China’s Model of State Capitalism
In less than fifty years, China has risen from a poor agrarian society to the second-largest economy and a global superpower. China reached this level of economic prosperity because of its liberalization into a free market economy under Deng Xiaoping during the Chinese economic reform starting in 1976. The Chinese economic reform divided political ideology from economic practice and created what is known as state capitalism. China’s economic model has deviated from socialism because of foreign trade and the privatization of business and property. China’s “Socialism with Chinese Characteristics” is a free market economy regulated by the government, now known as state capitalism. China embraced Weber’s ‘spirit of capitalism’ while using a one-party system that upholds the People’s Republic of China’s founding political values. The Chinese Communist Party’s commitment to socialism is evident only through its control over the state, not its economic behavior. For decades, China’s economy has seemed to be an unstoppable force. Now, China is facing severe youth unemployment and a dangerous real estate crisis, which has tested the sustainability of state capitalism.
China’s exposure to foreign trade dates back centuries to the Silk Road. However, China’s first interaction with free-market foreign exchanges occurred in the 19th century. I wrote in The Wesleyan Argus, “The Opium Wars took place between 1839 and 1860 and ended with a series of treaties between Great Britain and China intended to undermine Chinese sovereignty. These treaties forced China to open trade and its borders to foreigners, dramatically increasing cultural exchange after the Opium Wars.”(Fisher and Henning, 2023). Part of the treaty was ceding Hong Kong to Great Britain in 1842 (Hayes, 2021). These unfair agreements impacted China’s psychology of foreign involvement, as seen with Mao’s insular foreign policy. While China was subjected to a poor farming lifestyle, Britain used Hong Kong’s strategic location to expand the Empire’s trade and prosperity. Great Britain exploited China during the opium wars, which would make them very skeptical of the Western free market system in the future. China works to maintain an image that distinguishes itself from the West despite having similar capitalism and colonial practices because of the scars from its exploitative relationship with Western powers since the 19th century.
In Max Weber’s The Protestant Ethic and the Spirit of Capitalism, he is the first to articulate that capitalism has a psychological aspect. Weber sees that this psychological aspect that drives capitalism is the Protestant, or Calvinist, ethic. The text says, “The Calvinist ethic introduced an activism into the believer’s approach to worldly affairs, a drive to mastery in a quest for virtue in the eyes of God, that are altogether lacking in Confucianism” (Weber, 1930). Weber’s 1905 publication believes China's economic mobility was limited by its patriarchal Confucian bureaucracy. Weber writes, “Capitalism existed in China…, but in all these cases, as we shall see, this particular ethos was lacking” (Weber, 1930). Weber provides the framework for ascending to economic prosperity through a capitalist society. Using the definition of this ethic as openness to foreign engagement and a ‘drive’ to virtue, it can be applied to understand the political history and economic decisions of the People’s Republic of China (PRC) to determine if they embrace the spirit of capitalism.
In 1949, Mao Zedong and the Chinese Communist Party (CCP) won the Chinese Civil War against the former ruling party Kuomintang (KMT) and Chiang Kai-shek. Mao and the CCP founded the People’s Republic of China with strong influences from Marx and Lenin and a belief in a single-party state. Mao's rule would be uncontested until he died in 1976. Mao started the Great Leap Forward, hoping to transform China from an agrarian society to an industrialized economy. The Great Leap Forward proved unsuccessful, with millions dying from the Great Famine and a poor economy. Despite his lack of economic success, Mao maintained an unwavering commitment to communist values. Anyone who challenged his authority was purged. To get China out of its economic catastrophe, Mao started the Cultural Revolution to reinforce the communist values of China and purged dissidents and capitalists. The Cultural Revolution ultimately resulted in economic stagnation and mass chaos, but Mao kept a firm grip on his unchecked power. Further, Mao’s foreign policy was defined by a skeptical attitude to the West and foreign involvement. He believed that China should’ve been able to lift itself from its domestic activity.
