China: is capitalist restoration inevitable?

By Eva Cheng

China today confronts revolutionary socialists with some intriguing and controversial questions. How far have capitalist production and social relations been restored? Does this constitute a social counterrevolution that has rolled back the post-capitalist property relations established since the 1949 revolution? And what are now the strategic goals and tasks for revolutionaries?

China’s ruling Communist Party (CP) bureaucracy’s persistent rhetoric that it is still firmly for socialism has sent confusing indications as to where the decollectivisation of rural and industrial production—under the so-called “economic reform” since 1978—might be taking China. The CP has claimed that these were merely manoeuvres to speed up the development of productive forces, much needed to take China beyond its current primary stage of socialism. Even if it was the genuine intention, it at best represents the view of only one faction at the power centre. Ultimately, however, neither intentions nor proclamations matter. Their social consequences—their implications for the property and social relations in Chinese society—are what’s crucial.

The dominant faction in Beijing, headed by Deng Xiaoping until his death in 1997, has been pushing for capitalism in all but name, supported zealously by the military, provincial and local bureaucrats whose ability to pursue their private gains has been much enhanced by the material resources provided by sweeping fiscal decentralisation since the late 1970s.

Even if the central bureaucracy in Beijing now decides to recentralise the fiscal powers, its ability to do so is highly questionable. Harder to retrieve is production to serve a socialist goal. The obstacles would come not only from the substantial extent to which the economy has been privatised, but also from the expanding capitalist class which has significant interests at stake. These capitalists, and their market-hungry foreign counterparts, have a strong reason and the material resources to try and stop any reversal in the capitalist restructuring in China.

Since the late 1970s, the planned economy has been progressively chipped away, so much so that by 1997, state enterprises accounted for only 27.2 per cent of gross value of industrial output, 1  down from 34 per cent in 1995, 55 per cent in 1990 2  and 78 per cent in 1978. 3  Official statistics do not provide a breakdown in agricultural output by ownership categories, but the Asian Development Bank estimated that the state sector in 1990 produced less than 5 per cent of agricultural output in China. 4 

Moreover, “state enterprises” in China are not necessarily fully state-owned or don’t organically form part of the planned sector any more. Some have been partly sold to private or collective interests inside or outside China (through stock market listings or as non-listed joint ventures), run essentially as profit-making units but carrying the residual obligation to contribute financially to the state. Others have been leased out and are operating for private profit. Official propaganda strongly suggested that only loss-making and smaller state firms would be leased, but there were no safeguards at all that this would be the case.

The dismantling of the state sector has speeded up since the 1996 “Grasp the big and enliven the small” plan under which 1000 big state firms (of which 880 were in the industrial sector) were to be selected for capital injection and given privileges in credit, tax and supplies or even varying degrees of monopoly in a bid to groom them into super conglomerates. 5  Meanwhile, all remaining state firms would be available for leasing or sale into private hands. 6 

Having a strong state sector does not equate with socialism. But to implement social priorities in a socialist direction, or simply to improve the material basis for moving towards that goal, planned production and distribution are necessary. Early after a revolution, especially in semi-colonial countries in which productive forces are underdeveloped, it is necessary to retain a private sector to help consolidate the socialist order.

However, there was little evidence that the Chinese bureaucracy was re-introducing capitalist production only as a minor and decreasing part of the economy or for a revolutionary purpose. Not only were workers continuously deprived of democratic control of production—which has seriously distorted overall socialist construction in Chiana—the planned sector has progressively been displaced. Therefore, a critical tool for socialist planning and implementation has been seriously undermined.

What stance for socialists?

To gauge the strategic options facing China today, a crucial question to answer is whether the socialist property relations established since 1949 have been damaged beyond repair.

The cp seized power in 1949 and took predominant control of the key means of production by the mid-1950s. Under the pretext of countering capitalist forces both within the cp and the broader society, the Mao Zedong leadership refused to institute democratic functioning at any level—in national or local elections, within the party, or within the production unit. Instead, it consolidated the party leadership’s tight grip on state power which enabled its members to extract a privileged existence from the socialist property system. Its crazy idealist project of the 1958–60 Great Leap Forward contributed directly to the famine in which 20 million people were estimated to have died, 7  while its continuing purges since the late 1950s led to widespread demoralisation and a serious weakening of the socialist consciousness of workers (including those in rural production).

However, the socialist property relations won since 1949 remained. In fact, in order to continue thriving on it, the cp had been driven to help preserve it. Therefore, the central task for socialists in China had been to work towards a political revolution to get rid of this parasitic layer so that the state power would be in the hands of those to whom it rightfully belongs—the working class majority. The objective then was not to achieve a social revolution where the property relations needed to be rebuilt.

But since 1978, the drive towards capitalism has gone so far that this earlier conclusion needs to be reviewed.

A decisive factor that has pushed China onto a different course has been a fragmentation within the bureaucracy over which property and social systems can best enhance their interests. As will be elaborated later, despite delays caused by sections of the cp as they sought to preserve the pre-1978 status quo, the dominant Deng faction managed to ram through increasing capitalist overhauling of the property and production systems. This drive has gone so far that the planned sector now exists largely in name with most state firms operating as stand-alone production units, profit-oriented, but with some residual privileged access to supplies and credits and the obligation to contribute part of their profits to the central treasury.

Whether in Beijing or the provinces, this dominant faction has nurtured the formation of a fledgling capitalist class whose interests are tied integrally to the further expansion of capitalist production. This layer came predominantly from, and with the backing of, cp bureaucrats, which included the military, whose political power helps not only their massive looting of state resources but also their competitiveness (such as in privileged supplies, tax exemptions, credits, foreign exchange and export rights) and primitive capital accumulation.

Swelling overseas bank accounts and other assets, luxurious villas and other personal consumption apart, an increasing part of this loot and profit was put to capitalist reproduction. Beijing’s repeated public warnings of the massive “disappearance” of state assets100 million yuan per day according to one estimate 8 the massive business empire of the military 9  and the growing private sector are powerful indicators of the extent of this process.

