within the system, each of which appear to become wholly-owned subsidiaries with their own managements, but it is charged with maximising the assets under its control.

Such national shareholding companies will form the centres of the new industrial conglomerates, which will then incorporate those enterprises “downstream” from the core industries that are already efficient, numbering in all about 2,000 enterprises which between them produce 25% of gross industrial output.

Other large and medium enterprises, which are not profitable at present, will be reorganised. This could mean transformation into joint ventures with domestic or even foreign capital or mergers with related enterprises, as well as changes in management, products and marketing. The intention is that, once efficient, they will remain within the public sector, possibly via absorption into one of the conglomerates.

At the level of provincial and city-controlled state industry, a similar pattern of transforming administrative institutions into shareholding companies is already under way. In Qingdao, for example, what was previously the municipal industrial administration has become the Qingdao Yiqing Industrial Company which operates the fifteen light industrial enterprises in the city, each of which is a wholly-owned subsidiary company with limited liability.

Through such “incorporations” a distinction is established between ownership of assets by the state, and management of the assets by the company. The structure mimics that of any conglomerate firm except that instead of the ultimate owners being shareholders who “delegate” operational control to a management board, the owners are a shareholding company granted title by the state. The component companies have the right to restructure their assets, in order to maximise them, by agreement with their superiors within the shareholding company.

The shareholding companies, nationally and locally, are free to raise capital and some have already sought listings on the developing stock exchanges. Applications for shares in one of these “red chip” companies, Beijing Enterprises, were oversubscribed by a factor of 1,600 on the Hong Kong stock exchange in May this year, with a total of £18bn offered by would-be shareholders.

Finally, some 66,000 smaller plants which are currently owned by the state at local level but which are not seen as viable in their present form may be sold off, turned into co-operatives within the TVE sector, transferred to the conglomerates or simply closed down altogether.39

Within the state-owned conglomerates, the “vertical” linkages that already exist from the days of planning will allow production to be rationalised while gaining significant economies of scale. What makes the model state capitalist rather than “state socialist” (i.e. that classically associated with a bureaucratically degenerate workers’ state), is that the “horizontal” linkages between them will be broken and the overall development of the sector will not be determined by any integrated plan. In theory, at least, the role of the state as director of production will be removed even though its role as ultimate owner will be retained.

We should not, however, conclude from this that the state will play no role within the economy. Apart from the fact that this is not the case in any industrialised economy, experience from Eastern Europe and the former Soviet Union shows that forceful state intervention is necessary to complete restoration.

Without it, the state sector will continue its spiral of decline as each enterprise attempts, unsuccessfully, to maintain its existing suppliers and markets, drawing soft loans from the state banks to finance mounting losses.

State intervention is necessary for two related reasons. First, because there is no functioning capitalist system by which market signals can indicate the necessary direction of capital flows, there has to be an agency which can take decisions over that direction.

Secondly, directing investment in order to centralise and concentrate capital means raising the rate of exploitation of labour by destroying the jobs and living standards of huge numbers of workers and peasants. This will inevitably generate social conflicts, and to enforce the decisions will require a state force able to suppress such conflicts.

The result of current policy, therefore, would be a capitalist system in which the state itself plays an important part in determining economic decisions throughout industry and banking. For this, it will need institutional and ideological mechanisms by which such “interference” is justified both in terms of its influence on the direction of the economy and in its repression of working class opposition.

If we look closer at the system of conglomerates created out of the planned economy, we see, clear as day, the institutional mechanism by which the existing state intends to oversee the restoration of capitalism and the maintenance of social order: the Communist Party. At every level, decision-making is to be in the hands of the boards of shareholding companies.

Only one stipulation appears to have been made about membership of these boards:

“For shareholding companies completely owned by the government, the board members will be the top leadership of the Party committee. At least fifty percent of the board members in subordinate enterprises must be from the Party committee.”

To complete the relationship, “the Party committee must be made up of at least one-third of the enterprise managers.”40

In the city and provincial level corporations, the shareholding company (established by the state) “will appoint the director of the board, the auditor – and the Party secretary, and, the Party secretary of any subordinate enterprise joins the board by law.”41

Although these huge corporations, which are intended to dominate the national economy, will not be subordinated to any plan and will be free to pursue their business interests according to the demands of profit maximisation, the state will, nonetheless, be able to supervise their development.