After the death of Mao, Deng Xiaoping rose to power. While he never held the official title of General Secretary of the CCP, he was the de facto leader of China. He introduced a period of significant economic reform and liberalization called “Socialism with Chinese Characteristics.” With this term, state capitalism was created in China, and the ensuing decades of reform would bring great production into the economy. Deng Xiaoping was adamant about defining this economic reform as distinct from Western values to enforce their Communist values (Kobayashi et al., 1999). Deng’s policy promoted foreign trade and investment and free enterprise, exposed the labor force to the global market, created Special Economic Zones (SEZs), and had a model of state ownership that slowly allowed privatization (Hirson, 2019). The Special Economic Zones were an early test of infusing capitalist values into China’s communist society. SEZs are characterized by a confined geographical area, a single administrative entity, beneficial features based on its physical location, and a separate customs area with duty-free benefits. SEZs are designated areas under liberalized economic laws that promote less regulated free market and global exchanges (Zeng, 2012). Deng Xiaoping is often called the architect of China’s model of state capitalism. A key player in Deng’s leadership’s success was the infusion of Special Economic Zones that were allowed to deviate from socialist practices.
Xi Jinping has been the most powerful person in China for more than a decade. The CCP’s current general secretary has consolidated power, abolished term limits, and ousted political rivals. It appears that Xi will remain in power until the end of his days. Xi holds an unwavering belief in the PRC’s founding socialist and Maoist values. In a 2013 speech Xi gave to the Party’s Central Committee, he reaffirmed that the Chinese government is a socialist, not a capitalist society. He said, “It was Marxism-Leninism and Mao Zedong Thought that guided the Chinese people out of the long night and established a New China, and it was Socialism with Chinese Characteristics that led to the rapid development of China” (Xi, 2013). Since its origin, the People’s Republic of China has silenced, jailed, and purged capitalist dissidents. Even if the CCP aimed to implement capitalist economic reform, they would never explicitly say so because it is antithetical to their political doctrines. Xi continued, “In recent years commentators both at home and abroad have questioned whether the road pursued by China is truly socialist. Some have called our road ‘Social Capitalism,’ others ‘State Capitalism,’ and yet others ‘Technocratic Capitalism.’ These are all completely wrong. We respond that Socialism with Chinese Characteristics is socialism, by which we mean that despite reform, we adhere to the socialist road” (Xi, 2013). What the CCP calls “Chinese Characteristics” is just a mask for the word capitalism. The use of private enterprise and Special Economic Zones, two main factors in China’s economic success, directly contradict socialism. Xi's belief that the state was the most critical factor in China’s rapid development worries economists and business leaders because he is overlooking the importance of the private sector. In the 1980s, private enterprises, called township or village enterprises, created more than 100 million jobs. Xi is overestimating the role of the state and underestimating the role of the private sector (Page, 2019). The Deng Era reforms in the 1980s allowed for a more sustainable yet slower path to economic growth because of a healthier balance with the private sector. The post-1992 economic model is accredited with helping propel millions of Chinese out of poverty, but the state control has become too overpowering and could lead to long-term failures today.
China is currently facing a terrible real estate crisis. It could be that the second-largest economy is in a slump, but many analysts believe that this slowdown could be more long-term. China’s real estate sector makes up about 29% of its GDP (Petri, 2023). The decades of fast-growth targeted investments have created a large housing bubble bound to pop. Government policy has encouraged overbuilding, and many developers have over-speculated the housing demand, which has led to unfinished construction projects, a plummet in investments, and a loss of consumer confidence. Major developers such as the Evergrande Group are requiring massive government bailouts. Before the government started liberalizing the housing market in the 1990s, most people in China lived in units provided by the CCP. When the government opened up the housing market, it led to a historical investment boom (Wei, 2023). China went from a predominantly state-owned housing system to a nation of private homeowners. China now faces the repercussions of the government's reliance on housing developments to encourage growth.
