The evolution of economy and state in China

The Activist - Volume 7, Number 9, 1997
By Doug Lorimer

[The following report was presented to the October 4-5, 1997 DSP National Committee plenum for an indicative vote. The vote was full NC members in favor, 29; against, 1; abstentions, 0; candidate NC members in favor, 20; against, 0; abstentions, 1. The NC decided to open a general membership discussion on the line of the report in the pages of The Activist and to take a definitive vote on the line of the report, in particular its assessment that China is a capitalist state, at its next meeting.]

[At the end of the plenum, the NC elected a 14-member National Executive, consisting of Margaret Allan, Peter Boyle, Pat Brewer, Carla Gorton, Pip Hinman, Dave Holmes, Sean Healy, Max Lane, Doug Lorimer, Lisa Macdonald, Allen Myers, Dick Nichols, John Percy and Chris Spindler. At its first meeting, on October 13, the new NE appointed an eight-member Secretariat (consisting of Margaret Allan, Peter Boyle, Carla Gorton, Sean Healy, Max Lane, Doug Lorimer, Dick Nichols and John Percy) to supervise the work of the National Office, draw up the agendas for NE meetings and to act with the authority of the NE between its weekly meetings.]

In his report to the 15th National Congress of the Communist Party of China, held two weeks ago, CPC general secretary Jiang Zemin said that the theme of the congress was to "hold high the great banner of Deng Xiaoping Theory for an all-round advancement of the cause of building socialism with Chinese characteristics to the 21st century". Indeed, the official title of his report was "Hold High the Great Banner of Deng Xiaoping Theory for an All-Round Advancement of the Cause of Building Socialism With Chinese Characteristics to the 21st Century".

In China today, Jiang said, it is Deng Xiaoping Theory which represents the Chinese CP's orientation. Perhaps to impress this upon the more than 2000 assembled delegates, Jiang invoked Deng's name 60 times in his two-and-half hour speech – an average of once every 2.5 minutes.

`Primary stage of socialism'

At the heart of Deng Xiaoping Theory, Jiang told the congress, is the "recognition" that China is "in the primary stage of socialism" and will remain at this stage for at least another 100 years and that developing "the socialist system" will require "persistent struggle" by "dozens, even several dozens" of generations. Since a generation is usually reckoned at about 30 years, according Jiang China will not develop "the socialist system" (which in Stalinist terminology simply means a nationalised, planned economy) for at least 720 years!

In the meantime, Jiang told the delegates, China must develop "a socialist market economy".

The next major step in this direction, according to Jiang, is the "reform" of the state-owned enterprises. "We shall convert large and medium-sized state-owned enterprises into standard corporations", he said, "so that they will become corporate entities and competitors adaptable to the market." Elaborating on this, Jiang said: "Relying on market forces, we shall establish highly competitive, large enterprise groups with trans-regional, inter-trade, cross-ownership and transnational operations."

"We shall encourage Chinese investors to invest abroad in areas that can bring China's comparative advantages into play so as to make better use of both Chinese and foreign markets and resources", Jiang told the congress.

What exactly Jiang meant by this was spelt out in an article in the June 7 London Economist. Referring to Chinese economic officials and state-owned enterprise managers as "businessmen", the magazine's Shanghai correspondent wrote:

Many Chinese businessmen admire Japan's big corporations. They would love to have the muscle of Mitsubishi or Toyota. To this end, they are borrowing some things from Japan, especially the keiretsu system, in which individual Japanese companies, often with their own stockmarket listings, are linked together through cross-shareholdings. The firms in the family support one another and favor each other in their business dealings.

But the real role models are South Korea's conglomerates, the mighty chaebol, which are far less focused in their range of businesses than big Japanese companies and (at least in the past) much more closely linked to the state. The leading ten chaebol control around two-third's of South Korea's economy. Chinese officials and businessmen have visited South Korea to see at first hand how firms such as Hyundai, Samsung and Daewoo work. The Chinese are impressed by the fact that the chaebol helped to transform South Korea from a poor hungry nation into a rich one within a generation, and that the chaebol are now transforming themselves into multinationals.

"One Chinese chaebol in the making", the Economist notes, "is CITIC Pacific". According to the article:

The company is run by Larry Yung, the son of China's vice-president. Mr Yung has transformed CITIC from a sleepy mainland-backed holding company into a conglomerate listed on the Hong Kong stock exchange, worth $12 billion. Its growing interests now span power stations, toll roads, airlines and shopping malls. A number of other socalled `red chips' have since followed CITIC to Hong Kong. The latest is Beijing Enterprises, whose share price more than tripled when it was listed on the colony's stockmarket last week. It owns a rag-bag of businesses including a hotel, a toll road and a chunk of the Great Wall.

