On transitional economics - Why and how China went capitalist (Part two)

In this second part of Jeppe Druedahl's contribution to the discussion on China, he explains how initially the Chinese bureaucracy, after the death of Mao, introduced market methods as a means of stimulating production within a planned economy. However, over time the capitalist methods began to dominate and the relation between the plan and the market were overturned. Quantity was transformed into quality, and capitalism has come to dominate. [part one]

The role of bureaucracy

The basic motive of every bureaucracy is its own material interests. Two important aspects of this are the question of inheritance and that of consolidating wealth and income. The perfect solution to this is a regime of private property and capitalist relations of production. Only by turning itself into a new ruling class can the bureaucrats secure their own position and that of their children.

However, there are also important countervailing factors, especially resistance from the proletariat but also the threat of imperialist economic or military takeover. This was of concern for the conscious capitalist roaders within the bureaucracy in the Soviet Union as well as in China. What the bureaucracy is interested in is not capitalism as such, but capitalism where they rule.

In chapter 11 of The Revolution Betrayed Trotsky outlined three possibilities:

  1. A political revolution towards genuine socialism
  2. A bureaucratic counter-revolution back to capitalism
  3. The bureaucracy turns into an absolute fetter on the development of the productive forces – and either option 1) or 2) in the end.

Trotsky renounced predicting in advance which possibility would prevail. Only the relative power of the proletariat and the bureaucracy could determine this. In the Soviet Union, for many reasons we cannot dwell on here, the proletariat was incapable of carrying out the political revolution. However, in the end the bureaucracy was also too weak to control the situation. The result was a collapse and chaotic backsliding into capitalism.

The Chinese bureaucracy took note of this process, beginning with the slowdown in growth in the 1970s and ending with the collapse in the 1990s. This was the basis for the introduction of “market socialism” in 1978.

A NEP kind of policy is, however, very dangerous for the workers and peasants, especially in the context of a deformed workers’ state, because it has the tendency to strengthen all the pro-capitalist elements. Possibility becomes probability, and then probability becomes reality. Imagine for example a complete NEP in Cuba today – US imperialism would take over the country in no time. From an abstract economic point of view a NEP in Cuba would be correct, but politically it would be suicide.

During the period of the Cold War things were seen in terms of contradiction between the Stalinist bureaucracies and capitalism. But as Bukharin already showed in the 1920s there need not by any such kind of conflict. Had Bukharin and not Stalin succeeded in gaining power a capitalist counter-revolution could have been on the agenda as far back as in the early 1930s. But as the rest of the bureaucracy were aware, the living memories of the October revolution were still alive and the perspective of a successful counter-revolution where they stayed in power was not that likely. Thus they bet on Stalin instead.

In China the situation was very different. It is important to remember that the People’s Republic of China was born as a deformed workers’ state from the very first day, while the Russian revolution was a genuine workers’ revolution that only started to degenerate in the conditions of backwardness and isolation in the early to mid-1920s. The traditions of the Russian proletariat were therefore much stronger than those of the Chinese proletariat. For many years this put so much fear into the bureaucratic caste in the Soviet Union that they did not dare to take any steps towards capitalism. In the 1960s and 1970s when new generations of workers without any direct experience of the Russian revolution took the stage, the freedom of action of the Soviet bureaucracy was instead limited by the falling growth rates. These limitations were much weaker for the Chinese bureaucracy, who for this reason had a better possibility of experimenting with introducing capitalist elements.

Primitive accumulation in China – of which sort?

Looking at the concrete process it is first of all necessary to understand that neither the Chinese bureaucracy as such, nor Deng in particular, had “a roadmap to capitalism” from the beginning. Bureaucracies are by nature not characterised by ideological decisions but rather by empirical zig zags. They adopt policies that serve their interests and stop everything else. This was especially clear in the behaviour of the Chinese bureaucracy where new policies were introduced in stages and certain regions were used as test zones. In a deformed workers’ state the bureaucracy has risen above the working class and they thus play an independent role as a social layer.