The Evergrande Group has more than $300 billion in debt. The problem is that private real estate investors purchased land and didn’t have a buyer yet but speculated they would make a profit. The central government in Beijing set growth targets and incentivized local governments to grow as “city governments have every incentive to support ever-rising prices: land sales account for 46% of total government fiscal revenue” (Wei, 2023). In the real estate market, this artificial influx of growth skyrocketed investments in housing development. It is not sustainable because the demand for housing is not as high as projected, and buyers can’t afford it. This has created a housing market ‘bubble’ as this model of targeting growth is unsustainable. The homeowners who do buy these properties are expecting their value to increase. The government has told buyers in Beijing they can only buy two homes, but this will pop the bubble because not as many people will be able to buy. Evergrande put a lot of money into its development projects, but this was borrowed money, and in turn, Evergrand had to pay interest. Evergande is on the brink of default but paid the bond coupon. Evergrande almost didn’t pay their bill, but they avoided that debt crisis in a last-ditch effort. If Evergrande defaults, their borrowed money that was intended to build housing will not bring any returns, and they will be unable to pay the debt coupon, which stops the project development. If the project does not have the finances to continue, Evergrande can no longer keep building, so the real-estate builders and construction workers won’t be paid. This crisis rattled investor confidence as they thought that Evergrande Group would default. Xi Jinping said that homes are for living not speculation, because he doesn’t like that companies are speculating trying to make a profit (Browne, 2021). However, if Evergrande Group goes under, the housing market will crash completely, and the downside of these ramifications will be plentiful. So, the Chinese government is helping Evergrande navigate its way out of this crisis so there are no larger repercussions. However, the CCP is trying to make an example out of the Evergrande Group to show investors that even though they are helping Evergrand navigate this crisis because of its more significant economic implications, they want to discourage this behavior.
In addition, China’s state-owned businesses are overborrowing from the bank, which has limited private enterprises' growth. According to the Brookings Institute, “the share of state-owned enterprises in bank lending rose from 36% to 83% between 2010 and 2016” (Petri, 2023). State-owned firms have been borrowing increasingly from banks in the recent decade despite lacking profit. On the contrary, private firms' bank lending fell from 48% to 11% in the same time period. Based on data from the China Ministry of Finance, “Private companies have investment returns that are three to four times higher than state-owned firms, but the latter have had easier access to bank credit in recent years” (Lardy and Huang, 2018). State-owned firms are overborrowing despite bringing in less profits than private firms. The government is propping up underperforming state-owned firms, which is an unsustainable practice that could lead to a prolonged stifling of economic growth. This data shows that a preference toward state-owned enterprises, even if the private sector is outperforming them, is inherent to state capitalism. This is unsustainable because the government will continue to support its enterprises to maintain an image of success. Still, it will lead to a poor economy because private firms cannot flourish.
China’s economic stagnation has resulted in “full-time adult children.” More than one in five young adults in China are unemployed. 16 million young Chinese have moved back into their parents' homes, and most are college-educated (Mistreanu, 2023). This has proven to be a strong challenge to the CCP as the shortage of jobs has left many younger generations skeptical in believing that China’s economic model is superior to the West. The government stopped reporting on their youth unemployment in June 2023 to hide their economic failures (Douglas, 2023). The real estate crisis has slowed China’s growth and caused consumer confidence to waver. Many families save cash and pay down debt instead of spending on goods and services.
The People’s Republic of China’s private enterprises, homeownership, and international trade show the government embraced Weber’s spirit of capitalism. China has reaped the benefits of a capitalist society, including lifting millions out of poverty and becoming a global hegemon through its large economy. China's model of capitalism appears unique in the decades following its liberalization with a seemingly unstoppable economic boom. But currently, China’s housing market crisis and youth unemployment are facing problems typical of capitalist society. The current domestic challenges of slowing economic growth and the housing crisis indicate that the sustainability of state capitalism is at high risk. China’s successful run of state capitalism will be over if the Chinese Communist Party’s firm control over the state cannot bring an economic recovery.
References
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