National Sections of the L5I:

Restoring capitalism in China

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At its Fifth Congress this summer, the LRCI concluded that capitalism had been restored in China by 1996 and that this was made possible by changes in the class character of the state in 1992. But why has the triumph of capitalism in China not been accompanied by the same political upheaval as in Eastern Europe and the former Soviet Union?

Capitalism was restored in China by 1996. The fact that this was carried out relatively smoothly under the continued rule of the Chinese Communist Party was made possible by two principal factors.

First, nearly two decades of “market reforms” had created powerful capitalist sectors within China, and secondly, the crushing of working class political opposition in the aftermath of the 1989 massacre in Tiananmen Square had removed the most important social obstacle to capitalism’s return.

The key to understanding the Chinese pattern of restoration lies in the bonapartist character of the political regime established after the revolution of 1949 – a regime sufficiently detached from the pressure of the main classes in society to pursue a determined policy in the face of determined resistance.

The Chinese Communist Party’s own bureaucratic-military rule was assembled during the war against Japan after 1937 and this became the basis of the new administration after 1949.

With its social basis in the peasant majority, high prestige amongst the small urban working class and a bourgeoisie that had lost most of its wealth under Chiang Kai-shek, the CCP faced almost no social constraints when it decided to adopt the Soviet model of bureaucratic command planning to modernise China.

But from the outset factional struggles and the consequent shifts in policy rocked society. Three years of famine with twenty million dead resulted from the voluntarist experiment of the Great Leap Forward and the People’s Communes, while the Cultural Revolution closed down all education.

The decisive turning point in the succession of factional battles came with the return of Deng Xiaoping from internal exile in 1978. By this time, growth rates in both agriculture and industry were declining, not fundamentally because they were subject to centralised planning but because the dictatorship of the party suffocated the initiative and denied the creativity of workers and peasants themselves.

Deng’s solution in agriculture was to encourage the movement away from the communes and allow the peasants to decide for themselves what to grow and how to grow it. Releasing the peasantry from bureaucratic control led to immediate improvements.

In industry, however, Deng’s reforms were unsuccessful because they could not address the inherent limitation of the Soviet model of planning.

Although it is possible to construct and operate the basic industries by bureaucratic command, it is not possible either to raise productivity or to dynamise consumer goods production without the creativity and enthusiasm of the workers themselves. But this required democracy in the planning process – the one thing the Stalinist bureaucracy could not contemplate.

Instead, Deng relied on greater autonomy for the enterprise managers. Throughout the 1980s, a series of reforms were introduced to allow them to retain profits, seek new markets, reduce the workforce and increase production.

However, the overall mechanisms of the command planning system could not accommodate factory level decision-making. An important basis of support for the whole regime was the planning bureaucracy it had itself created.

Time and again the reforms were delayed, diluted and even derailed by the powerful and entrenched interests within the state sector.

Quite apart from factional opposition to reform, the actual structure of the planned sector militated against change. Managers often wanted to introduce greater financial stringency or new product lines.

But it was impossible to evaluate costs, obtain raw materials or invest in newer technology in a system where all resources were allocated from on high and prices were laid down by Beijing.

The only way in which the system could increase production was by building new capacity and taking on new workers. As a result, although productivity stagnated, output continued to grow in the state sector.

Nonetheless, a combination of constant pressure from the Politburo, headed by Deng, and the consequences of other reforms such as those in agriculture, the Township and Village Enterprises (TVEs), the Special Economic Zones (SEZs) and the introduction of foreign direct investment, did begin to loosen controls and increase managerial autonomy from the mid-1980s.

Economically, increased contact with the TVEs allowed industrial managers to start making profits, “on the side” whilst more than fulfilling their quotas for the planning authorities.

At the same time, decentralisation of the planning authorities themselves strengthened provincial institutions, especially banks, which extended credit for the building of yet more new capacity, thereby adding indebtedness to the problems of the state sector.

Politically, tensions increased both within party and state as different factions proposed different courses of action. It became impossible to keep these arguments secret and by the mid-1980s a semi-public discussion over economic policy was under way.

Attempts by the authorities to suppress this movement only served to highlight the lack of “democracy” within China and thus the seeds of the “democracy movement” were sown which grew after 1987.
Popular discontent, however, was not confined to political issues.

Fuelled by inflation, which rose to 18 per cent in 1988, and the manifest corruption of the new rich and many officials, economic grievances drew in the working class. At first, the leadership of the party was slow to respond to the rising discontent. Its own ranks were seriously divided.

The “reformers”, supported by an increasing number of managers and economists who had already given up any hope of reforming the planned economy, tended to support the demands for greater openness and public debate but the defenders of the “old regime” sympathised with the anti-corruption demands of the masses.

However, when protests became huge the leadership began to close ranks. Zhao Ziyang, who was believed to be sympathetic to the demonstrators, was replaced by Li Peng.

Finally, when increasing numbers of workers’ delegations from around the country began arriving in Tiananmen Square in 1989, Deng and Li decided to send in the reliable troops from rural provinces.

Although the immediate consequence of this bloodbath was a return to power by the military and supporters of command planning, the destruction of the workers’ movement inevitably strengthened the pro-restorationist forces in the long run.

To regain stability, the regime not only froze prices and purged a number of conspicuously corrupt officials but also raised wages and restored many central controls over the economy.

In the short term the suppression of the Democracy Movement showed both the solidity of the regime’s support in the countryside and the continued strength of the factions opposed to the market reforms. However, over the next two years, it became clear that a return to the past was impossible.