Where corporations, or other economic actors, perhaps Hong Kong or Taiwan-based companies, oppose Beijing’s interpretation of the national interest it is not difficult to imagine the role of the Party in mobilising “public opinion” on the basis of a rampant nationalism against them. In short, what the Beijing Stalinists intend to create corresponds very closely to the corporatist economic model of fascism.

Capitalism with Chinese characteristics?
Over the next decade China will be one or three of four countries which will exercise a decisive influence over the fate of global economics and politics in the next century. Despite all the unevenness and contradictions within the Chinese economy, it is already reckoned to be the second or third largest economy after the USA and Japan. Were it to prove possible to develop the interior provinces at anything approaching the rate already achieved by those on the coast there can be little doubt that China would move into first place within the next two decades.

Economic development, however, is rarely a straight line. Although it is possible to iron them out by reducing growth rates to long term averages, the last twenty years have seen dramatic fluctuations within the Chinese economy, reflecting above all the swings of official policy as Beijing tried to reconcile uncontrolled surges of investment and production in the “competitive” sector with sluggish performance in the central state sector.

As we have seen, the reform period has created powerful social class forces whose further development is likely to lead to greater unevenness, destabilisation and conflict. The TVE sector, which has provided most growth, has reached a stage where further development implies going beyond the stage of primitive accumulation in which quick profits could be made by taking advantage of the gross inefficiencies of bureaucratic planning.

Attracting the capital necessary for modernising the technical basis of production will dictate an end to much of the free-wheeling “frontier capitalism” that has characterised the sector. The closing down of opportunities for “soft” loans, the drive to win foreign investment and markets, restructuring production to less labour intensive techniques, will all tend towards a sharpening of class tensions within this sector. Property rights, in particular, will have to be more clearly defined, priorities as between local employment and company profits will have to be decided.

As the scale of production increases, so the competition for markets will sharpen, not only within China but internationally. This will stimulate a degree of “rationalisation” of production on a national scale, bringing to the fore the extreme disparities between the different regions of China. Already there are reports of firms transferring production from Guangdong’s Pearl River region, near Hong Kong, to the less developed province of Shandong in the north where labour costs are 30% lower.42

The consequences of such moves are contradictory bringing progress and modernisation to the interior but, in the process, tending to establish a national market for capital and labour. In addition, enterprises remaining in the south, for example, have to invest in more capital intensive technology or go bust.

In the state owned sector, too, there is the prospect of imminent major changes. The proposed transformation into conglomerates is not just a matter of reorganisation but the first step in a programme to modernise and re-equip the heavy industrial sector, including not only iron and steel and the related heavy engineering sector but also oil and the petrochemical industry, the chemical industry, aircraft, railway and shipbuilding.

This will require capital on a huge scale for a long time. If it is to be found from within the Chinese economy, this will mean big increases in taxation or massive government intervention in the capital markets. Either course would have both economic and political implications for the further growth of the “non-state” and private sectors.

If, on the other hand, the capital is to be found abroad, then the terms of investment will have to be satisfactory to international capital which remains suspicious, at present, of the probity of state finances and fearful of China’s record of macroeconomic instability and inflationary cycles.

Implementation of the state capitalist policy in the state sector also means a major offensive against the core of the industrial working class. Already there are reports of a mounting wave of workers’ demonstrations and strikes across China. According to Hong Kong sources, Li Peng reported to the Central Committee in April that there had been “rallies, demonstrations and disturbances as a result of sackings and threatened redundancies in 230 cities in the previous three months. He gave official estimates of 2,350,000 people involved, hundreds of serious injuries and 42 deaths.”43

In the past, fear of such unrest has forced Beijing to slow down or even give up plans for restructuring and this has exacerbated tensions within the bureaucracy. In the aftermath of Deng’s death it is likely that Jiang Zemin will attempt to consolidate his own position by forcing his policy through. The first occasion for this will be the Party conference in November.

A further dramatic change, now underway, is the recovery of sovereignty over Hong Kong. Although Beijing means what it says when it promises not to overthrow capitalism in the territory, the idea that the former colony will be allowed to carry on in the same old way is not tenable.