To disguise its capitalist push, Beijing has tried to market the crudely mechanical idea that China remained socialist so long as the state sector controls a majority share of the economy. Its exact yardsticks aren’t spelled out but nominal ownership has been a main reference. Not only did it make a fetish of this legalistic approach, it even arbitrarily included into the state sector firms on lease to private interests as a “proof” of its argument that China is still socialist! Even with this mechanical measure, the “state sector” only accounted for 27 per cent of industrial production in 1997. Though they were still employing the bulk of the urban workforce (65 per cent in 1995), 10  Beijing has warned that at least half of them would be sacked as soon as practicable (read: politically safe to do so) because they were a profit-drag.

Beijing’s justification shifted yet again over the past few years, gradually dumping the state sector in favour of the “public sector” as the critical reference for its headcount of the “socialist content” of the Chinese economy. Apart from the state firms, the “public sector” also includes collective firms and a host of capitalist production units arbitrarily labelled otherwise and justified them as an invention of the socialism in China which carries unique “Chinese characteristics”.

Collective firms, owned by various local adminstrative units, have experienced a major expansion since Beijing started farming out power in the late 1970s to regional interests in the bureaucracy. Totally profit-oriented, they are even more remote from the planned sector than the nominal state firms and many of them are in fact private firms wearing a fake “red cap” for supplies, credit and tax expediency.

The key examples of the arbitrary categories are firms under joint-stock company structure, whose shares theoretically can only be bought by the staff and employees of that firm, and those owned by mass organisations and social funds. Again, they are stand-alone firms, not part of a planned sector geared to meet social needs but to maximise the profits of its “investors”.

The social identity of the owners has no automatic bearing on the purpose and nature of a production unit. In capitalist economies, many firms were taken over wholly or partly by way of “management buyout”, that is, bought by its managers and employees. But this act, on its own, does not change at all the profit-oriented/capitalist nature of the firm. The same goes with the companies whose shares were bought by trade union, charity, other non-profit-oriented organisations or even with workers’ pension funds.

Moreover, the proportion of shares held by the employees of these joint-stock firms can vary. Beijing’s statement that the gaps “should not be very big” provides no guarantee against the management gaining decisive shareholding control. 11 

Even if individual firms aspire to tone down their profit orientation and give some consideration to producing products of social needs, they can at best be capitalist units “with a heart”. The crucial determinants of the socialist nature of these firms are their fundamental purpose of production and the extent to which they form an integral part of a growing planned sector which gears towards meeting social needs. (Obviously, this mission is hard to achieve without the support of a revolutionary state power.)

Beijing has quite the reverse concern. It said a prime undertaking for state-owned assets should be to create “economic return” for the governments which oversee them. It added that the socialist goal could still be served by smartly using a small amount of state assets to control greater amounts of “social capital” and, in doing so, “guide and influence” other economic sectors. To “prove” its success in this manoeuvre, it proclaimed that a 1996 survey of production units in Beijing revealed that “public ownership” accounted for 99.7 per cent of the total capital in state-owned enterprises, 94 per cent in collective units, 75.2 per cent in cooperatives, 50.9 per cent in joint-stock units, 25.6 per cent in Sino-foreign joint ventures, 24.7 per cent in firms funded by Hong Kong, Macau and Taiwanese interests, and 5.9 per cent in the private sector.  12 

It does not take an economic genius to work out how little, if any, can such “publicly owned” assets guide and influence the collective units, the cooperatives, the joint-stock units, the ventures owned by or jointly held with foreign capitalists and other outright private interests away from their profit orientation.

From 22.3 per cent in 1978 and 36.6 per cent in 1995, the collective sector’s share of the gross value of industrial output increased to 44.4 per cent in 1997.  13  With the “red” disguise over the collective sector, the real strength of the private sector is seriously understated in official statistics. Even so, the formal private sector—including those foreign owned—in 1997 accounted for a high 28.4 per cent of the value of industrial output. Though a small dent from its 1995 peak share of 29.5 per cent (12.9 per cent for the individually owned, that is, those with up to eight employees, and 16.6 per cent for the remainder), the formal private sector has come a long way from its virtual non-existence in 1978 and the 3 per cent share of industrial output in 1985. 14 

To formalise this new retreat, Jiang Zemin, the chief of the cp, government and the military, told the cp’s Fifteenth Congress in September 1997 in his formal report that:

On the premise that we keep the public ownership in the dominant position, that the state controls the life-blood of the national economy and that the state-owned sector has stronger control power and is more competitive, even if the state-owned sector accounts for a smaller proportion of the economy, this will not affect the socialist nature of our economy. 15  [Emphasis added.]

Jiang explained:

The public sector includes not only the state- and collective-owned sectors, but also the state- and collectively-owned elements in the sector of mixed economy…We should make a strategic readjustment of the pattern of the state-owned sector of the economy. 16  [Emphasis added.]

This indicates that further privatisation of the state sector is yet to come.

There is little doubt that the dominant section of the bureaucracy has acquired a stake in the capitalist transformation of China and is working to make sure it continues. This was a central issue that a massive number of students and workers were protesting about in Beijing in the second quarter of 1989. With residual political inhibitions about being openly for capitalism, the dominant wing was covering this process with socialist rhetoric.

“It’s glorious to get rich…Let some people get rich first,” said Deng Xiaoping, trying to fool the rest that they will prosper in time. These glorifications of the capitalist process aren’t essentially different from the myths propagated in the capitalist West: that small capitalists (many misnamed “individual enterpreneurs” in official statistics) “earned” more because they worked harder, especially in terms of “sophisticated mental labour”, and bigger capitalists were merely getting rewards commensurate with their risks.

Beijing’s posturing even took the form of high profile “ideological campaigns” against capitalist thoughts and tendencies—a major media blitz often accompanied by repression of political opponents. As elaborated later, they were launched time and again throughout the 1980s and early 1990s which, together with the repeated stalling of the “economic reform”, has blurred the political nature of the drive to capitalism.

The dismantling of socialist property relations in China took a further leap following Deng Xiaoping’s southern tour in early 1992, which was followed by more partial sales of key state firms to local and foreign capitalists through the stock market. For a few years until Deng’s death, those bargain sales of lucrative state assets triggered a mad scramble for Chinese “red” shares in stock markets in China and overseas.

