A preliminary report on China's capitalist restoration

By Liu Yufan

Liu Yufan is a leader of the Hong Kong socialist group Pioneer.

Today's China can no longer be considered a post-capitalist country in any sense. On the contrary, full-scale capitalist restoration has already been completed in two stages: first the qualitative changes in the class character of the state, then similar changes in the socioeconomic arena.

In 1982, the Chinese Communist Party (CCP) abolished the right to strike in the new constitution, which at the same time allowed, in practice, the growth of private capital under the guise of the category "self-employed labourer". This change signified the beginning of the restoration process. In 1988 a qualitative change took place in the state. The CCP amended the constitution, legalising private enterprises and the sale of land use rights. Such an amendment in itself, in addition to abolishing the right to strike, signified that the state character had been transformed from a post-capitalist state into a capitalist one, because on the one hand it officially inaugurated the rebirth and unlimited growth of the capitalist class, while on the other it kept the working class in bondage to the former and to the bureaucracy.

Before l988, contrary to official opinion, China was neither socialist in the genuine sense of the word, nor was it a state in which the working class was in charge. In a direct political sense it was only a state ruled by the bureaucracy. Yet, although the claim that "the working class is the master in its own house" was false, the class policy of the CCP did favour the working class. Although both workers and peasants were robbed of all political rights, the bourgeoisie was denied the right to exist as a class. By contrast, workers were regarded, at east in name, as the "leading class", and as such were allegedly the class which the CCP could "count on".

However, the more the bureaucracy found its one-party dictatorship and its project of "socialism in one country" sinking deeper and deeper into political, ideological, and economic crisis, the more it antagonised working people, and thus the more acutely it felt the need to restore private property so that its privileges could be passed on to the bureaucrats' children. On the other hand, their prophecy of the imminent collapse of capitalism not only failed to materialise, but capitalism appeared to be enjoying prosperity.

The contrast between the "socialist camp" and the West increasingly undermined the bureaucracy's self-confidence, and in response it became increasingly determined to restore capitalism and make peace with imperialism. The result was the amendment of the constitution. Even if we conceded that the l988 event was not sufficient in itself to determine the qualitative transformation, the events between the l989 massacre and Deng Xiaoping's tour of the south in the early 1990s are clear enough signs that identify a political metamorphosis. Although the l989 democratic movement was not a conscious campaign against the CCP's attempt at restoration, given its scale and the fact that it distinctively targeted the princelings of high officials for enriching themselves through speculation in scarce products (a practice made possible by the market reforms), it was still objectively a challenge to the CCP's restorationist project. Although the workers rose up against the CCP much later than the students, they posed a greater threat. Then the CCP no longer found workers to be the class which it could count on. Just the opposite. That was why the CCP had to crush the movement before Deng could launch the great leap forward to capitalism in early 1990s. That was also why the CCP persecuted workers much more severely than students (workers probably sacrificed more in numbers than students during the massacre, and they received much harsher sentences in the subsequent trials).

In contrast, under the guardianship of Deng, after the crackdown the CCP adopted a much friendlier policy toward domestic and foreign capital, giving more concessions, in the course of which increasing numbers of officials have become bureaucratic capitalists. Large numbers of state-owned enterprises (SOE) have been privatised. Thus the suppression of the movement and the events which followed were themselves a clear indication that the CCP regime had been transformed into a restorationist regime. The transformation in the political arena implied similar changes in the economy sooner or later.

The result of the big leap forward to capitalism in early 1990s was that the share of the state sector in industrial production shrank from more than half in l990 to thirty percent in l999. In the same period the private sector's share rose to a half or even more (many so-called collective enterprises are in fact private). As for investment, the share of the state sector shrank from sixty-six per cent in l990 to fifty-three per cent in l999. In the meantime private investment rose dramatically. The drastic changes were brought about partly by great waves of privatisation, partly by the dramatic growth of domestic and foreign investment encouraged by the CCP.

Moreover, the absolute majority of the prices of both producer and consumer goods have already been subjected to the market. SOEs still account for a considerable portion of the economy, but, as in the private sector, investment in them has long been directed by profit. This implies that in the socioeconomic arena a qualitative break with the past has occurred and that a capitalist market economy has been put in place. The rush to capitalism stimulated an investment bubble in the first half of the 1990s, followed by a downturn in the second half, which resulted in overproduction, deflation, and a drop in domestic investment and consumption. It is a typical capitalist business cycle. Before l988 there was only a crisis of underproduction rather than overproduction.

