Is China’s economy doomed to stall?

Ballooning state sector debt, the Renminbi’s protracted devaluation, rapid foreign currency reserve losses, diminishing GDP growth rates, real estate bubbles, potential trade wars, looming geopolitical instability—China’s mounting spate of woes would seem to cast a dark shadow over Xi Jinping’s ambitious program for China’s “great revival.”

Ongoing doom-and-gloom forecasts by mainstream media portray a nation mired in crisis.  Does mainstream Western analysis provide a complete picture of China’s economic situation?  Held to standards shaped by liberal notions of free-market exchange and democracy, China falls short in many areas.

But governance and economic management in the PRC is run by a different playbook, and that includes divergent theoretical underpinnings.  With the aim of viewing the situation in China from a wider angle, this article provides a brief overview of the theory behind Beijing’s economic policymaking, and the larger “operating system” for development which is taking shape in China today.

The first reform paradigm (1978-2000s)

Deng Xiaoping’s grand project of “Reform and Opening” transformed China by redefining socialism.  Holding the planned economy in the “primary position,” while permitting private and semi-private forms of ownership in industry, commerce, and agriculture, China borrowed from the early Soviet NEP (New Economic Policy) to develop socialism under dismally backward socio-economic conditions.

Indeed, the reorganization of society and the economy in accordance with market activity commenced from an extremely low developmental base.  With malnutrition rife, much of the rural population mired in dire poverty, and urban industries plodding along using antiquated technology, Deng’s reform measures in the early 1980s ignited the rapid take-off of an economy that had nowhere to go but up.  Sweeping privatization in agriculture and other sectors unleashed the dormant entrepreneurial spirit of the Chinese population.  At the same time, the Communist Party of China (CPC) jettisoned much of the ideological baggage of the Marxist-Leninist-Maoist developmental paradigm. While retaining the institutional mechanisms of Communism, the government phased out soft-budgets, corporatized industry (delinking enterprises from direct state administration), and applied Western thinking in economic matters and management.

As China ramped up growth through the development of private enterprise and free trade, the Party’s commitment to Marxism become more of an abstraction, with growth-for-growth’s-sake supplanting the utopian mantras of the Maoist era.  Strict central planning and full public ownership were phased out, but so was the social contract customarily provided by the Marxist-Leninist system: the “Iron Rice Bowl” social protections, and cradle-to-grave provisions to which workers in the PRC had grown accustomed, faded into memory.

Deng Xiaoping believed “a rising tide will lift all boats.”  But while a few boats were carried to dizzying heights by the tidal wave of China’s “socialist market,” most workers discovered that better living standards also came with alarmingly high degrees of economic uncertainty in an increasingly competitive labor market.

By the late 1980s, corruption, inequality, crime, and other vices of capitalism began to reemerge in Chinese society for the first time in a generation.  Competition and private accumulation worked to jumpstart fast growth, but this came at a tremendous social and environmental cost.

For years, the social contradictions and ecological damage wrought by market activity were offset by the material improvements enjoyed by most of the population.  China’s reform-era leaders believed that delivering better living standards would be enough to demonstrate the Party’s commitment to the people.  Egalitarianism was put on back burner, dismissed as utopian or incommensurate with China’s current “lower stage” of socialist development.

“Let some get rich first” became a maxim widely associated with Deng and China’s overall reform agenda.  Tight family kinship bonds could, to some degree, supplant the disintegrating social welfare system, and the weight of traditional Confucian culture stabilized Chinese society and smoothed over the transition from planning to market-based development, allowing the PRC to evade much of the social instability and crime which came to define post-Communist privatization in Eastern Europe and Central Asia.

With the nation’s economic engine surging forward at double-digit growth rates throughout the `90s and 2000s, few cared to challenge the wisdom of China’s reform-era leadership.  The CPC’s legitimacy remained rock solid long after most of the socialist world returned to the capitalist fold.

Times are changing, the Chinese people have higher expectations, and China’s economy today is again entering uncharted territory.  Renewed modernization requires that China address the structural problems left over from the previous growth paradigm of the 1980s though the first decade of the 2000s, which has saddled many state-run industries with excess capacity, and rendered the wider economy overly-reliant on exports and government spending on infrastructure projects.