A decisive advance of the creeping social counterrevolution in China accompanied this euphoria.

Given the disguised and protracted nature of this zigzag process, it is useful to examine some of its key developments to understand how it took shape, and how far it has gone.

Bureaucracy: interests dictate

There were no indications that the bureaucracy had a blueprint to guide its push for capitalism. Its changing excuses in justifying the “reform” make amusing reading: from a planned economy supplemented by market regulation (1979–84), a planned commodity economy (1984–87), an economy in which the state regulates the market and the market regulates the enterprises (1987–89), an economy with organic integration of a planned economy and market regulation (1989–91) and a socialist market economy with Chinese characteristics (from 1993). 17 

The process was marked right from the start by intense conflicts of interest among various wings of the bureaucracy. A growing wing saw their interests as best served by capitalism, while others defended the pre-1978 status quo.

The scheme kicked off quietly in 1977 as an experiment in Anhui province to allow sideline private agricultural production. China was in a major crisis. Mao Zedong’s September 1976 death and the arrests shortly after of his followers around the Gang of Four triggered a scramble for power. The economy was devastated, a legacy of extreme commandism and mad priorities during the Great Leap Forward, the subsequent famine and the 1966–76 Cultural Revolution.

Widespread prosecutions during Mao’s rule—especially the 1957 Anti-Rightist Campaign and the Cultural Revolution—had devastated millions, many of whom were still, in 1977–78, deprived of civil rights and other essential social entitlements, and discriminated against in jobs. There were popular demands to redress these wrongs, 18  but unrestrained rejection of the past order could endanger the cp’s rule.

Deng Xiaoping and a broad layer of the bureaucracy who were purged during the Cultural Revolution resumed power in 1977 when top positions were still held by remnant Maoists—the “Whatever Faction”, named after its aggressive advocacy that “whatever is Chairman Mao’s decision we must firmly follow”, “whatever is Chairman Mao’s order we must loyally implement” and headed by Mao’s chosen heir, then party chairman Hua Guofeng. While the Whatever loyalists were struggling to preserve the status quo, Deng and other newly rehabilitated cadres were seeking popular support to consolidate power.

Rural decollectivisation

Under the 1977 experiment, rural households were allowed to engage in sideline production (strictly forbidden during the Cultural Revolution) and to sell their produce in the unofficial “free market” with no price restrictions, but on condition that they met production quotas. The sideline incomes were widely welcomed. The local and provincial bureaucracies stood to gain and pressured to have their regions included in the experiment. This policy was formalised in a crucial Central Committee meeting in December 1978. Capitalist “experiments” with industrial state firms were also approved under the morale-boosting “strategic objectives” to modernise China in four major fields and quadruple the country’s gdp by the year 2000.

By 1980, this new production arrangement was extended to most parts of rural China. It replaced the commune system, each involving thousands of producers, subdivided into brigades and smaller production teams, where production was increasingly socialised though still held back by low technology. Production was prescribed from above and farmers’ remuneration was linked directly to arbitrary social and political categories, by and large at the mercy of local bureaucrats.

Under the new system, a farmer had the potential to earn more, but only as part of a household. Socialised production suffered a major blow. Economies of scale have largely gone and mechanisation and proper upkeep of supporting infrastructures such as irrigation has been made difficult. The loss of independent identity as a producer hit women especially hard. They were forced to earn their existence as part of the family institution which was and still is dominated by patriarchy.

Farmers’ productive zeal in a Chinese commune was undermined by the “scissors policy” under which agricultural produce was underpriced in order to support industry and better welfare in the cities. That might well have been a correct tactic for the best defence of socialism in China, but rural producers would only extend their support if they were politically convinced of it, which wouldn’t be possible without democratic decison-making on production matters. This wasn’t the case in China and, not surprisingly, rural producers were atomised into being preoccupied with their individual interests. It was made worse by the Mao years of purges, famine and economic devastation.

In any case, the bourgeois norm of distribution—that is, distribution according to labour rather than needs—is a reality that most post-revolutionary regimes in semi-colonial countries have to come to terms with in view of limitations of their productive forces. Establishing a link between the reward and labour productivity and allowing a degree of non-exploitative personal labour can help to raise production enthusiasm and does not necessarily run against the socialist goal. However, under Mao, such options were largely banned, only to swing to the other extreme under Deng, nurturing a full-blown comeback of capitalism under the pretext of developing the productive forces.

Following the dissolution of the communes, all land was still nominally owned by the state, but each rural household was alloted a small plot, on lease for 15–30 years. 19  Farmers could and did sell their land lease titles and that helped to nurture larger scale capitalist farmers.

However, nominal state ownership of land and state procurement of part of the produce provided no immunity against the capitalist transformation of agricultural production. Narrow individual interests, often short-term, overrule broader societal needs: farmers’ new freedom to choose their crops and low procurement prices for grain have led many to give up grain production, contributing to China’s rising grain imports and threatening its food security.

China’s precious bank of cultivated land has been increasingly encroached on by construction, not necessarily the most sensible use of the land for the overall interest of society. Yet it has been welcomed and encouraged by grain-growing capitalists in other countries who were keen to sell more to China. Worse, many such properties were built for speculation, which worsened the competition for (not to mention the waste of) cement and other resources in short supply.

An average rural person in post-1949 China did not have the freedom to move to the city, blocked by a permit system that strictly segregated the rural and urban populations. A powerful enforcement tool was to deprive illegal urban residents of subsidised food supply and other essential entitlements.

Primitive capital accumulation and concentration quickly gathered pace in rural China, finding their way into some more lucrative industrial production. Though mostly of low technology and small scale, their competitiveness and profit margins were increased by the abundant supply of dirt-cheap rural labour, who weren’t entitled to the social wage of their urban counterparts. Officially only a small portion of rural enterprises were privately owned and most were held by collectives, but in fact many of the latter were private operations in disguise. 20 

The shareholding breakdown in these collectives are hard to come by. But given the continuing monopoly of political power by the bureaucracy, it is inconceivable that their ownership isn’t dominated by cadre-turned-capitalists or backed by those still in political power. Many collectives were on lease to private interests. In any case, collectives are outside the planned sector and outrightly profit-driven.