The continuous inflow of foreign direct investment (FDI) has helped China to alleviate economic problems. Thus for the moment the economy is slowing down but has not yet entered recession. But oversupply and idle productive capacity persist and in fact are worsening. Over fifty per cent of major products were in oversupply several years ago, and now it is over sixty per cent. The products are oversupplied simply because ordinary people, especially the peasants, have no money to buy them. The serious lack of effective demand is also the bitter fruit of the restoration. The Gini coefficient of income in China (a measure of income disparity), once one of the lowest in the world (in l978 it was 0.2), has become one of the highest (in l998 it was 0.46 and it is probably past 0.5 now). The real incomes of ordinary people have been dropping, resulting in a continuous fall in demand and a slowing of the economy. Some Chinese scholars put forward the notion of "socialist economic cycles" to characterise what has been going on. This is sheer nonsense. Overproduction and underconsumption are two ends of the same stick, and the name of this stick is capitalism, not socialism.

After engineering such massive social regression, the CCP made further concessions to capitalist forces by amending the constitution again in l999, raising the legal status of private enterprises from "playing a supplementary role" in the country to being an "important constituent component".

Fusion with the world market

Capitalist restoration has helped China to integrate totally into the world market, in which China now emerges as a big but dependent capitalist country. For the last seven years, China has attracted more FDI than any other country except the US. China is able to win the fight to attract FDI among east Asian countries because the government has deliberately and shamelessly tried to bring the China's "comparative advantage", i.e., low wages, into full play. To achieve this, the bureaucracy has suppressed all attempts to form autonomous trade unions. Thus in "socialist" China the wages are much lower than in many capitalist Asian countries. No wonder more and more TNCs are shifting their production from other Asian countries to China. China accounts for sixty per cent of the twenty-seven million workers in all the export-processing zones of the world.

The strategy of export-oriented growth in general, and of export-processing zones in particular, greatly contributes to China's increasing dependence on world markets. China's trade dependency now is as high as thirty-five to forty per cent, twice that of the US. According to some experts, half of the economic growth rate comes from exports and FDI. For the past ten years, the CCP has so opened China's market to foreign capital that the latter has been capturing a larger and larger market share and driving more and more SOEs and collective enterprises into bankruptcy. SOEs which still try to cope with the changing market choose joint ventures with TNCs, and pay the price of losing control over their brands and market share.

China was not hard hit in the l997-98 Asian crisis, thanks to the fact that the capital account of the renminbi remains controlled, while the current account has long been subject to market forces. Yet the Asian crisis has not reduced the CCP's determination to open up the capital account sooner or later. Indeed, control over the capital account is already being slowly relaxed. The opening of the B stock market to local residents last year demonstrates this. From then on, foreign capital could sell stocks, denominated in foreign currency, to local residents. The arrangement gives foreign capital access to the huge local reserves of foreign currency and in the long run encourages portfolio investment, replacing some of the FDI that has been the main form of foreign investment to date.

To sum up, China's integration into the world market has reached the point of no return, and it follows that the boom and bust cycle of world markets will now directly affect China.

Accession to World Trade Organisation

The fact that China was finally allowed to join the WTO is in itself additional evidence for the conclusion that today's Chinese economy is basically capitalist. According to the report of the working commission on China's entry to the WTO, the Chinese representatives presented a large number of examples to support their argument that China's economy is largely regulated by market forces. The commission obviously accepted the presentation, because only countries with a market economy would be allowed to join the WTO. Moreover, according to the report and the protocol, China pledged:

  1. to allow prices for traded goods and services in every sector to be determined by market forces, except for a few products specified in the protocol;
  2. that SOEs and state investment firms will trade according to commercial principles, and the government will avoid influencing commercial decisions of SOEs;
  3. that foreign companies will enjoy full rights to import and export, and the Chinese government will eliminate trade or foreign exchange balancing requirements, and local content and export requirements;
  4. to open banking, insurance, telecommunications, information technology and accounting (the commanding heights of the economy) to foreign capital.

These major commitments, along with many other concessions, not only imply the complete and irreversible destruction of the last remnants of the planned economy and the complete restoration of capitalism, but also amount to giving up substantial economic sovereignty to imperialism. No wonder the US and European Union welcomed China into the WTO. They have good reason to be happy, because China's concessions were greater than those of many developing countries. For instance, its concessions on tariff reductions were greater than India's.