But despite the empiricism, four periods of China’s transition to capitalism can be outlined:

  • 1978-1989 - The first reform period: from NEP and beyond
  • 1989-1992 - The Tiananmen Slowdown
  • 1992-2001 - The second reform period: downsizing and restructuring of the plan
  • 2001 to the present - The final reform period: Transition to capitalism

1978-1989: From NEP and beyond

The first sector affected by the reforms was the agricultural sector. In 1979 the Household Production Responsibility System (HPRS), which leased the land individually to the peasants for a 30-year period, was introduced, thus dissolving the communes and giving the peasants the possibility of increasing their income by selling their produce for a profit on markets.

The system was an enormous success from the point of view of increased production and by 1984 99 percent of all peasants were within the new system. The effect on agricultural output was swift and the annual growth of agricultural increased significantly as seen in Table 1.


Table 1. Annual growth of agricultural output







Source: Sweetman and Zhang, 2009, p. 17.

From 1978 to 1984 alone China’s annual output of grain increased from less than 300 million tons to 407 million tons (Liu and Zhang, 2001, p. 6). In total this was very similar to the effect the NEP had in the Soviet Union in the 1920s.

Based on this success the bureaucracy tried to extend this to industry as well. The socialised character of industry however reduced the possible effect of these reforms and made them more difficult to implement. But they were forced through:

“In industry, the main policy innovations increased the autonomy of enterprise managers, reduced emphasis on planned quotas, allowed enterprises to produce goods outside the plan for sale on the market, and permitted enterprises to experiment with the use of bonuses to reward higher productivity. The government also tested a fundamental change in financial procedures with a limited number of state-owned units: rather than remitting all of their profits to the state, as was normally done, these enterprises were allowed to pay a tax on their profits and retain the balance for reinvestment and distribution to workers as bonuses.” (Wikipedia, Economic history of the People's Republic of China)

To do this, and as a consequence of this, a number of prices was released from the plan and were instead completely determined by the market, or as Sweetmen and Zhang explain:

“Enterprise managers gradually gained greater control over their units, including the right to hire and fire, although the process required endless struggles with bureaucrats and party cadres. The practice of remitting taxes on profits and retaining the balance became universal by 1985, increasing the incentive for enterprises to maximize profits and substantially adding to their autonomy.” (Sweetman and Zhang, 2009, p. 19)

It is especially important to remember that this new hiring and firing schema was a big step away from the previous lifelong guaranteed jobs. In 1983 even contract work in state firms was introduced.

Another important aspect was the possibility of setting up Town and Village Enterprises. Many argue that about a third of China’s output is produced by the TVEs but their character is typically misunderstood. As Huang explains: “The Chinese definition of TVEs refers to their locations of establishment and registration (i.e., businesses located in the rural areas), not their ownership; Western researchers, on the other hand, have come to understand TVEs in terms of their ownership status.” (Huang, 2008, p. xiv) In 1985 about 40 percent of the TVEs were private (Huang, 2008, p. 79)

Finally the self-sufficiency principle was done away with. Before the reform period, the combined value of imports and exports had seldom exceeded 10 percent of national income. In 1980 it was 15 percent, in 1984 it was 21 percent, and in 1986 it reached 35 percent. (Wikipedia, Economic history of the People's Republic of China).

An effort was also made to attract foreign capital by opening up special economic zones (SEZs) where foreign investors were invited to enter into joint ventures. Initially nothing much happened. By 1983 Foreign Direct Investment (FDI) was only 0.31 percent of GDP. Then the Chinese bureaucracy lowered the regulations on wages and work conditions in the SEZs. In 1986 the access for foreign investors to China was eased even more by lowering taxes and granting more freedom to hire and fire. In 1987 the limit on the number of workers in a private firm was removed (Sweetman and Zhang, 2009, p. 24-5). Still the effect was limited and the ratio of FDI to GDP was only 0.90 percent in 1990 (OECD, 2002, p. 15).

Each economic reform taken separately, the main line of the reforms was not completely illogical even from a genuine Marxist point of view. The Chinese reforms in the late 1970s and early 1980s had many things in common with the NEP, advocated by Lenin and Trotsky. However, if we take them all together in the end they went well beyond the scope of the NEP. This could at first be seen in the ignoring of the conditions of the workers.

