A Preliminary report on China’s capitalist restoration

Liu Yufan

Today’s China can no longer be considered as 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, followed by similar changes in the socio-economic arena.

Restoration completed in two stages

In 1982, the Chinese Communist Party (CCP) abolished the right to strike in the newly adopted 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 the state character had transformed from being a post-capitalist state into a capitalist one, because on one hand it officially inaugurated the rebirth and unlimited growth of the capitalist class, while on the other hand, further kept the working class in bondage to the former and also 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, despite 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 simply denied the right to exist as a class. By contrast, workers were regarded, at least in name, as the ‘leading class’, and as such was 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’ sank into deeper and deeper political, ideological, and economic crisis, the more it antagonised working people, and thus the more acute 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 imminent collapse for capitalism not only failed to materialise, on the contrary, in appearance it is still enjoying prosperity.

The contrast between the ‘socialist camp’ and the west increasingly dampened the bureaucracy’s self-confidence and in response to this they increasingly determined to restore capitalism and made peace with imperialism. The result, as we have seen, 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 to the south in the early 90s of the last century should be 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 of scarce products (a practice made possible by the market reforms), it was still objectively a challenge to the CCP’s restoration 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 a 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 90’s. 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 more friendly policy to appease domestic and foreign capital by 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 clear indication that the CCP regime had then 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 90s was that the share of the state sector in industrial production shrank from more than a half in l990 to 30 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 66 percent in l990 to 53 percent 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 market forces. SOEs still account for a considerable portion in the economy, yet, like the private sector, investment in them has long been directed by profit . It implies that in the socio-economy arena a qualitative break with the past has occurred and that a capitalist market economy has been safely put in place. The rush to capitalism stimulated an investment bubble in the first half of the 90s, followed by a downturn in the second half, that resulted in over-production, deflation, and a drop in domestic investment and consumption. It is a typical business cycle of capitalism. Before l988 there was only a crisis of under-production rather than over-production.

The continuous inflow of foreign direct investment (FDI) has helped China in alleviating the economic problems, thus for the moment the economy is slowing down but has not yet turned into recession. But over-supply and idle productive capacity persists and in fact is worsening. Over 50 percent of major products were in over-supply several years back, and now it is over 60 percent or even more. The products are over-supplied 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 China, once one of the lowest in the world (in l978 it was 0.2), have now become one of the highest (in l998 it was 0.46 and probably past 0.5 now). The real incomes of ordinary people have been dropping, resulting in continuous fall in demand and slowing down of the economy. Some Chinese scholars put forward the notion of ‘socialist economic cycle’ to characterise what has been going on. This is sheer nonsense. Both over-production and under-consumption are merely the two ends of the same stick, and the name of this stick is called capitalism rather than socialism.

After engineering such earth shaking social regression, the CCP not only refused to retreat, but on the contrary 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. The reason for China being able to win the fight to attract FDI among East Asian countries is that the Chinese government, has consciously 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 workers’ attempts in forming autonomous trade unions. Thus in ‘socialist’ China the wages could be much lower than many capitalist Asian countries, for instance, Thailand. No wonder more and more TNCs shift their production from other Asian countries to China. China accounts for 60 percent of the 27 million workers in all the export processing zones (EPZ) all over the world.

The strategy of export-oriented growth in general and the development of EPZs in particular, greatly contributes to China’s increasing dependence on world markets. China’s trade dependency now is as high as 35-40 percent, a figure which is twice that of the US. According to some experts, half of the economic growth rate comes from exports and FDI. For the past 10 years the CCP has so opened up China’s market to foreign capital that the latter has been capturing larger and larger market share, and in the course of which has been driving more and more SOEs and collective enterprises into bankruptcy. SOEs which still try hard to cope with the changing market choose joint venture with TNCs as the alternative, and pay the price of losing control over their brands and market share.

China was not hard hit in the l997-8 Asian crisis, thanks to the fact that the capital account of the RMB remains under control, while the current account has long been subject to market forces. Yet the Asian crisis has not deterred the CCP’s determination to open up the capital account sooner or later. Indeed the control over the capital account has already been relaxed slowly. The opening up of the stock B market to local residents last year demonstrates this. From then on foreign capital could sell the stocks, denominated in foreign currency, to local residents. The arrangement enables foreign capital to get access to the huge local reserves of foreign currency and in the long run encourage a cycle of portfolio investment, replacing some of the FDI which 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.

The domestic and international significance of China’s accession to WTO

The fact that China was finally allowed to join the WTO is in itself additional evidence for supporting 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 view that today 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, although EU continues to consider it the otherwise. Moreover, according to the report and the protocol, China is committed to:

l.     allow prices for traded goods and services in every sector to be determined by market forces, except for a few kinds of product specified in the protocol;

2.    SOEs and state investment firms shall trade according to commercial principles, and the government shall avoid influencing commercial decision of SOEs;

3.    Foreign companies enjoy the full right of import and export, and the Chinese government shall eliminate trade or foreign exchange balancing requirements, local content, and export requirements;

4.    China will open up banking, insurance, telecommunications, information technology, and accounting etc. ( the commanding heights of the economy) to foreign capital.

The implementation of the major commitments above, along with many other concessions, not only implies the complete and irreversible destruction of the last remnants of the planned economy and the complete restoration of capitalism, but also amounts to giving up substantial economic sovereignty to imperialism. No wonder the US and EU happily welcome China into the WTO. They have good reasons to be happy because China’s concessions have been greater than many developing countries. For instance, her concession on tariff reduction is greater than what India has committed to.