The Economist article notes that:

Whereas South Korea's chaebol grew fat with a generous amount of government-directed cheap credit, China's conglomerates are receiving "asset injections". These work much like steroids. What happens is that the parent company, which is usually a municipal government or a ministry, provides its protege with the opportunity to acquire a state-run business – a toll-bridge, for instance – at highly preferential terms.

"The high price which investors are paying for shares in Chinese red-chip companies", the Economist explains, "reflects not so much what the firms consist of today but what goodies they are expected to be injected with in the future, as they are transformed into conglomerates."

While the Economist would not be so impolite as to openly say so, this process of "asset injection" from state-owned enterprises to joint-stock companies controlled by the relatives and cronies of top Chinese state and party officials is an exercise in private capitalist accumulation carried out through the officially sanctioned embezzlement of state assets.

The scale of these activities was highlighted by Eva Cheng in an article in the September 17 Green Left. She reported that: "The National Administration of State Property revealed two years ago that state property worth 300 million yuan (US$36 million) `disappeared' each day. Other official figures revealed that the accumulated loss in the 10 years to 1994 amounted to 500 billion yuan (US$60 billion)."

The thrust of Jiang's report to the CPC congress was to give a green light to massively accelerate this process of de facto privatisation of state assets. According to Wang Zhongyu, the State Economic and Trade Commission minister, the government will give priority to 512 major enterprises. The remaining 250,000 medium and small state enterprises would, according to Jiang, be reformed "by way of reorganisation, association, merger, leasing, contract operation, joint-stock partnership or sell-off".

Mass `downsizing of staff'

"We should", Jiang told the CPC congress, "encourage merger of enterprises, standardise bankruptcy procedures, divert laid-off workers, increase efficiency by downsizing staff and encourage reemployment projects so as to form a competitive mechanism selecting the superior and eliminating the inferior".

"All workers should change their ideas about employment", Jiang said.

Western analysts estimate that cutting off state subsidies to the great bulk of medium and small state-owned enterprises and forcing all state-owned enterprises to be "internationally competitive" will make at least 30% of China's 117 million industrial work force redundant. Chinese officials already admit that there are 130 million unemployed in China's rural areas. And the official Chinese media reports that by the end of this year urban unemployed workers will reach 60 million.

The Chinese CP leadership's fear of widespread social unrest as a result of the implementation of its call for the mass "downsizing of staff" in the state sector was only hinted at in Jiang's report. "We should maintain vigilance against rightist tendencies, but primarily against the left", he told the congress.

Addressing a meeting of delegates from Guangdong province during the congress, Ren Zhongyi, a former party secretary from Guangdong elaborated on Jiang's comment. "Five years ago at the last congress", Ren said, "I had said that in building up a socialist market economy, we must guard against interference from the left. [I said] future resistance is likely to come from this argument of socialism versus capitalism."

"In recent years", said Ren, "the question of whether China's reforms are surnamed socialism or capitalism again reappeared in the form of the argument over public ownership or privatisation". According to Ren, this showed that "Leftism is very deeply rooted" in China.

Jiang's and Ren's references to the danger of "leftism" were most likely warnings to any party or state officials who, for whatever reason, attempted to encourage worker opposition to the Beijing authorities' plan, as part of its aim of creating a "socialist market economy", to de facto privatise most state-owned enterprises.

The very concept of a "socialist market economy", of course, is an oxymoron. A market economy is an economy in which the bulk of the productive forces, that is, most of the means of production and human labour power, are commodities. And contrary to the obfuscations of Deng Xiaoping, who claimed that such an economy is a form of socialism, albeit a form "never mentioned by Marx", Marx did "mention" this form of economy. In fact, he wrote three rather large volumes about it.

A `quiet bourgeois life'

Today, only the most slavish apologists of the Beijing regime could believe that this regime is "building socialism". The Chinese leaders' attachment of the "surname" socialist on their "reforms" has certainly not led the capitalists and their ideologues outside China into believing that "socialism" is what these leaders are creating.

Reporting on Jiang Zemin's speech, Rowan Callick, the Australian Financial Review's Beijing correspndent, was in no doubt what it all meant. In a front page article under the banner headline "China's Capitalist Revolution", Callick informed his big-business readers that:

China's President, Jiang Zemin, on Friday unveiled a breathtaking modernisation program that amounts to a Great Capitalist Leap Forward for Asia's emerging superpower.

His speech opening the 15th Communist Party Congress in Beijing has set the stage in train for China's second stage of capitalist economics – carefully wrapped in socialist rhetoric.

Up to 100 million workers could be jobless as a result of the bold program to dismantle State enterprises, although that was announced with considerable understatement as a decision that which "will cause temporary difficulties to part of the workers".

