Understanding the role of the private sector in the Chinese economy

We are pleased to publish below the text of a speech by Dr Jenny Clegg at a public meeting in Manchester, Britain, organised by the Greater Manchester Morning Star Readers and Supporters Group. The title of the event was China and the Western Left, and it aimed to uncover the nature of China’s political economy and its role in the world. The other guest speaker was Friends of Socialist China co-editor Carlos Martinez.

Jenny’s speech seeks to explain the role of the private sector in the current phase of China’s development. Jenny lays the ground for understanding today’s domestic capitalist class by uncovering the role of the national bourgeoisie in the history of the Chinese Revolution, including in the massive strike wave of the 1920s, the United Front to resist Japanese invasion, and the period of rebuilding during the New Democracy phase between 1949 and 1956. Jenny posits that this group, while not always reliable, “had an anti-imperialist side” and furthermore “was prepared to accept CPC leadership in the right circumstances – something still influencing the CPC’s attitude to today’s private entrepreneurs.”

The speech explains the unusual nature of China’s socialist market economy, in which the public and private sectors have an essentially symbiotic relationship, and where the state maintains overall control.

“The majority of large-scale private enterprises are linked into the state through mixed-ownership arrangements, with the state investing and divesting to shape industrial growth according to overall plans… Around 40 percent of private entrepreneurs are Party members and around half of private enterprises have CPC cells organised within them. Over 40 percent of workplaces so far are unionised, more than twice the rate here in Britain.”

As such, “the relationship then between the socialist state and the private sector is one of unity in developing the economy as well as struggle to ensure public benefit.”

A member of our advisory group, Jenny is a retired academic and an activist in the anti-nuclear, peace and friendship movements. She is the author of China’s Global Strategy: Towards a Multipolar World, published by Pluto Press.

The major stumbling point for the Western Left in understanding China as a socialist country is the question of the growth in recent decades of market relations and the private sector. This question requires in the first place a consideration of the contribution that the domestic capitalist class made in China’s revolutionary process before getting some measure of the private economy in China today.

The historical role of the national bourgeoisie in the Chinese revolution

One hundred years ago – minus one year – in 1925, on May 30, a British officer ordered the police in the Shanghai British concession to open fire on Chinese protestors, killing at least nine of them. The protests were part of a mounting strike wave in which the Communist Party of China (CPC) – founded in 1921 – was very active, and the incident sparked some momentous developments as anti-imperialist feelings surged.

Ayear-long strike in Hong Kong, starting in 1925, dealt a great blow to British imperialism, which from its island base had extended its influence, becoming the leading imperialist power not only in China but across Southeast Asia. The fact that Chinese capitalists supported and funded the strike, showing they too had an anti-imperialist side, was a particular lesson for the CPC.

The Kuomintang (KMT), supported by the CPC in the first United Front, began to prepare its army for the Northern Expeditionwhich set off in 1926to overthrow the feudal warlords and imperialist rule. As it advanced, peasant associations spread like wildfire.

The British Tory government launched a 20,000 strong expeditionary force; and in due course cities along the Yangtze came under British bombardment.

And in Britain, Hands off China became the largest anti-imperialist movement during the General Strike.

The situation in China became highly radicalised as peasants’ moderate demands for rent reductions gave way to land seizures and workers took over the British concession in Wuhan. These developments caused KMT Nationalist army officers to take fright, and what followed was a brutal massacre of communists in Shanghai, ordered by KMT head Chiang Kai-shek. Too late, the remaining CPC activists formed their own Red Army but, failing to capture an urban base, retreated to the mountains to set up worker-peasant soviets.

Over the next ten years, the CPC carried out various land reform policies with limited success. It was Mao who recognised the Leftist errors thatfailed to take capital into account in implementing reforms to eradicate feudal relations. Taking corrective measures, following the Long March (1934-35), by the time the Japanese escalated its occupation of China in 1937, the CPC was ready to meet the new anti-imperialist upsurge by entering a second United Front of resistance with the KMT. 

In the red base areas under its control, the CPC moderated its land reform policies, and the two-class Soviet strategy was replaced with a New Democratic alliance including the national bourgeoisie as well as the petty bourgeoisie.

These adjustment proved a great success: in the eight years to the defeat of Japan in 1945, the red bases grew from a population of one million to nearly 100 million people, almost a quarter of China, and the Red Army from 30,000 to 900,000.

New Democracy was to continue through the ensuing years of civil war (1945-49), the founding of the People’s Republic (1949), up to the 1956 transition to socialism.

In 1949, whilst others fled, some capitalists stayed on to make valuable contributions to China’s recovery. The fact that China was able to stabilise within three years to 1952 after a century of wars and economic ruin was truly remarkable.

Then in 1956, when private enterprises were nationalised, these former owners stayed on as managers, as Mao declared the contradiction with the national bourgeoisie, now antagonistic under socialism, was to be handled in non-antagonistic ways, that is by ideological struggle.

History thus shows the important role the nationalist capitalist class played in the Chinese revolution: if not always reliable, not only did it have an anti-imperialist side but it was prepared to accept CPC leadership in the right circumstances – something still influencing the CPC’s attitude to today’s private entrepreneurs.