Privatisation of state enterprise

In a 1978 experiment to invigorate sagging industrial production, selected industrial state enterprises were given more discretion to make operational and sales decisions, including the retention of a portion of their profits, on condition that they surrender to the central treasury the bulk of them and meet production quotas. That system was welcome and was adopted widely by 1982.

The profit retention levels and quotas were negotiable, between enterprises and local officials, and exchange of favours were common at the expense of treasury receipts. This contributed to the historical budget deficit in 197917 billion yuan 21 and a 1983 switch to levying by way of tax under the “‘tax-for-profit” system.

As a transitional step, all large and medium state enterprises would pay a flat profit tax of 55 per cent, before splitting the remaining profits—again by negotiation—between the central treasury and the enterprises. From late 1984 a uniform tax rate applied to all firms, but a new “adjustment tax” was added on those that were extraordinarily profitable. Meanwhile, under the pretext of promoting “diversity”, contracting, leasing and the so-called “shareholding corporate structure” were tested out.

Under contracting, a firm (which can also be an industry 22  or a government department) would have near complete discretion in running its business if it was able to meet production targets, financial obligations to the state and be fully responsible for its own losses. The bigger its total profit, the larger the proportion of it that the firm could keep.

There are three main types of contracts. One laid down the unit’s obligations on production targets and financial contribution to the state in exchange for the state’s guarantee on capital for reinvestment. A second, called “two guarantees and one link”, the most popularly adopted, required the unit to guarantee a pre-determined level of financial contribution to the state and reinvestment for expanded reproduction and technological upgrading, while wages were linked to productivity. The third capped a unit’s financial obligation to the state to effectively 70 per cent of profits (a 55 per cent tax on total profits and 33 per cent on the remainder). 23 

The degree of profit contribution could vary, 24  opening room for political pork-barrelling. All firms under a contract had to contribute a set amount of profits to the state. But for the remaining profits, while some could keep them all, others were to surrender part of them based on a set ratio or a rising scale. At the end of 1987, 95 per cent of the big and medium state firms were operating on contracts in one form or another. 25 

One key objective of contracting was to limit the state’s financial obligations towards the contracting unit. Another was to insulate its management from “interferences” from government officials in order to maximise its profitability. But problems remained in both areas. Bailouts continued from the centre, mindful of excessive political risks, and so did interference, especially from local governments. 26  By having quasi-ownership of state enterprises under their jurisdictions, provincial and local governments were able to milk them for revenue, which would be much harder to achieve if a firm acquired greater autonomy.

Another problem of contracting was that a firm was induced to favour decisions which maximised its own short-term gains, even at dearer longer-term (and public) expense. 27  Haggling on terms during the contract period were also widespread. The accounting for the net worth of state assets was rudimentary and lax, an issue which Beijing recognised officially as a problem only years after the “reform” started, indicating that an enormous amount of looting has not even been accounted for. Given the dominance and widespread corruption of the cp bureaucracy on all levels, there is little doubt that most of the booty has been pocketed by the cadres.

Price reform

The rural and urban “reform” had clearly crippled the planned economy. Yet it was not entirely redundant, say in the control of the supply and prices of key industrial inputs and staple foods. While such residual, now disjointed, controls have created new smuggling and other profiteering opportunities for one section of the bureaucracy (many of whom are in the military and the provinces along the coast and the border), they were increasingly at odds with the interests of other sections who have established a stake in capitalist production.

This drag of residual state control on capitalist production was first officially recognised in 1981 and a proposal to deregulate prices for industrial inputs was raised in 1984. Manufacturing interests, mostly in coastal provinces, vigorously opposed the proposal as their production costs would rise. Their guardian ministries, whose power base and income depended on their well-being, backed them up. The extractive industries, mostly located inland, and the ministries whose control they were under and which stood to gain from the change, manoeuvred zealously in the opposite direction. At the end, in 1985, only some industrial prices was deregulated.

“Prices” in the official market, often for an accounting purpose, were a legacy of the planned economy. But the concurrent existence of a capitalist “free market”, where prices were higher, opened room for highly profitable arbitrages. 28  Bureaucrats, who have control over supplies, channelled valuable state resources—especially those in short supply—to the “free market” for their private gain. This lucrative source of income would dwindle with price reform.

A 1986 national work conference—an institution to give provincial interests a direct voice in policy making—to examine comprehensive price deregulation again drew vigorous dissent. The opponents included the treasury which had already spent 300 billion yuan during 1979–86 to compensate the industries affected by price deregulations. 29  These industries’ guardian ministries added their voice, resulting in the fact that only the price of steel was deregulated.

In mid-1988, the Politburo approved a new proposal for price reform, but widespread panic buying quickly followed, driven by fear of sharp price rises, which led the Central Committee to shelve the plan for “at least two years”.

A recarving of turfs—fiscal decentralisation

In line with the capitalist restructuring in production, provincial authorities were pressing since the late 1970s for a direct share of fiscal revenue and greater spending discretion. In return, they offered to guarantee a fixed revenue contribution to the treasury and a reduction in the centre’s obligations to bail them out. With Deng’s approval, a 1977 experiment in Jiangsu and Sichuan provinces on this proposal was quickly copied in more provinces. 30  Deng was still embroiled in a succession wrangle with Hua Guofeng and needed to broaden his support.

But the provinces’ fiscal contribution fell short of expectations and by 1979 the national budget was in limbo. Deng, now more consolidated in his position, tried to recoup some fiscal powers from the provinces in late 1979, but the move was strongly resisted. A compromise was reached in 1980 and the new regime, formalised into a contract system, was applied to most parts of China. Renewable once every five years, the new arrangement would free the centre of future obligations to plug budget shortfalls in the provinces in return for losing the power to impose on them spending and other fiscal parameters.

The level of revenue obligation, however, can vary from one region to the other. Finer contract terms were also negotiable, between the provinces and the centre, often determined by factional interests. Almost as a rule, the provinces observed those terms in their favour: minimising the revenue that they passed on to the centre while still pressing to be rescued when they were in trouble. 31  Following the 1981–82 economic retrenchment, for example, many provinces pressed to have their contractual terms revised. Many had their way because a section of the central bureaucracy didn’t find it in their sectoral interests to turn these demands down.