In the end the difference of the NEP and the Chinese reforms were not just of a quantitative character, but of a qualitative character. On the one hand private capital was accumulated in the hands of the richest peasants, the bureaucracy in the privatised factories and the foreign capitalists in the SEZs. On the other labour was “set free” and a traditional labour market was created with corresponding unemployment or in short what Marx would call a process of primitive capitalist accumulation.

Primitive capitalist accumulation is unavoidable in a NEP period but as in the 1920s in the Soviet Union, and as was criticized by the Left Opposition, this was not used sufficiently to strengthen primitive socialist accumulation. The contradictory character of the reform process was also characterised by the official term of a “planned commodity economy” which in Marxist theory (where commodities are products produced for a market) is a very odd term.

Some of the reforms also went too far for the bureaucracy in the sense that rising unemployment and inflation led to social stability. This was the economic basis to the uprising at Tiananmen Square and of the pause in reform of 1989-1992. However, as the bureaucracy were aware of the fact that it was still firmly in power and after they saw the tragic fate of their counterparts in the Soviet Union, the reform process was actually speeded up after 1992 when “socialist market economy with Chinese characteristics” became the official term for the economy of the People's Republic of China.

1992-2001: The second reform period downsizing and restructuring of the plan

There is a pretty clear consensus among bourgeois commentators as well as Marxists on the developments in the 1980s as described above. The following period, however, is much more debated. One example of this is Huang who in Capitalism with Chinese Characteristics writes:

“When and where rural China has the upper hand, Chinese capitalism is entrepreneurial, politically independent, and vibrantly competitive in tis conduct and virtuous in its effects. When and where urban China has the upper hand, Chinese capitalism tends toward political dependency on the state and is corrupt. (…) While decadal differences in China’s GDP growth are fairly small, the economic and social implications of a more entrepreneurial version of capitalism in the 1980s and the one closer to state-led capitalism in 1990s in fact differed enormously.” (Huang, 2008, p. xvii)

On the same lines some have even argued that the 1990s saw a move away from capitalism. For Huang it is just a question of different kinds of capitalism. There is some truth in this. While the focus in the 1980s was on agricultural reforms and on the creation of private capital from the bottom (“entrepreneurial” capital) in the form of TVEs, the focus in the 1990s was on reforming the state industries. As Table 2 shows the high point of the TVEs measured in employment was in 1996 and no major reforms were seen for agriculture.


Table 2. Town and Village Enterprises



Employed (millions)

Private share










Source: Huang, 2008, p. 79.

Some of the basic processes from the 1980s continued. The limits for foreign investment were removed even further and in 1993 there were 2000 “special” economic zones. FDI as a percentage of GDP reached a high point of 5.36 percent in 1995 compared to 0.9 percent just five years earlier or about 13 percent of all investments in China. By 1999 the ratio was down to 4.07 percent but still very high and over 10 percent of all investments (OECD, 2002, p. 15). By the end of the 1990s 450 out of the 500 largest multinational corporations had operations in China and now produce about 20-25 percent of China’s GDP.

The most important reforms however were related to the state sector. In the course of the first half of the 1990s 2,500 local and 100 centrally managed firms were privatised. In 1993 it was decided that the Chinese state would only remain in control of the 1,000 largest corporations and of these only 100 located in important branches such as telecommunications, transportation and petroleum should be centrally controlled (Sweetman and Zhang, p. 19).

Some have interpreted this as a strengthening of the plan. The logic is that the state has privatised the smallest, weakest and loss making firms and has kept the big profiting ones. There is some truth in this. But what it actually resembles is a shift of strategy by the Chinese bureaucracy. They saw what happened in Russia and realised that the only way they would be able to compete on the world market was by starting with what they already had and strengthen it. Had they really tried to build capitalism from below, imperialism would have taken over completely.

However, to say that this policy strengthened the plan and represented a move away from capitalism is pretty farfetched, to say the least. Table 3 shows that the private share of output in the industrial sector was rising rapidly at the end of this period.

Table 3. Private sector shares for industrial firms with sales above 5 million yuan







































Source: Huang, 2008, p. 14-19.