Moreover, in order to appease the imperialist countries, China agreed to drop its domestic support of agricultural products from ten per cent—a level to which developing countries are entitled—to 8.5 per cent. This concession greatly alarmed India, which complained about it. Later, in order to compete, India found it necessary to make more concessions to the US. Given its vast size, China's determination to make important concessions in exchange for foreign investment and foreign markets will only provoke a more serious race to the bottom among Third World countries. Back in 1949, when the People's Republic of China was founded, and in the decades that followed, China was greatly respected by many people in the Third World for its role in the anti-imperialist movement. Fifty years later, China has become a pioneer in luring FDI and does not mind whipping up cut-throat competition among developing countries. The sole beneficiary in this race will be imperialism.

Economic and political crises

The CCP could overcome its crisis in 1989 partly due to the weakness of the democratic movement, and partly because the fight between the two factions of the CCP had not reached the point of open split, enabling Deng to crush the movement. From then on, in order to save itself from economic crisis, the CCP turned to borrowing in order to finance the leap towards capitalism, piling up domestic and foreign loans. Today the debt mountain costs the government so much that new loans are needed to pay back old loans. Thus the public deficit has been growing and is now well past three per cent of GDP.

A growing number of overambitious projects, financed by loans, are now on the verge of bankruptcy. Widespread corruption exacerbated the problems, and the result is the piling up of bad debts. The official figure for bad debts in the banking system stands at twenty-nine per cent, but that figure does not include bad debts in various kinds of financial companies. If the latter are included, the proportion grows to fifty per cent. For the moment, the inflow of foreign capital helps to hide the problems. However, the persisting generalised overproduction and the slowing of the global economy are paving the way for a debt crisis in the long term if not in the medium term.

Although the CCP suppressed all serious challenges from without, still it could not avoid crisis from within. The bureaucracy, in its rush towards privatisation and self-enrichment, has also set free powerful centrifugal forces. Every level of officials cruelly exploits working people within its jurisdiction, without realising that it is pushing ordinary people to rebel; as well, all of them engage in a dog-eat-dog fight over the spoils.

Conflicts among local governments and between the central government and the provinces are rising. On one hand, all kinds of political, economic, cultural, and moral problems are piling up; on the other hand, severe corruption has long weakened the administrative capacity of the state. So even when proposed solutions are good in themselves, which is rare, very often they turn sour when implemented. Besides, it is safer for officials to cover up problems and falsify figures rather than solve problems. Since the top leaders rely on statistics in order to make decisions, the common practice of falsifying figures serves to exacerbate future crises. Every bureaucrat knows this. That is why their mentality is also undergoing substantial change. Now many of them have lost confidence in the self-reform of the CCP, and hardly any important section believes that corruption could be eliminated or uprisings from below prevented. On the contrary, they are interested only in saving their own skins.

China's entry to the WTO signifies that its economic situation has entered a new stage. The further opening of the market to foreign capital, especially when the market is crisis ridden, will probably accelerate the onset of economic crisis. For the moment, it is possible that China's economy could keep growing, albeit at a slower rate, thanks to the inflow of FDI. However, in the longer run, the inflow of FDI, even if it were to continue indefinitely, may not be able to promote much growth or create enough jobs. More and more FDI is now buying up SOEs and therefore destroying jobs rather than creating them. Even in cases where FDI is for building entirely new plants, it is usually aimed at gaining markets that originally belonged to SOEs, implying that more jobs are going to disappear alongside new jobs created within foreign companies. The official China Daily admitted that upon China's accession to the WTO, urban unemployment will double to forty million. In rural areas, another ten million will be added to the present 200 million unemployed. The Daily comforted its readers with the long-term "benefits" of joining the WTO. But before we witness these "benefits", the huge surge of unemployment will further reduce demand and worsen the economy. What is more, opening up the banking and financial sectors will pose a direct threat to debt-ridden local banks, thus increasing the possibility of a financial crisis.

China's entry into the WTO has given new impetus to the factional fight inside the CCP. Deng Xiaoping and Chen Yun are long dead, but the fight between the two factions—namely, the radical restorationist wing and the moderate restorationist wing—goes on under new leaders: Jiang Zemin and Deng Liqun, respectively. They continue to quarrel over the terms of joining the WTO and over allowing capitalists to join the CCP. For a long time, the radical wing under Deng and now Jiang has received support from the vast majority of bureaucrats, simply because their great leap forward to capitalism allows them to enrich themselves quickly. The moderate wing—which wants the restoration done in a more controlled and nationalist way—has been much weaker.