In an extraordinary move to increase income, the treasury in 1982–83 seized control of five profitable industries—automobiles, tobacco, petrochemicals, non-ferrous metals and shipping—strengthening their monopolies (to improve their profitability) despite the fact that this move ran against the general thrust of enterprise reform. 32  Before 1978, profits from state firms accounted for the bulk of treasury income. 33 

The treasury also wanted to replace profit-sharing (by way of a contract) by a flat tax on state enterprises. Profit sharing, subject to negotiation between enterprises and their guardian ministries, was easily abused to minimise revenue contribution to the treasury. A standardised tax, however, would give the treasury bigger revenue guarantees and a share of a firm’s rising profit.

Profit sharing, which permited a province to expand its income base without giving up a rising share to the treasury, was generally welcomed by the provinces. In addition, it helped to preserve their patronage control over their pet enterprises. This option was generally supported by profitable enterprises, their ministries, the forces around the State Economic Commission and then party general secretary Hu Yaobang. The tax alternative was favoured by the treasury, elderly pro-centre (centralised economy) leader Chen Yun, and then premier (and Hu’s political rival) Zhao Ziyang. The stakes were high and the fight was heated.

The State Council eventually decided in 1983 to favour the tax option, but resistance had not gone away. Opposition only laid low as the broader economic picture wasn’t working in their favour: while the centre was still suffering from huge, though reduced, deficits, state enterprises were retaining a record level of profit. The differences between Hu and Zhao on this crucial subject, openly revealed in 1982, weren’t over even after the tax option was chosen. This gave confidence to the provinces to hold their line, knowing a united crackdown from the centre was unlikely.

Moreover, some teeth of the tax levying system had been removed: enterprises’ financial obligations weren’t supposed to be negotiable but they still were, and they continued to rely on state subsidies to cover losses. The treasury’s bid to levy an additional “adjustment tax” on super-profitable firms drew strong resistance from powerful firms. This taxing system was to start to bite in its second phase, scheduled for 1985, under which taxes were to be paid directly to the centre which would sever the revenue link between enterprises and the local bureaucracy.

For unknown reasons, Zhao brought forward to 1984 the implementation of the second phase. The resistance was strong, leading a June–July national work conference to an impasse. As a compromise, a number of proposed taxes were scrapped, and the concession previously reserved for smaller enterprises which allowed them to repay bank loans ahead of tax—a measure that encouraged excessive borrowing and capital investmentwas extended to bigger enterprises. However in a backflip, this hard-won victory of the “tax-for-profit system” was junked in 1986 in favour of a return to profit-sharing! 34 

The options over tax-for-profit or profit sharing as a way the centre sourced its revenue directly affected how much resources and power would go to different parts of the bureaucracy. Not surprisingly, the conflicts were intense. However, it was only one of many issues that has split the bureaucracy since 1978.

Opposition within the CP disintegrates

The contending parties were powerful groups defending their vested interests. They had no differences on the broadest policies of pro-capitalist restructuring; they just didn’t share the same interests on how to get a better deal for themselves. Both camps paid lip service to socialism, as was the case with other less-defined interest blocs on other issues. They had no permanent loyalty to any particular perspective, but were driven primarily by their own narrow interests. For example, after years of barracking strongly for the tax-for-profit system as opposed to profit-sharing contracts which were promoted by Hu Yaobang, Zhao Ziyang quickly switched his support for profit sharing soon after Hu lost power in early 1987. Little could explain this backflip except the attempt to poach the loyalty of Hu’s power base in the provinces with the profit-sharing lobby.

From the very beginning of the “reform”, a section of the cp opposed it. But they were neither a crystallised, stable faction, with clearly identifiable membership nor were they based on a coherent ideology or an alternative strategy for running China. Hua Guofeng’s demise in 1980 spelled an end to the obstacles coming from the Whatever opponents. (Most of its core leaders were sentenced to long jail terms that year on “counter-revolutionary” charges.) The other main personalities critical of the “reform” were mainly elderlies—Wang Zhen, Peng Zhen, Hu Qiaomu, Song Pingand a handful of second generation stooges such as Deng Liqun and later Li Peng. Their only noticeable common ground was their defence of the pre-1978 status quo and extreme dogmatism characteristic of Mao’s time. Deng and other reformers called these cp opponents, which they never named, the “Leftists” and their die-hard elements the “Extreme Leftists”.

They were actively in opposition despite Deng’s 1982 move to set up the Central Advisory Committee of about 200 members as a transitional home for retired leaders in a bid to squeeze them out. It was designed to have a 10-year life only and its Standing Committee members are entitled to attend Politburo sessions as “observers” (which often amounts to a de facto vote).

Up till the mid-1980s, they seized on every major setback of the “reform” to launch an attack. Their most visible offensives took shape in the official media (and public billboards), as a launching pad and propaganda medium for their offensives against “spiritual pollution” and “bourgeois liberalism” the code words for the reform and all its ills. One such campaign was launched in late 1981, again in 1982 and 1983, with token support from Deng. But when the 1983 offensive started late that year to extend its attack to the rural reform—a cornerstone of Deng’s capitalist program—Deng intervened promptly to stop it.

In a coup against his opponents, Deng called for an extraordinary party conference in 1985, two years before a party congress was due, to force his key opponents—who, like himself, were mainly in their 80sto retire. In that move and a number of top level meetings around that time, over 100 elderlies resigned from official positions, which included 64 of the cc’s 210 members. Ten of those resigning came from the 25-member Politburo. 35  To maximise the pressure, Deng resigned in 1987 from all key positions except for his chairmanship of the Central Military Commission.

These opponents’ influence had started to wane since the late 1980s, due a lot to old age and death. Chen Yun stood out, but not as a total opponent. Among the most senior of all elders, a Politburo member since 1934 36  (Deng only since 1955) 37  and for a long time in charge of economics nationally, Chen supported the reforms but until his death in 1995 kept the pressure up on Deng in arguing vocally for a real dominance of the planned sector. 38 

‘Political reform’

The saga in relation to “political reform” in 1986 powerfully illustrated the instability of Deng’s rule and the popular yearning to be freed from the cp’s tight ideological and political controls.