There are different ways of measuring how big the private sector is and the discussion about which is the correct policy is endless. In the data there are typically five different possible types of owners: (1) State (direct or indirect), (2) collective (i.e., local government), (3) domestic legal persons, (4) individuals and (5) foreign companies. (1) and (2) clearly means state ownership, (4) and (5) obviously means private ownership. The problem is that “domestic legal persons” can be either state companies, funds or just other private companies.

Let us take an example. If a car producer is owned for example 40 percent by private investors and 60 by a State Owned Company, the OECD defines this as private, while the Guangdong method defines this as stated owned, because the state owns more than 50 percent. In this way it is justifiable to regard the OECD method as an upper limit and the Guangdong method as a lower limit. (In the Guangdong method there is a looser definition of foreign ownership, so a higher degree of output is form foreign companies here.) (Huang, 2008, p. 14-19)

However, whichever criteria one uses, more than half of the industrial output in China is now produced by the private sector. Therefore it is clear that China today has gone well beyond the NEP policy and there is no comparison between the China of today and the Soviet Union in the 1920s. The matter is, however, not solved by ownership shares alone. If all the private firms are delivering components to state firms and these are functioning according to a state plan then it can be argued that the planning principle is still more important than the profit motive, i.e. that capitalism is not yet the dominant mode of production. Therefore we have to study the state sector a bit more.

The profit motive and the state sector

When Marx in the German Ideology explains the basics of historical materialism he starts from a very basic point:

“[T]he first premise of all human existence and, therefore, of all history, the premise, namely, that men must be in a position to live in order to be able to ‘make history.’ But life involves before everything else eating and drinking, a habitation, clothing and many other things. The first historical act is thus the production of the means to satisfy these needs, the production of material life itself. And indeed this is an historical act, a fundamental condition of all history, which today, as thousands of years ago, must daily and hourly be fulfilled merely in order to sustain human life.” (Marx, 1845)

To grasp the laws of motion of a specific society we have to know how the basic needs of humanity – food, clothing, shelter etc. – are satisfied, i.e. the relations of production, who decides what, when and how much is produced. In the foreword to A Contribution to the Critique of Political Economy Marx explains that the relations of production normally correspond to the property relations (i.e. the ownership relations) which is just the legal terms of the former. But it is important to remember that the property relations are only the expression of relations of production. In a concrete specific historic situation expression need not correspond to content. Of course, it has to do this sooner or later, but sooner or later is not now. When we investigate who decides the “what, when and how much” in the state enterprises it is not enough just to look at ownership. Otherwise state run companies in the advanced capitalist countries should also be considered small islands of socialism and of a planned economy. But an economic plan is only a plan if it covers the entire economy or at least a considerable part of it.

Preobrazhensky made some very interesting comments on this subject in his The New Economics. He explained that every social system of social production with a division of labour requires proportionality between the different branches of production. Under capitalism this is achieved by the law of value which determines prices and profits and therefore also the flow of capital between different branches:

“The category of price has three aspects: first, as a production-relation which summarizes both the level of productivity of labour within each branch of production and the distribution of labour power among the different branches; secondly, as a relation of distribution, in so far as the price level determines the level of that stream of values which flows from the hands of one group of people into the hands of others; thirdly, as a production-relation once more, in that through the mechanism of the deviation of prices from values, redistribution of productive forces takes place between the different branches of the economy” (Preobrazhensky, 1926, p. 149)

In the transitional economy as with the NEP the law of value also plays a role, but it is countered by the planning principle which is given strength by the workers’ state (or the dictatorship of the proletariat as Preobrazhensky would have called it). The planning principle limits the law of value, but it is also itself limited by the law of value. If grain prices are too low in the plan the peasants stop their supply. The point of primitive socialist accumulation is exactly to strengthen the plan in relation to the law of value. This becomes more and more economically variable as the productive forces are developed. A perfect planned economy in the advanced economies today would leave much less room for the law of value than the NEP did in Russia in the 1920s.