Demographic challenges loom: PRC citizens are living longer, the working-age population is set to decline, and higher wages are undermining China’s traditional comparative advantage in cheap exports.  The economy is slowing down in quantitative terms.  More qualitative, innovation-driven growth is now required.  In the context of today’s “new normal” period of diminished growth, the deep class cleavages and regional disparities of the reform era are finally coming to a head, requiring urgent government action.

In light of the nation’s shifting economic and social realities, the Party under Xi Jinping has signaled a re-pivot to Marxism while at the same time stressing the need to deepen market reform.  Understanding how these two seemingly incongruous aims fit together, requires a deeper understanding of the theoretical framework of China’s “operating system.”

China’s operating system for development

The long-standing question of whether China is socialist or capitalist, has lost much of its relevance, as 20th century understandings of both paradigms become increasingly outdated.  China’s mixed-ownership, “socialist market” system blurs distinctions between public and private, the market and the state, the Party and society.  China’s model is wrought by a tremendous degree of ideological innovation and policy flexibility.  “Re-imagining” Marxism and what Marxism means for Chinese development, is an ongoing project for the CPC top leadership—a task known as the “Sinification of Marxism.”  Government efforts to perfect institutional mechanisms by way of digital technology are fashioning a Party-state nervous system arguably more efficient and expansive than both traditional Western bureaucracies, or the typical Marxist-Leninist state apparatus.

China’s “operating system” for development is indeed unique, and needs to be studied on its own terms.

China’s ongoing efforts to optimize governance and economic management are by no means fail-proof, as social instability, factional infighting, environmental problems, and innumerable other variables may complicate Party leadership in the present or future.  But there is no reason to believe that China’s system of governance is rigid, out of touch, or doomed to collapse.

Mainstream Western analysis, in its rush to bind all China discourse into the ideational straitjacket of liberalism, often overlooks or downplays the following aspects of Chinese development:

  1. China is improving.  There is much to be said about the degree of social progress which China has, and continues, to achieve.  The PRC today is a relatively open society.  Chinese citizens may generally travel freely, amass personal wealth, access information, and express their opinions online.  There has been no major crackdown on personal freedom or academia under Xi’s leadership. The government routinely emphasizes greater “rule of law,” with the nation’s regulatory system trending towards better protections for individual and property rights.  China today may be laggard by the standards of liberal good governance, but the contrast to the China of 40 years earlier is stark.  The nation is far more integrated into the wider world than any other Marxist-Leninist system, past or present. The greater personal freedom, rising living standards, cosmopolitanism, and consumerism which define modern Chinese culture should not be mistaken as convergence with Western politico-economic values, however.  From the very beginning, the reform process was guided by the leadership’s determination to shore up and reinforce Party governance, to move in a socialist direction, and to frame China’s development in Marxist terms.
  2. China’s Party-state apparatus strives to balance elite and public interests.  The levers of the Marxist-Leninist system remain in full force in a market system regulated and permeated by the CPC at all levels.  In terms of macroeconomic planning, Party theory emphasizes the advantages of state-guided market development, such as the government’s ability to channel resources into strategic sectors, social spending, and other areas requiring investment.  But the Party can do much more!  China’s system empowers the state to address corruption far beyond common judicial means.  For example, the Party has various means to reinforce discipline among its more than 89 million members, who tend to dominate industry and commerce.  Shuanggui detention is routinely applied, involving periods of detainment and interrogation spanning varying and indefinite periods of time for CPC members suspected of crimes.  Sweeping rectification (zhengfeng) campaigns across institutions of government at all levels, as well as SOEs and the military reinforce the Party’s resolve at reining in corruption and moderating elite privilege.  Ongoing campaigns to break up deeply-entrenched interest networks and monopolies in the state sector have demonstrated the Party’s commitment to substantive growth and development.

Though dismissed as mere cosmetic changes by the Western media, Xi Jinping’s crackdown on extravagant consumption among Party cadre continues to hit many high-end service sectors hard.  Fine dining and golf are now eschewed by Party event planners, forcing facility closures across the country.  Other developments hint at subtle measures to tighten the Party’s grip over the professional classes.  Mid-level and upper management in SOEs must report all assets and often hand in their passports to Human Resources.  The information which state sector management must report is extensive, including even family members who have emigrated or purchased property abroad.  In the state finance sector, employees of major banks are forbidden from taking second jobs or earning income beyond their salaries, except through the stock market and real estate.  Xi has placed emphasis on “responsible wealth,” putting more pressure on Chinese elites to contribute more to charities, universities, and other social endeavors.  Finally, while private equity in SOEs enriches numerous elite families, their share, as a rule, composes a small percentage of overall assets.  The State-owned Assets Supervision and Administration Commission (SASAC) retains upwards of 80 percent or more equity in all of China’s major centrally-administered SOEs.  China’s state sector is a vehicle for the enrichment of elite families, but within very strict boundaries.  This contrasts to the oligarchies of the former Soviet Union, or South Korea’s chaebol system, which offer to elites unbridled wealth and power, and an open door for accumulating more of both.