The immediate reasons that prompted them to take the dramatic move remained unclear, but Hu’s surprising call in April 1986 for people to “speak the truth” strongly implying less restrained criticism of social policies—was part of a broader drive in which other top bureaucrats of the reformist faction and the propaganda department also threw their weight behind. 39  As any social critique could lead the finger to be pointed at it as the ruling party, the cp has held a tight grip on freedom of speech. In fact, it treated opposition to its rule as near-treason. It was unimaginable that the bold move led by Hu could have gone ahead without Deng’s nod.

But as in 1957 and 1978–79 when the cp also openly invited unrestrained social critique, intellectuals and students around the country responded zealously which resulted in another wave of politically empowering debate. On all such occasions, they escalated their demands to a quest for democratic reforms. Students in Hefei, Anhui province, even took to the streets in December 1986, which was soon followed in Beijing, Shanghai, Nanjing, Hangzhou and Wuhan. 40  Deng’s key opponents, elders Peng Zhen and Wang Zhen, immediately put the blame on Hu Deng’s chosen heir—and campaigned to remove him from power. Surprisingly, Deng didn’t object. In January 1987, Hu resigned as party secretary. Soon after, yet another campaign against “bourgeois liberalism” was launched.

Zhao Ziyang, who soon took over as party secretary, immediately decreed to limit the campaign to within the party. But Deng’s opponents still tried to broaden it. Deng intervened in April 1987 41  to redirect the campaign against them, ordering that the main target be the “Leftist” forces within the cp which opposed his reform—and not the “Rightist” coined in the 1957 Anti-Rightist Campaign, used loosely since then in reference to the dissidents (including the intellectuals) outside the party. 42  Later in 1987, more of Deng’s opponents were removed from the Politburo, but the 1988 overheating of the economy had provided them with new ammunition.

In September 1988, the cp—clearly in trouble—had to stall the reform, in the name of “shifting the focus” to “rectification” and “consolidation” until 1990. However, inflation didn’t subside. Shortages fuelled more corruption, and more pain and anger among the broad population, which helped spark the mass mobilisations in 1989 demanding democracy which ended in the June massacre. Widespread economic sanctions by the imperialist countries that followed were imposed to officially punish Beijing for “violating human rights”, but by 1991 they remained only on paper while foreign capitalists’ dealings with China (mainly sales and loans) started to gather pace again even though political repression in China continued.

It was a major setback for the “reform”. The “rectification” period was originally projected to last two years, but it didn’t end until Deng’s southern tour in early 1992 to invigorate the “reform”. By then, Deng’s opponents had already been weakened signficantly. Shortly after, Deng led another big privatisation push, seemingly to make up the lost time.

It was a broad scheme to “corporatise” state firms, in the name of “modernising” them. They were turned into limited companies, with their asset and liability system and limits, even accounting methods, brought into line with the standards under capitalism. Evaluation of their worth can therefore be more efficiently done and their appeal to potential foreign buyers increased.

To make it easier to speculate in them, a portion of them had their balance sheets modified to meet listing requirements in foreign stock markets, getting them ready for listing at any time. Since Deng’s tour, two stock markets were launched in China and an expanding fleet of the stocks of major state firms had been listed on overseas stock exchanges.

Deng’s February 1997 death has not changed this course. Before Deng’s death, most of his prominent opponents had already passed away, and their followers were hardly a force. Although Jiang Zemin has far from consolidated his power base, and the reshaping of the power lineup will take time to settle, the capitalist overhauling of the Chinese economy continues, with the active promotion of the ruling bureaucracy. Jiang’s July 1998 order that all army, party and government units must immediately halt their extensive involvement in businesses sounded like wishful thinking, because there is simply no chance that the already deeply entrenched and extensive web of interests would be relinquished upon an order. However, Jiang’s latest order was yet another confirmation of the extensive involvement of cp interests in capitalist production.

China’s workers today

A crucial reference point to ascertain the nature of a social order is how its working majority are faring.

Socialism is a social and economic order operated by and for the working majority, through a system of democracy. Production should be geared and priorities set to most efficiently achieve this objective. Socialised and planned production is a necessary means to bring about the material basis to make it happen (although certainly in all the early stages of socialist construction there’s also a place for individual producers—unlike Mao’s bizarre Cultural Revolution when even keeping a chicken in your back yard got you branded a capitalist). A state power that acts in the interests of the working majority is essential in putting this process into practice.

A strong planned sector, defended by the state power, which organises the most important sectors of production is an important medium in taking a society towards socialism, although on its own it doesn’t equate to socialism. But in China today, with a declining nominal state sector, driven primarily to generate private profits, there’s been a qualitative move away from socialism.

Over 80 per cent of China’s population has been living in the countryside and forced to stay there since 1949. Land for production and housing was provided as a matter of course for the rural population who were organised for collective farming around a national network of communes. Basic health care was also provided and the extreme polarisation of wealth that existed before 1949 was gone.

Most key government officials were cp members anyway, but the party still established an elaborate structure of its own to mirror and station at each level of government to ensure day-to-day control. Like the political system, production decisions were prescribed. Remuneration, measured by work points based on labour time, was reasonably standardised (with male and female difference) but local officials had the power to decide the scores. Mechanisation of farming remained at low levels and the scissors policy had kept rural living fairly primitive. This was hardly a recipe to encourage productivity.

With the new production freedom in 1978, petty commodity production quickly swamped the countryside. The state still technically owns all land but grants the right to use a plot to every rural household. Such rights are transferable, which led to the emergence of a de facto land market and concentration of land controlled by a thin layer of bigger capitalist farmers, often originating from or under the protection of corrupt officials. If rural households were enticed into foregoing their land entitlement for short-term gains and lost a means of livelihood, too bad. Cultivation on a household basis, or even small-scale cooperative farming, aren’t guarantees for a stable income either. This problem is particularly acute for the inland and remote provinces where the physical conditions are difficult. There, cultivation and hard work alone had not provided the people a ticket out of impoverishment.