But primitive socialist accumulation was not taking place in China in the 1990s. Instead what was happening was an expansion of the role of the law of value within the state sector – i.e. the expansion of the profit motive. Some bourgeois commentators say that this process already began with the profit retention in the middle of the 1980s:

“Further, as a result of this move toward market economy, SOEs had to shift their strategies and attitudes in order to stay alive in the economy. Thus, the main focus of the state sector shifted from meeting goals to actually making profits.” (Sweetman and Zhang, 2009, p. 19) Table 4 shows that the degree of management autonomy was very big in 1996. Almost half of the state enterprises for example had complete autonomy of investment. The same point is seen by the fact that an increasing share of top Chinese managers today have been educated in capitalist universities in the West (Cheng, 2007, p. 143).

Table 4. Degree of management autonomy in the SOEs in 1996


% of enterprises declaring complete

autonomy on decision making







Use of retained earnings


Right to decide on organization structure




Wages and bonuses


Right to hire workers


Right to manage personnel




Establishment of JV or mergers and acquistions


Import and export


Right to dispose of assets


Right to refuse non-regulated government charges


Source: OECD, 2002, p. 15.

Joining the WTO (2001)

Quantity turned into quality when China joined the World Trade Organisation in 2001 and thus had to abide by its rules.

“The current WTO-inspired wave of reform, which will probably continue for five to ten more years, has resulted in intense efforts to revise laws and regulations on trade, technology transfer, investments, banking, insurance, securities, taxation, customs, intellectual property, telecommunications, health, professional services and other subjects to bring them into compliance with the WTO regime and to make the adjustments required by market access commitments.” (OECD, 2002, p. 365)

In the OECD’s latest report on China 2009 OECD Reviews of regulatory reform China, defining the boundary between the market and the state it is clear that the bourgeois economists at the OECD consider that the SOEs have been turned into “corporate legal entities operating as profit maximizing commercial businesses”:

“The new property law adopted in 2007 defines and codifies the rights to private property and establishes equal protection of property rights of state-owned, collective and private businesses and individuals. The law defines each type of property; specifies means to enforce property rights; provides for the establishment of property registers; and broadens the range of property recognised as collateral to include inventories and business receivables. The law does not fundamentally alter the property rights regime for land but it does mark a beginning in defining use-rights to land as property rights, which in principle could allow their transfer. It also explicitly prohibits unilateral alterations of land use contracts by the legal owner for the life of the contract.” (OECD, 2009, p. 54)

And further:

“The corporatisation process is approaching completion, with more than 80% of all SOEs, and virtually all those controlled by the central government, incorporated under the company law by the end of 2006 (…) These reforms are fostering (and indeed are essential to) the transformation of SOEs away from their earlier role as agents of the plan into competitive profit-oriented businesses.” (ibid., p. 58)

And the conclusion is that capitalism is now the dominant force in China and that the time of major reforms is in the past:

“With many of the fundamental steps having been taken, future reforms are likely to focus on completing the established frameworks and on strengthening implementation; the emphasis is likely to be on judicial, competition, and other policies applying to the economy as a whole rather than to individual sectors.” (ibid., p. 65)

The planning principle has lost all of its power. Of course the Chinese state is still very strong and probably it is the strongest state ever seen in a capitalist economy. In none of the situations of state capitalism or in the fascist regimes has state control been greater. But the control is not based on a plan. It is mostly based on typical capitalist methods such as taxes and credit while direct force also plays a role.

This is also supported by the fact that “market capitalization, as a percent of GDP, soared from 37 percent in 2005 to over 100 percent in 2007” (Sweetman and Zhang, 2009, p. 24). Up till now we have not discussed the role of credit at all. Before 1978 there was just the People’s Bank of China (PBOC), however, during the 1980s and the beginning of the 1990s it was divided into different semi-autonomous parts. But further steps have now been taken:

“Foreign banks were not allowed to enter Chinese markets until the late 1990s. Initially they were subject to many restrictions. After joining the WTO in 2001, China removed most of these restrictions (…) The next step in reforming China’s banking system was to make state banks more responsible for their financial gains and losses through profit retention and a profit loss contract system.” (Sweetman and Zhang, p. 23)