  1. State planning and state ownership are not to be phased out.  China’s reform goal from the outset was never to move towards a free-market economy; instead, developing a “planned commodity economy” with public ownership at the forefront was envisaged as the outcome of reform at China’s current stage of development.  In terms of concrete policymaking, one of Beijing’s greatest accomplishments in the initial reform era was to redefine the government’s role in managing the economy.  China shifted from central planning (jihua) to “strategic planning” (guihua) in its system of Five Year Plans, precluding central micromanagement over economic matters while promoting market-based allocation of resources.  The nation’s SOEs—the “lifeblood” of the economy—dominate many sectors, but are increasingly forced to play by market rules domestically and globally.  Indeed, China’s lumbering SOE behemoths of yore are now increasingly agile and competitive players in the international economy, with 60 now on the Fortune 500.  The nation’s state sector as a whole requires continued fat-trimming and market optimization, but ongoing streamlining and consolidation measures indicate SASAC is serious about taking SOEs to task.  China’s SOEs are here to stay.
  2. Shoring up SOEs does not signal a reform u-turn.  Xi Jinping has stressed that the market must be given a decisive role in resource allocation.  The CPC emphasizes growing the private sector while at the same time safeguarding the Party’s control over SOEs.  This is not a contradiction.  SOEs and small and medium-sized enterprises (SMEs) are seen as mutually-beneficial and as necessary components of an “organic whole.”  Well-managed SOEs will provide a stronger bedrock for the overall Chinese economy, facilitating macroeconomic conditions in which the private sector can flourish.  SMEs, in turn, will break up state monopolies and require SOEs to perform better.  Current structural economic challenges are understood as contradictions in the Marxian dialectical sense—obstacles along a linear path to progress which, in the process of resolution, bring society to a higher plane of development.  In the present period, the private sector represents the more dynamic, innovative, and efficient component of the whole; in the long-term, the Communist Party is committed to improving the state-sector as the foundation for “advanced” socialism.  The private sector cannot “wither away” until it has exhausted its vitality, and the state sector cannot supersede private enterprise until more advanced digital or quantum computerized systems for production and planning render the market obsolete.
  3. Theory guides development.  Profound theoretical innovations underlie the leadership’s shift from ideological to pragmatic policy-making.  Marx’s writings were based almost entirely on the Western European and North Atlantic socio-historic contexts; consequently, Marx’s revolutionary prescriptions applied mostly to the West.  Societies to the East—especially those defined by “Asiatic modes of production”—were never offered a revolutionary blueprint by Marx beyond casual conjecture.  Subsumed under the heading of “socialism with Chinese characteristics,” Sinified Marxism borrows largely from the thinking of Yevgeni Preobrazhensky and Nikolai Bukharin, who attempted to craft a blueprint for “socialist construction” in backward societies through the early Soviet NEP.  Markets and private accumulation are tolerated as concessions in a longer-term process of attaining more advanced productive forces.  Whether by ameliorating the condition of the peasantry and entrepreneurial classes, or through more coercive means of “primitive socialist accumulation,” surplus generated from private enterprise can be channeled into developing the wider economy, and in particular towards strengthening the state sector.  Perfecting the market is not the end goal in this schema: shifting resources towards overall national development is the medium-term goal, with a vague socialist endpoint on the distant horizon.
  4. China assesses its own progress through other indicators.  Whether GDP is an adequate metric for assessing progress is up for debate in the West, but China’s Marxian framework for gauging its own socio-economic development transcends quantitative analysis. “Development” is measured in more holistic terms, according to a range of economic, environmental, social and demographic variables.  Kilometers of high speed rail lines and highways built, completion of major infrastructure projects, numbers of citizens traveling abroad, measurable reductions in air pollution, retail sales figures, patents placed, inventions registered, bandwidth improved, affordable housing units constructed, life expectancy increases: these provide but a few examples.  In short, strictly judging China’s performance according to GDP growth per annum, fails to provide a complete picture of China’s economic potential as the nation shifts toward an innovation-based growth engine.  For example, online payment platforms are far more commonly utilized in the PRC than in the U.S., demonstrating one way in which Chinese society is surging ahead and reshaping the retail industry.
  5. China is still serious about Marxism. The Sinification of Marxism applies Marxist dialectical and historical materialist thinking towards long-term development, factoring in the nation’s indigenous cultural, historical and material circumstances, as well as 21st century realities.  This is a wide departure from mid-20th century CPC theory.  The Party’s revised understanding of Marxism may be likened to one who in her early life espoused a literal interpretation of the Bible, but later embraces a more figurative understanding of the Gospel.  Similarly, the CPC platform has evolved from mid-20th century attempts to directly apply Marx’s Labor Theory of Value and Theory of Surplus Value to labor-economic calculations—to the nation’s detriment–toward a more refined view today, which emphasizes Marx’s stage-based view of long-term development, dialectics, and holistic people-centered development.  Marxism as orthodoxy has been replaced by Marxism as a “living science,” from dogma to a guidepost for development.
  6. Digital technology is transforming China’s operating system.  Through the digital feedback loop, the Party can assess and reevaluate policy implementation, track economic and social trends, and handle crises more effectively.  Vast quantities of data are transmitted up the Party-state institutional hierarchy, allowing SOE managers, bureaucrats, and cadre at all levels to make real-time decisions on pressing social, economic or environmental matters.  Though not a democracy in the Western sense, China’s system demonstrates a notable degree of government responsiveness to public opinion.  Xi Jinping has instructed officials to study mass trends and sentiments through social media, for example, and to apply that information to policy making.  Advanced technology and big data can optimize the performance of state planning organs, far surpassing the performance of 20th century socialist systems weighed down by chronic under-productivity and bureaucratic stasis.   In the long run, China’s digitalized hybrid socialist system may succeed in combining the best aspects of rational state planning and competitive market relations.