The dismantling of the post-1949 cooperative medical system, which provided the rural population with basic health care, has made things worse. From 90 per cent in 1978, coverage of the system was slashed to 4 per cent in 1990, according to the March 3–9, 1997, edition of Beijing Review. It said: “Farmers in most parts of the country have difficulties gaining access to doctors or obtaining medicines or medical treatment”.

The state still procures some produce for which the prices had been raised but it was still dwarfed by income offered by township and village sweatshops to which many had switched. In 1994, 26.9 per cent of the rural workforce was employed by them compared to 9.2 per cent in 1978. 43 

Greater freedom of movement also made it possible for a rural person to seek a job in an urban sweatshop, in petty trading or to start their private business. Tens of millions of them rushed to neighbouring cities or the special economic zones (many in sweatshops owned by foreign capitalists). Urban welfare was shrinking, but anyway they weren’t entitled to any. Even in terms of only money wage, they are getting less than those with urban residential status. They form a super-exploited layer which makes “investment” in China particularly lucrative.

In the city, the state was the predominant employer before 1978 (employing 78.3 per cent of the urban workforce in 1978). 44  The state enterprises were also a basic social unit through which a range of social provisions were delivered, including housing, health care, pensions, childcare, education, communications and price subsidies. 45  Such a social wage was equivalent to about 80 per cent of the money wage. 46  Foreign capitalists blamed this expenditure for the “losses” of China’s state firms, saying they would not be attractive purchases until such a “burden” was gone. For example, the World Bank estimated in 1996 47  that the state firms’ social service payments equalled their “losses”, meaning they would have made a profit if their workers hadn’t been provided with such basic necessities. They were speaking the truth from the stand point of their own interests, but were also imposing capitalist categories onto a social arrangement geared to achieve a totally different objective.

Despite the lack of democracy, which seriously held back socialist development in China, the post-1949 economic order was socially more progressive than capitalism. It is debatable whether the “scissors policy” best served the strategic needs of China’s socialist order and urban workers would certainly get less entitlements otherwise, but the urban welfare system provides an example of how the working majority’s essential needs can be prioritised. Whether those benefits were most efficiently delivered by state firms is only a technical matter.

For some years, most state firms had the power to fire their workers but few had done so on a significant scale, clearly because such a move would be socially unsettling. Many of them have made a big number of workers redundant and delayed wage or pension payments but they still haven’t dismantled the long-existing social welfare system. But that’s true only for workers employed before 1986. Those were “permanent workers”. Workers that state firms employed after 1986 were on a contract, and had to fund their unemployment insurance and pension to buy future protection, just as in capitalist economies. But enforcement of such new schemes has been difficult—firms weren’t keen on such expenditures while workers weren’t confident of the security of these funds.

In name, the state sector is still employing about 66 per cent of the urban workforce. But an increasing portion of them have been deprived of such protection due to the labour contracts, and the partial or quasi-privatisation of state firms. Those who are still entitled to the previous more comprehensive social provisions are a shrinking minority of the urban workforce. 48 

But of them, many were sent home “waiting for work” because their firms have reduced or stopped production altogether. By September 1996, 6.5 million workers (out of an urban workforce of 173.5 million in 1995) from 35,000 state firms were in such a situation. In addition, 30–50 million more could lose their jobs any time because their firms were theoretically bankrupt. 49 

Moreover, joblessness has become a fact of life. Central Bank governor, Dai Xianglong estimated that in the first half of 1996, 7–8 per cent, or 12–14 million, of the urban workforce was unemployed though only 5.2 per cent was unofficially unemployed in 1995. 50  This added to the 120–140 million “surplus” workers in agriculture, or 35–40 per cent of the rural workforce. 51 

These figures give a glimpse of the human price being paid for the restoration of capitalism. It is a counter-revolution that seeks to overturn the more progressive social order that was established in China in 1949. Before 1978, the ruling bureaucracy sought to defend this social order such that they could continue to benefit from it, like parasites. Not any more. A growing portion of them have come to derive their prime interests by being a participant in capitalist production.

While this process of capitalist restoration is not yet finished, the critical task for socialists is clear—a social revolution is once again needed, for workers to seize the state power, smash yet again the capitalist property system and, on this basis, take the production and social order forward in a socialist direction.

For quite some time after a revolution, a society wouldn’t be socialist in the ultimate sense of the word where distribution according to needs is actually achieved. The productive forces needed to develop correspondingly to match the task, to provide it with the material basis to make it possible.

Barring other factors, this transition is likely to be shorter and easier for the advanced imperialist countries because their productive forces are more developed. But a reversal of it, a counter-revolution, is always a possibility even there, and certainly in the interests of capitalist classes within and outside the country to bring it about. Whether such a backsliding occurs will be determined by class struggle, the balance of class forces, within the country and internationally. A continuing defence of the gains of a revolution is therefore imperative.

The transition to socialism in a semi-colonial country, due to the less developed productive forces, is likely to be longer and harder, especially in the absence of solidarity assistance from more developed socialist states. The danger of a reversal to capitalism is greater. This danger has become a reality in China. 