In 1937 in an attack on the idea that the Soviet Union was state capitalist Trotsky said that: “The class nature of the state is, consequently, determined not only by its political forms but by its social content; i.e., by the character of the forms of property and productive relations which the given state guards and defends” (Trotsky, 1937). Remembering how the OECD explains the entry of China into the WTO and the reforms that followed, it is clear that the Chinese state today defends capitalist property relations in a form where the state is very powerful. In The Revolution Betrayed Trotsky estimated how the capitalist counter-revolution would appear in the Soviet Union. The process he outlined as a perspective is actually very similar to what we have actually seen in China:

“The chief task of the new power would be to restore private property in the means of production. First of all, it would be necessary to create conditions for the development of strong farmers from the weak collective farms, and for converting the strong collectives into producers’ cooperatives of the bourgeois type into agricultural stock companies. In the sphere of industry, denationalization would begin with the light industries and those producing food. The planning principle would be converted for the transitional period into a series of compromises between state power and individual “corporations” – potential proprietors, that is, among the Soviet captains of industry, the émigré former proprietors and foreign capitalists. Notwithstanding that the Soviet bureaucracy has gone far toward preparing a bourgeois restoration, the new regime would have to introduce in the matter of forms of property and methods of industry not a reform, but a social revolution.” (Trotsky, 1936)

To sum up the differences between what we have seen in China since the beginning of the 1990s and the original NEP we can look at the market. Trotsky said, as quoted above, that the plan should be “checked and, to a considerable degree, realized through the market”. Now it is the other way around; the market is checked by the “plan” – or simply “regulation”. In a planned economy markets can be used to determine supply and demand which can then be manipulated using taxes and credit, etc. Some firms can be run with deficits by subsidies, etc. If instead the market and therefore the profit motive becomes the prime determinant of production and investment, then quantity has turned into quality.

  1. Under the NEP the state was controlled by a party of and for the working class – this is not the case in China today.
  2. Under the NEP the state remained in control of all the most important productive forces – this is only the case to a very limited degree in China today.
  3. Under the NEP the state was in complete control of credit – in China today the state still owns the majority in the biggest banks, but these are now driven in a capitalist-like manner.
  4. Under the NEP the state held an absolute monopoly of foreign trade – this is not the case in China today.

The transition to capitalism in China today is no longer in the realm of possibility as general Marxist theory states for any workers’ state. It is not just a probability as is the case in any NEP-like period. Capitalism is a concrete reality in China today as the dominating mode of production even though the Chinese state plays an enormous role compared with almost any other capitalist country in history.

The basics tasks for the Chinese Marxists are therefore not just those of a political revolution but also a social revolution where the state enterprises and the credit system are reintegrated into the plan, the largest private firms are nationalised and the foreign firms are put under strict supervision and the state monopoly of foreign trade is re-established. Common welfare demands known in the West, such as free and better health care, education and social security will also gain in importance.

China was relative mildly hit by the world economic crisis in 2009 and still managed to grow by 7.7 percent. However, the fundamentals do not seem to be that sound. Overcapacity is lurking in many branches of production and bubbles in house prices and stocks are evident with prices rising faster than incomes and profits. The growth of the last few years has been increasingly capital intensive leading to weak employment growth. Now a survey by the Chinese Academy of Social Sciences argues that the figure for urban unemployment is above 9 percent. Struggles against privatisations and lay-offs have been rising. The Honda strike in June was only one of the first shots in a long struggle, an indication of what is to come. When the Chinese working class really starts to move nothing will be able to stop it.

How the Marxists connect with this enormous working class is of critical importance for the world revolution. The aim of this article has been to achieve a more clear understanding of the economic processes leading up to the present situation. The real task now is to develop the demands briefly mentioned above so that they connect with the present day conditions of the Chinese workers and points in the direct of a socialist planned economy.

Copenhagen, July 2010


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Liu, X. and Zhang, W., 2010, China’s Three Decades of Economic Reforms

Marx, K., 1845, The German Ideology

Marx, K., 1852, The Eighteenth Brumaire of Louis Bonaparte:

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OECD, 2009, OECD Reviews of regulatory reform China, defining the boundary between the market and the state

Preobrazhensky, E., 1926 (1965), The New Economics

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Trotsky, L., 1936, Not a Worker’ and Not a Bourgeois State?


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