The New Development Concepts 

The developmental program of the Xi Jinping administration may be seen as a partial repudiation of Dengism.  Whereas previously the Party emphasized its role as simply guiding “development,” Xi’s theory harkens back to the Party’s egalitarian roots.

The 18th Party Congress put forward Innovation, Cooperation, Ecology, Openness, and Sharing as the nation’s main developmental principles; in aggregate, these are known as the New Economic Development Concepts (NEDC).  The Party seeks to focus on these key areas while also consolidating lessons from domestic and international developmental experience.  The NEDCs are seen as providing a theoretical upgrade of previous Party policy, which chased growth as the prime imperative.  Geared towards “more efficacious, fairer, and sustainable” development, the NEDCs “deepen” the Party’s socio-economic development theory, with the overarching goal of realizing a “moderately prosperous society” and the “Two Centenary Goals” of reaching $10,000 per capita GDP by 2020, and achieving general social affluence by 2049.

The NEDCs are in line with wider global trends.  Sustainable development, microfinance, cooperatives, horizontal production, digital platforms, crowdsourcing, green cities, and similar concepts are increasingly prevalent in Western economic and political discourse, too.  But China’s system is different: the CPC and its economic planning institutions have tremendous power to actually implement policy.  Bureaucratic inertia, special interest groups, or public apathy may hinder progress, but these obstacles can be addressed through disciplinary or incentive measures within the framework of the system.  At the end of the day, the Communist Party wields tremendous influence over industry and commerce, and Party directives carry powerful weight.  In Western liberal democracies, on the other hand, these trends are at loggerheads with the structure of the existing system: major corporations, monopolies, partisan bickering, weakened bureaucracies, and ideological stasis present major roadblocks to economic transformation, with notions such as “digital distributism” or moving towards localized, cooperative-based economies, remaining purely aspirational.

The PRC has surged ahead rapidly towards bridging its developmental and innovation gap with the West, defying the conventional neoliberal wisdom all the while. The presumption that China is now destined to suddenly stall would seem rather ideological and short-sighted.  As mainstream economists myopically hone in on China’s short-term struggles, they may be losing sight of the bigger picture: China’s ongoing transformation may be rewriting the rules of modernization in the digital era.

While we wait for China to stumble, she may already be leaping ahead.