  1. Beijing Review, January 5–11, 1998, p. 16.
  2. Quoted in World Bank, China 2020: Development Challenges in the New Century, World Bank, Washington D.C., 1997, p. 146.
  3. China Statistical Yearbook 1994, State Statistical Bureau, People’s Republic of China, p. 352.
  4. Quoted in China Embraces the Markets: Achievements, Constraints and Opportunities, East Asia Analytical Unit (eaau), Department of Foreign Affairs and Trade, Commonwealth of Australia, 1997, p. 338.
  5. Ibid., p. 336 and World Bank, op. cit., pp. 18 and 29. These 880 firms accounted for 63 per cent of the fixed capital of industrial state firms (which numbered 118,000 out of a total of 305,000 state firms), generating 70 per cent of their revenue and 74 per cent of profit and tax. These figures must be taken in the context of the state firms’ serious and inefficient inflation of their fixed assets and the fact that half of them were still making a loss in 1996. Under the same plan, the 15-Year Perspective Plan, five industries have been chosen as “pillars” of the economy for special promotion: machinery, electronics, petrochemicals, automobiles and construction. They represented, in Beijing’s view, China’s niche industries in the world capitalist market.
  6. In fact, China’s State Economic and Trade Commission in July 1998 criticised local officials for selling too many state firms, quoted in the Sydney Morning Herald, July 15, 1998.
  7. Ting Wang, The Successors to Power in Beijing Across the Century, Celebrities Press, Hong Kong, (Chinese) 1997, p. 23.
  8. Equivalent to 36.5 billion yuan, or us$4.4 billion, per year, according to China’s Business Times, May 30, 1996, quoted in eaau, op. cit., p. 342.
  9. With 30,000 business units both inside and outside China, including some listed in foreign stock exchanges. Quoted in Sydney Morning Herald, July 24, 1998.
  10. World Bank, China 2020: Development Challenges in the New Century, p. 151. That is, 112.6 million state firm employees out of a total urban workforce of 173.5 million.
  11. Beijing Review, September 15–21, 1997, p. 11.
  12. Beijing Review, January 5–11, 1998, pp. 14-15.
  13. Ibid., p. 16.
  14. China Statistical Yearbook 1994, p. 352, and World Bank, China 2020: Development Challenges in the New Century, p. 146.
  15. Beijing Review, October 6–12, 1997, p. 19.
  16. Ibid., p. 19.
  17. Quoted in World Bank, op. cit., p. 9.
  18. In the name of mourning late premier Zhou Enlai, tens of thousands of people gathered in Tiananmen Square, Beijing, on April 5, 1976, but the event soon turned into a political protest, with demands being put forward for democracy, the end of the one-party domination by the cp and rehabilitation of the millions purged during the Anti-Rightist Campaign and the Cultural Revolution. The cp, led by Mao, branded the protest counter-revolutionary and violently suppressed it. But since then, the call to have the revolutionary nature of this brave mass action officially recognised had become a focal popular political demand. Its rehabilitation in late 1978 by Deng was greeted with mass euphoria. A similar demand has been put forward by pro-democracy Chinese activists to rehibilitate the Tiananmen protests in April–June, 1989 (started in the name of mourning ex-cp general secretary Hu Yaobang) which ended in a massacre under Deng’s order.
  19. David Zweig, Freeing China’s Farmers: Rural Restructuring in the Reform Era, M. E. Sharpe, usa, 1997, p. 75.
  20. World Bank, op. cit., p. 32.
  21. Statistical Yearbook of China 1981, State Statistical Bureau, People’s Republic of China, p. 403.
  22. By 1993, eight major industries were operating on a contract basis, including petrochemical, coal mining, non-ferrous metal mining, railway, post services and civil aviation. Encyclopedia on China’s Enterprise Reform, Volume 1 (Chinese), Chinese Broadcasting Television Publisher, Beijing, 1993, pp. 643 and 650.
  23. Ibid, pp. 639–640.
  24. Encyclopedia on China’s Enterprise Reform, Chinese Broadcasting Television Publisher, Beijing, 1993, Volume 2 (Chinese), p. 1789.
  25. Encyclopedia on China’s Enterprise Reform, Volume 1, p. 639.
  26. Ibid., p. 650.
  27. Ibid., p. 623.
  28. A series of State Council statements in the late 1980s revealed that such arbitrages, cadres’ engagement in business and financial activities and other forms of abuse of power for private profiteering were rampant. They were especially among the five major state-owned corporations which were set up since 1978 with the mission to “facilitate” China’s “economic reform”. They were armed with elaborate privileges—especially in foreign exchange and other overseas activities—and were run prominently by the children and families of top cp leaders, including Deng Xiaoping. A state auditor’s report in August 15, 1989, detailed the ill-gotten gains (through arbitrages of state supplies and illegal foreign exchange dealings) and uncovered three of them: Keng Hua Development Corp. (headed by Deng’s eldest son, Deng Pufeng) has pocketed us$8.81 million in two years; China International Trust and Investment Corp. over $24 million in 10 years; Everbright Corp. over $40 million in six years. Quoted in Ting Wang, Before and After June 4, Distant View Publisher, Taiwan, 1995, Volume 2 (Chinese), pp. 228, 234, 237 and 274.
  29. Susan L. Shirk, The Political Logic of Economic Reform in China, University of Calfornia Press, England, 1993, pp. 304–307.
  30. Ibid., p. 149.
  31. Ibid., pp. 171 and 230.
  32. Ibid., p. 172.
  33. Seventy-five per cent in 1978. ibid., p. 152.
  34. Ibid., pp. 239–245.
  35. Ibid., p. 295.
  36. Li Kuo Shing, The Highest Echelon of the Chinese Communist Party, Ming Pao Publisher, Hong Kong, 1993 (Chinese), p. 257.
  37. Li Kuo Shing, The Party, Government and Military Structures of the Chinese Communist Party, Ming Pao Publisher, Hong Kong, 4th Chinese edition, 1993, p. 311.
  38. His idea is captured in his well-known “bird cage theory” in which he likened the market to a bird in domestication, advocating that while it must be given some breathing space to stay fit, it mustn’t be let out of the cage of a planned economy or it’ll be out of control.
  39. Ting Wang, Before and After June 4, Distant View Publisher, Taiwan, 1995, Volume 1 (Chinese), pp. 103–107.
  40. Ibid., p. 12.
  41. Ibid., pp. 13–14.
  42. Some of the Anti-Rightist campaigns took place in 1981, late 1983 to early 1984, January–May 1987 and June 1989; and the “Anti-Leftist” ones in the year to mid-1983, 1985–86, May 1987–88, January–May, 1989. ibid., p. 302.
  43. eaau, op. cit., p. 399.
  44. China Statistical Yearbook 1994, op. cit., p. 65.
  45. World Bank, China 2020: Sharing Rising Income, World Bank, Washington, 1997,
    p. 19.
  46. Ibid., p. 3.
  47. eaau, op. cit., p. 331.
  48. In 1981, 71 per cent of the Chinese population had access to government health facilities. In 1993, it was down to 21 per cent, mostly in urban areas. World Bank, China 2020: Development Challenges in the New Century, p. 25.
  49. eaau, op. cit., p. 343.
  50. Ibid., p. 343.
  51. World Bank, op. cit.,p. 45.