However, things may change following China's entry into the WTO if it results in a deeper economic crisis. The moderate wing may become stronger, especially if they make use of popular discontent. As a matter of fact, they are doing this more consciously. Yet, no matter how they attack the ruling clique in seemingly leftist language, and no matter how sympathetic rhetorically they are to the plight of common people, as long as they do not abandon their position of one-party dictatorship and their course for capitalist restoration, it will be impossible for the people to support them (although tactical and critical support for their criticism of the ruling clique should not be excluded).

Conditions for a political revival of the working class

The working class has not been able to stop the CCP's drive towards capitalism because its fight back has been too confused politically and too unorganised. There are deep-rooted causes for this. First and foremost is the historical legacy of the l949 revolution, namely that the working class was "emancipated" by a peasant army led by the CCP, rather than emancipating itself. This legacy crippled the political awareness of the working class, and the political despotism installed by the revolution further suppressed the growth of independent thinking. Thus for decades a kind of dependent mentality developed and took root among the working class—dependent on their own workplace and their "socialist" state for job security, housing etc. The 1989 events showed that the most thoughtful elements among the working people had begun to think and act politically, but the bud of political awakening was crushed by the CCP before it could grow. After the suppression, the working class was doubly powerless in fighting against capitalist restoration and could only watch the CCP sack thirty million of their brothers and sisters from the SOEs.

Only in the last few years of the 1990s did we witness a sudden increase of fragmented protests. Those protests mainly occurred in bankrupt or near-bankrupt SOEs, where the workers concerned had already lost their potential control over production and therefore were robbed of their most important armament. Although they have been able to gain certain economic concessions from the government—for instance, collecting some of the unpaid wages or pensions—in general these kinds of protests could not fight against full-scale restoration, nor could they directly develop into political struggle in the present situation.

As for workers in the private sector, although we witness a net increase of ten million (while labour in the state sector is shrinking) and also fragmented economic struggles from time to time, they too are not in a good position to develop a political fight back. They are mainly migrant workers from rural areas and as such do not enjoy permanent residential rights in the cities. They are constantly at the mercy of local officials and capitalists, who can send them back home if they want to. Moreover, these new migrant workers still bear the marks of their peasant origins and are culturally and politically less aware than the SOE workers. A new political awakening of the working class will require a strong stimulus from a new cycle of crises facing the CCP, not the other way around.

Lacking their own organisation and cadres left the workers powerless to fight restoration, but the same fact also implies that they did not suffer a devastating blow in the 1989 repression. In the repression they lost individual protesters rather than organised cadres, and as such the defeat they suffered was not heavy enough to check the revival of the working class for decades. The decisive battle is still in front of us. The economic hardship resulting from the restoration has undoubtedly demoralised workers for the time being, but it may not last. In a period of economic and political crisis, economic hardship may well promote rather than hamper the political revival of the working class. As the working class is still in a state of political and organisational primitiveness after decades of apathy, activists will have to begin from nearly nothing in order to promote the rebirth of the workers' movement. This too is a gigantic task which requires all activists to double and triple their efforts, but still it is quite different from a devastating defeat after which workers would need decades to regain confidence for a new round of struggle.

Today the biggest obstacle to the primitive accumulation of socialist consciousness and revolutionary cadres among the working class is the horrible damage the CCP has done to the credibility of socialism. Hardly any important sections of youth or academics are now attracted by genuine socialism, i.e. Marxism. Socialists who want to revive the credibility of socialism first and foremost must not further damage the socialist project by denying that capitalist restoration has been completed, while the CCP has become a restorationist party. The CCP refuses to admit that it has restored capitalism, claiming that it is installing a "socialist market economy". If we believe that, objectively we are helping the CCP to trick and cheat the people and thus helping it to take even more capitalist measures. If both the totalitarian regime of Mao's era and the widespread privatisation and corruption of Jiang's are still related to socialism, how can the socialist project be worth fighting and sacrificing for?

Secondly, to deny that China's status has qualitatively changed will only confuse the objective of working-class struggle. The logical conclusion of such denial is that the task of the working class should be confined, at most, to political revolution and the democratic transformation of governmental institutions, while keeping property relations largely intact. It follows that any action which might lead to the overturn of present property relations must be stopped. Such a position amounts to protecting the stolen property of the new rich, who probably take more than half of social wealth today. This is the line of the liberal bourgeoisie, not that of proletarian socialists.