Private sector growth under state sector predominance

Under Mao, and especially during the Cultural Revolution, capital was suppressed: resources had to be pooled to feedand clothe the impoverished population and to develop the industrial base.

By the 1970s, China was basically able to feed its people and had a more-or-less complete set of industries under state ownership. When normalisation with the US finally came in the late 1970s, China was able to move to a new stage of reform and opening up, proceeding not as in Russia with a big bang but step by step.

What Deng Xiaoping recognised was that socialism had to advance through stages, and that China was just at the primary stage in which markets and private ownership could play a positive role in socialising the productive forces, something that Engels stressed in distinguishing scientific from utopian socialism.

Over the last 40 years, millions of people have migrated from the countryside seeking jobs in the cities – and 80 percent of these jobs are provided by the private sector. The rural population has fallen from 80 percent to around 40 percent, whilst China’s working class has grown to 700 million. Over this period, China has been able to complete its goal of eradicating extreme poverty; life expectancy has increased 10 years; years of schooling have doubled; enrolment in higher education has shot up; and wages have doubled and doubled again.

In the last 20 years, private enterprises have quadrupled in number from 10 million to 40 million. These enterprises are dependent on the government for land, access to electricity and water, for contracts, subsidies, tax relief and above all finance from state-owned banks. Only 10 percent of business funds are raised on the stock market. Private enterprises then need the support of the state to succeed.

The vast majority of the 40 million private enterprises are small, medium-sized and household enterprises. Meanwhile state-owned enterprises make up nearly 80 percent of all large-scale enterprises. Defence, traditional energy, telecoms, aviation and railways are state-owned.

The majority of large-scale private enterprises are linked into the state through mixed-ownership arrangements, with the state investing and divesting to shape industrial growth according to overall plans.

Many private entrepreneurs have come up through the CPC. For example the managing director of Huawei started out in the Peoples Liberation Army and is on record as saying that if there were to be a conflict of interest, he would prioritise the Party before his business.

Around 40 percent of private entrepreneurs are Party members and around half of private enterprises have CPC cells organised within them. Over 40 percent of workplaces so far are unionised, more than twice the rate here in Britain.

There are around 600 billionaires – slightly fewer than the US. But in the showdown between Jack Ma of Alibaba and Xi Jinping in 2020, it was Xi who won with ease.

The private sector has grown exponentially and in growing the economy has also stimulated the strengthening of the state sector: the two have grown side by side, with public ownership remaining predominant. In 2017,this stood, relative to GDP, at around three times greater than any other country; last year the state sector produced 66 percent of GDP.

Looking to the future

When Deng Xiaoping called on some to get rich first he added “so that they can helpothers to catch up”. Now the richer coastal provinces are linking with poorer provinces to help them develop.

The new goal of common prosperity is to lift up to 400 million low-income people tomiddle income levels by 2035.

China is at a critical period in shifting from one set of economic pillars – cheap exports and iron and steel for urban construction – to a new set of economic pillars. All the talk now is about a new development phase featuring innovation, sustainability and high technologies, with rising skills and wages.

Critical to this upgrading is the question of finance: to tackle the buildup of debt in the system plus the fact that new innovating enterprises require large injections of capital to scale quickly.

China is aiming to build itself up as a financial power. This means reforms to financial markets, balancing between state and market through the use of state investment funds – like Blackrock but owned by the state.

Finance is to serve the real economy looking to the long term, unlike the short-termism of the speculative financial markets of the West. Deepening the financial sector will further assist in the gradual internationalisation of the RMB as part of the de-dollarisation trend.

On new technologies like AI and quantum computing, these clearly have huge potential, for example in improving health as well as tackling climate change, given the ability to crunch vast amounts of data. A core component of this issue is a race between the US and China to attain a military edge in the Taiwan Straits.

So finally, to address the Western Left I’d say:

First, understand that China is still a developing country. Average per capita income is a quarter of that of the UK and one sixth that of the US.  Development problems, especially rural-urban inequality, are the underlying determinant in Chinese policy-making.

Second, Chinese socialism is still a work in progress. It’s not about changing everything all at once, it’s about working through stages in an ongoing process. Engels, contrasting scientific with utopian socialism, talks about subjugating the anarchic laws of capitalism to the social regulation of production according to a plan. This is what China is doing.

Thirdly, on the capitalist class, we need to understand that this is not an independent class but has been created by the state in such a way as to benefit public interests; and that it is not the leading class but is led – it accepts CPC direction under the primary stage of socialism insofar as this develops the national economy against imperialist monopolies.

The relationship then between the socialist state and the private sector is one of unity in developing the economy as well as struggle to ensure public benefit. As the CPC learnt from its own historical experience, when the interests of capital were not taken into consideration, when things got too radical under Leftist policies, things got in a mess; but when these interests were taken into account in fact the CPC made remarkable gains.

Lastly I’d say we cannot understand the world without understanding China’s rise. Consider the past: the four great inventions of paper, gunpowder, the compass and printing came from China and helped to lay the foundation for the industrial revolution in the 19th century; in the 20th century China’s revolution was to inspire other anti-colonial struggles around the world, laying the basis in principle of a completely new order of equal states; and in our lifetime consumer and electronic goods assembled in China have transformed the way we live. 

As China becomes an advanced socialist state over the next 25 years, let’s think what impact this will have on us and the world.