Although inflation was brought under control and production in State Owned Enterprises briefly rose in 1991, by 1992 it was the southern provinces – especially Guangdong – which were the most market-dominated and which were growing fastest.

Having crushed and cowed the industrial working class and emboldened by the inability of the “old guard” to reverse earlier reforms, Deng and the “technocrats” around Jiang Zemin and Zhu Rongji decided the time was ripe for a decisive change of policy.

This was first signalled by Deng’s “Southern Tour” in January 1992 during which he praised the Shenzhen SEZ as the way forward for the whole of China.

This was then codified into a series of policy statements including the opening up of the border regions to trade, relaxation of foreign investment regulations in cities along the Yangzi River and in a further 18 provincial cities, the complete opening for foreign trade of a series of coastal cities and the abolition of the Production Office of the State Council and its replacement by the State Council Office of Economic Trade, under Zhu Rongji.

The change of policy culminated in the adoption of a new programme for a “socialist market economy” by the Fourteenth Party Congress in October 1992. At the time, Workers Power judged this programme to be similar in vein to the “market socialist” policies that had been adopted years earlier in, for example, Hungary and Yugoslavia.

These had weakened, but not destroyed, the fundamentals of central planning in those countries. In the light of the events in Eastern Europe and the former Soviet Union where capitalist restoration took the form of the so-called “big bang” strategy of closing down planning ministries, liberalising prices and, thereby, practically halting production, we concluded that Beijing had chosen to retain some modified form of central planning. We were wrong.

With hindsight we can now see that this was the point at which the character of the state changed. Whilst continuing to be a bonapartist regime that had to secure its own economic base and at the same time balance between the main social classes, it consciously decided to transform its economic base from a planned economy to a state capitalist one.

Politically, the old guard had to be ousted from all positions of decisive power but a thorough purging was not necessary because the two years after 1989 had proved that they were, ultimately, a spent force, especially as their only realistic basis of support – the working class – had been suppressed in 1989.

Economically, the shift in policy was possible because the planned sector was by now only responsible for slightly more than 50 per cent of production. Any serious shortfalls in production could be made good either from the private and TVE sectors or from the world market.

The crucial evidence that the government was committed to the destruction of the planned economy came at a Central Committee Plenum in November 1993 which adopted “Fifty Articles for a Market Economy”.

This laid down the strategy for systematically dismantling the planning controls over the state owned enterprises and their transformation into independent “trusts”.

At the same time, it proposed a radical reform of banking, a move towards convertibility of the Renminbi, removal of restrictions on where foreign investment would be allowed and the end of the “iron rice bowl” labour regulations which guaranteed urban industrial workers job security, education rights, housing, healthcare and pensions.

Similar proposals had been made before but had not been implemented and although, in 1993, the state sector for the first time produced less than 50 per cent of all industrial production, it continued to dominate the industrial core, the “commanding heights” and remained the single most important sector.

Since no actual dismantling of the planning system had yet taken place, we continued to characterise China as a degenerate workers’ state. We should have recognised it as a bourgeois restorationist state which was still preparing to push through its programme.

The next two years, however, saw a dramatic change in the Chinese economy under the impact of “trustification”, the first closures of planning ministries and a flood of foreign capital. In fact, a serious degree of economic instability developed as enterprise managers sought to take advantage of growth rates of up to 18 per cent .

Characteristically, many opted for extending their production facilities rather than improving the productivity of existing plant and equipment. As a result, the state owned sector continued to grow at an annual rate of some 8 per cent even though this left a majority of its firms in debt and unable to make a profit.

It was during this period that the basis of production shifted decisively in favour of capitalist methods. Figures for 1996 show state owned industry producing only 28.3 per cent of industrial production while the collectively owned, mainly TVE industry, accounted for 39.4 and, very significantly, production in private hands (15.5 per cent ) and foreign owned companies (16.6 per cent ) amounted to 32.1 per cent .

In subsequent years, state policy focused on the incorporation of the 1,000 biggest and most productive plants in the state sector, leaving some 49,000 smaller enterprises to find their own solutions in the new economic landscape.

The majority of them appear to have been privatised at give away prices to their own managers. Others have merged to form more viable units and the remainder have been closed altogether.

However, there is now a clear trend towards not just “corporatising” state owned enterprises, as envisaged in the mid-1980s, but towards full privatisation in the form of shareholding joint stock companies.

The Fifteenth Party Congress in September 1997 officially sanctioned such companies, justifying them by the remarkable argument that they were a form of collective ownership and, therefore, entirely compatible with its socialist principles. This represents an important shift towards the developing bourgeois class within China.

Since that Congress, Zhu Rongji has been made Premier by the People’s Congress and, as head of the first government that contains no military figures, has overseen the dismantling of the remaining planning ministries, the divesting of the PLA’s entire industrial empire and the negotiation of an agreement with the USA to allow China to enter the World Trade Organisation. This deal, which included the opening of China to foreign firms and banks, is likely to result in a further dramatic restructuring of the Chinese economy.

The prospect for China, therefore, is one of mounting instability. The imposition of capitalist norms in industry has already led, according to the World Bank, to some 10 million redundancies per year for the last three years and this has generated a wave of political struggles across China.

Two decades of reform, culminating in the restoration of capitalism have not only changed the face of China but transformed and massively enlarged the Chinese working class, now the biggest single working class in the world. Out of its experiences and its current struggles, that class will find its own political voice and create its own political organisations.

The task of revolutionaries everywhere is to ensure that these are won to a revolutionary programme that destroys for good the dictatorship of the bureaucracy, expropriates the new capitalists and takes power into the hands of workers’ councils and a workers’ militia.