But what will be the content of the new relationship? Will the bureaucracy exert political pressure on the city-state’s financial conglomerates to buy government bonds? Will Beijing take advantage of the wealth of Hong Kong, intervening minimally in the day to day government but drawing tribute from the economy via taxation? Funds from this could be used as a resource to turn the best of the SOEs into viable capital while creating a minimal social welfare network for the “surplus labour” expelled from the failed ones.

However, Hong Kong’s capitalists are likely to oppose such a bias and will look for allies against “unfair competition” and in support of the “rule of law” on the mainland.

In the longer term as important a question will be how the existing Chinese bourgeoisie, based not only in Hong Kong but also in Taiwan and across South East Asia, will decide to relate to Beijng. Government plans to focus industrial and commercial development in the five “central provinces” on the banks of the Yangzi River upstream from Shanghai and the new SEZ of Pudong, are a considerable threat to the pre-eminence of Hong Kong’s role as an entrepot and commercial centre. But they also threaten the new capitalist sector, both TVE and private, that has established itself under Hong Kong’s influence in Guangdong province. Who will ally with whom?

Further afield, there is another force that will ensure that China’s economic development is not straightforward. In 1995, China’s exports grew by US$ 28 bn. her foreign exchange reserves rose from US$51bn to US$73.5bn and foreign trade accounted for 40% of GDP44. These figures underline two things; firstly, the extreme importance of foreign trade to China’s internal economic development and, secondly, the impact of that development on other countries’ imports.

To date, China’s trading partners have been willing to accept the imbalance of trade as the price to be paid for access to investment in China. Reports of Chinese intentions to seek foreign investment for 40 new regional airports, 114 metropolitan light railway systems, scores of ports, power plants, roads, bridges, US$100 bn. worth of aircraft45, make the logic of their position very clear.

However, trade and investment on that scale can be a powerful lever for forcing internal political change. With the Cold War over, China’s biggest trading partner, the USA, is no longer so concerned to maintain a tolerant attitude to Beijing.

In the “new world disorder” there is a strong tendency to regionalisation and this is already having an impact on trading patterns.

In 1996, textile exports from China to the USA rose by 8% to US$5bn, but similar exports from Mexico increased by 34.7%. China was still ahead in gross terms, Mexico’s exports were worth US$3.74bn, but the trend is unmistakeable and is caused by Mexican membership of the Nafta block and consequent avoidance of a 17.6% duty on imports into the USA.46

Trends such as this are likely to strengthen rather than diminish in the years ahead. Although China will remain a major location for foreign investment, the key players in the international capital markets will have a powerful means of influencing China’s internal politics, again the question is posed, with whom will they ally?

From whichever angle they are viewed, the lines of economic development in China are creating contradictory social forces, class forces, which cannot express themselves as competing political programmes because of the continuing bureaucratic dictatorship on the mainland and a century and a half of denial of democratic rights within Hong Kong.

The most important issue is the future of the state owned sector. Is it to be developed through state capitalist trusts, overseen by a party-state machine, like the PRI in Mexico or Golkar in Indonesia, diverting a subordinated bourgeoisie’s wealth through a combination of coercion, assimilation and promises of future national expansion? Or will the nascent indigenous capitalist class of the TVE sector make common cause with “overseas” Chinese capital and force a privatisation of assets?

Neither side in this impending contest is an ally of the working class, in China or internationally. The struggle for revolution in China will be bound up with the struggle for a politically independent party. The party’s programme must defend state property without accommodating to the Stalinist bureaucracy, and fight for democratic rights and the overthrow of the Stalinists without accommodating to bourgeois forces seeking the restoration of capitalism.

In short, it must stand for the Trotskyist programme of proletarian political revolution as the only alternative to capitalist social counter-revolution.

However, the advanced stage of capitalist development within China means that it is already necessary to combine elements of the programme of a social revolution – the expropriation of capital and its subordination to democratic planning – with the essence of the political revolution, the forcible overthrow of the Stalinist dictatorship and its replacement with a dictatorship of workers’ councils.

In the stormy years ahead such a party can only be built as part of a revolutionary International able to draw on the experience of workers throughout the world, from the degenerate workers’ states, the semi-colonies and the imperialist heartlands, because China shares aspects of all of these formations, although in a unique combination.