Moreover, in order to appease imperialist countries China has agreed to drop her domestic support in agricultural products from 10 percent --- a level which developing countries are entitled to enjoy --- to 8.5 percent. The concession by China greatly alarmed India, who complained about this. Later, in order to compete, India found it necessary to make more concessions to the US. Given her 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 l949 when the People’s Republic of China was founded, and the decades that followed, China was greatly respected by many people in the Third World, for her role in the anti-imperialist movement. Fifty years later the clock has turned full circle. Today China has become a pioneer in luring FDI and as such does not mind whipping up cut-throat competition among developing countries. As a matter of fact the sole beneficiary in this race will only be imperialism.

The brewing of economic and political crises

The fact that the CCP could overcome its crisis in 1989 was due partly 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, enabled Deng to crush the movement. >From then on, in order to save itself from economic crisis, the CCP has turned to borrowing in order to finance the leap towards capitalism, hence the piling up of domestic and foreign loans. Today the debt mountain has cost the government so much that new loans have to be borrowed to pay back old loans. Thus the public deficit has been growing and is now well past three percent of GDP.

A growing number of over-ambitious projects, which have been financed by loans, are now on the verge of bankruptcy. Wide-spread 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 29 percent, but that figure does not include bad debts in various kinds of financial companies. If the latter is included then the proportion grows to 50 percent. For the moment the continuous inflow of foreign capital helps to hide the problems. However, the persisting generalised over-production, the slowing down of the global economy etc., are all paving the way for a debt crisis in the long term if not in the medium term.

Although the CCP successfully 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 within it. Every level of officials not only cruelly exploit working people within their jurisdiction, without ever realising that what they have been doing is pushing ordinary people to rebel; they even unscrupulously engage in a dog-eat-dog fight over the spoils.

Conflicts between local governments and between 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 solutions given are good in themselves, which is rare, very often they turn sour when implemented. Besides, it is safer for officials to cover up the problems and falsify figures rather than solve problems . Given that top leaders rely on statistics in order to make decisions, the common practice of falsifying figures only 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 of them believe that corruption could be eliminated or uprisings from below could be prevented. On the contrary, they are only interested in saving their own skins .

China’s entry to WTO signifies her economic situation has entered a new stage. The further opening up 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 lower rate, thanks to the continuous 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 for buying up SOEs and as such is killing jobs rather than creating them. Even in cases where FDI is for building entirely new plants, it is probably aimed at cornering the market share which originally belonged to SOEs, implying 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, which means that urban unemployment will reach 40 million. In rural areas, another 10 million will be added to the present 200 million unemployed. The Daily comforted its readers with long term “benefits” upon joining WTO. But before we can witness these ‘benefits’, the huge surge of unemployment will further hamper 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.

In the political arena, China’s entry to 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, i.e. Jiang Zemin and Deng Liqun respectively. They continue to quarrel over the terms of joining the WTO and over the issue of 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. In contrast 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 to the WTO if it results in a deeper economic crisis. The moderate wing may become stronger in the CCP, especially if they make use of popular discontent. As a matter of fact they are doing this more and 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 plights of common people, as long as they do not abandon their position of one party dictatorship and their course for capitalist restoration (albeit in a more controlled way), it would be impossible for the people to support them (though tactical and critical support for their criticism of the ruling clique should not be excluded beforehand).

The 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 their fight-back has been politically too confused, and too unorganised. There are deep-rooted causes about why this is so. First and foremost is the historical legacy of the l949 revolution, namely, that the working class was ‘emancipated’ by a peasant army led by CCP, rather than being a class of emancipation in itself. This legacy crippled the political awareness of the working class, and the political despotism installed by the revolution only served to further suppress the growth of any independent thinking. Thus for decades a kind of dependent mentality developed and took root among the working class --- dependent from their own workplace up to their ‘socialist ‘ state for job security, housing etc. The 1989 events showed that the most thoughtful elements among the working people did begin 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 capitalism restoration in the 90s, and could only watch the CCP sack 30 millions of their brothers and sisters from the SOEs.

Only in the last few years of the 90s did we witness a sudden increase of fragmented protests. However, those protests mainly occurred in bankrupt or near-bankrupt SOEs, the workers concerned had already lost their potential control over production and therefore were robbed of their most important armament. It follows that although they have been able to get certain economic concessions from the government, for instance, gaining 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 to those workers in the private sector, though we witness a net increase of 10 million(while labour in the state sector is shrinking) and also fragmented economic struggles from time to time, they too are not in better position than SOE workers in developing a political fight-back. They are mainly migrant workers from rural areas and as such they do not enjoy permanent residential rights in the cities. They are constantly at the mercy of local officials and capitalists who could send them back home if they wanted 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. To sum up, for a new political awakening of the working class to occur, it will require a strong stimulus from a new cycle of crises facing the CCP, and not the other way round.

Lacking their own organisation and cadres left the workers powerless to fight restoration, but on the other hand the same fact also implies that they did not suffer a devastating blow in the 1989 repression. They were as unorganised after the repression as they were before. 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 of workers resulting from the restoration undoubtedly demoralised them for the time being, but it may not last. On the contrary, in a period of economic and political crisis their 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 where 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 section of youth or academics are now attracted by genuine socialism, i.e. Marxism. For socialists who want to work to revive the credibility of socialism, first and foremost they must not further damage the socialist project by denying that capitalist restoration has long been completed while the CCP has become a restorationist party. The CCP refuses to admit that it has restored capitalism, instead it claims that it is simply installing a 'socialist market economy'. If we believe the same thing as the CCP, objectively we are helping the CCP to trick and cheat the people and as such 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 era 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 serve to confuse the objective of the 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 may lead to the overturn of present property relations will be stopped forcefully. Such 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 the proletarian socialists.

20/1/2002