Mr Jiang's moves defy those who had cast him as a stopgap successor to Mr Deng Xiaoping and establishes him as the leader who will mark communism's 50th anniversary of Chinese rule, in 1999, by listing, selling or closing thousands of government businesses.

And, just in case any of the corporate executives he was writing for had some worries about "Mr" Jiang's "socialist rhetoric", Callick assured them that they should take this as seriously as the ALP's "socialist objective". "The vision of a 21st [century] China under President Jiang", Callick wrote, "resembles that of a West European social democracy and (minimalist) welfare state, with the major strategic industries government-owned but managed in a hands-off manner, while the norm of economic activity comprises privately owned businesses."

"The thrust of the reforms outlined or implicit in President Jiang's speech", Callick concluded, "will be welcomed by the international community. They will open huge new opportunities for investors. But at the same time, they demand revised strategies for some of those already most committed to China, where few aspects of life will escape the new revolution whose goal – at the same time humdrum and exciting – is a quiet bourgeois life."

Contrast with Vietnam's NEP

The world capitalist press's enthusiastic approval of the economic changes introduced in recent years in China stands in marked contrast to the business media's complaints about the concessions made to the "market" in neighbouring Vietnam. For example, under the headline "Nothing is really private in Vietnam", the Economist carried the following assessment of Vietnam's "reforms" in its May 17 issue:

On paper, the private sector is booming along with the rest of the economy. While state enterprises have dwindled in number from 12,296 in 1989 to fewer than 6,000 now, private businesses have multiplied to about 19,000. But the numbers are misleading. Most private business are tiny – shops, restaurants, and the like – and the reduction of state companies was in part achieved by merging smaller ones.

The state dominates manufacturing, mining and finance, and is the partner in more than 90% of joint-ventures set up with foreigners since the reforms began. The state's share of the economy has actually grown from 33% in 1990 to 40% now. Last year, the Communist Party said it wanted the state's share of GDP to increase further, to 60%.

The Economist went on to note that last year's national congress of the Communist Party of Vietnam "reaffirmed the state sector's `leading role' and granted `the private capitalist economy' just a grudging mention as being `capable of contributing to national construction'."

Indeed, in his report to last year's national congress of the Communist Party of Vietnam, party general secretary Do Muoi, did not foster illusions about the use of market mechanisms, as the Beijing regime has done for nearly 20 years now. Do Muoi stated: "Market economy contains negatve aspects which are contradictory to the nature of socialism. These are trends to overpolarisation between the poor and the rich, the cult of money which tramples upon ethics and dignity, etc." [Communist Party of Vietnam, VIIIth National Congress Documents, Hanoi, 1996, p. 28-29.]

The Communist Party of Vietnam has set itself the task of carrying out a "socialist orientation in building a multi-sector economy", made up of the state, cooperative, state-capitalist (i.e., joint venture), individual small-owner, and private capitalist sectors. This orientation involves promoting the growth of the state and cooperative sectors at the expense of the individual small-owner and private capitalist sectors, utilising joint ventures with foreign capitalists to enhance the technological level of the state-owned enterprises.

According to an article in the June 30, 1997 Vietnam Investment Review, state-owned enterprises in Vietnam have grown at 1.5 times more quickly than the rest of the country's economy, and account for 65% of gross national income. The article reports that:

Restructuring at SOEs has helped to wean them off State subsidies which have decreased in the past years.

Figures for the years 1988 to 1994 show that Government subsidies, made in the forms of basic construction, capital infusions and compensation for losses and falling prices, sank to just 0.5 per cent of the country's GDP – a far cry from the 8.5 per cent of the GDP they soaked up just nine years ago.

`Public ownership'

The Western media's enthusiasm for the program of "modernisation" outlined by Jiang Zemin at last month's CPC congress was not at all dampened by his repeated statements that "public ownership" is and will remain the dominant form of ownership in China. They were no doubt reassured by Jiang's argument that joint-stock companies are a form of "public ownership". That, after all, is the exactly how they're described throughout the capitalist world. Haven't Qantas and the Commonwealth Bank been transferred to "public ownership"?

According to official figures, 70% of mainland China's industrial assets are "publicly owned", and the "public ownership" sector accounts for about the same percentage of gross industrial output. According to official statistics, the private sector comprises 430,000 self-employed or family owned enterprises, accounting for only about 13% of gross industrial output. But the regime uses a very loose definition for "self-employment", defining those enterprises as employing up to seven workers as "self-employed". "Small capitalists" would be a more accurate description.

Moreover, what is formally described as "public ownership" includes both state-owned and so-called "collectively owned" enterprises. Some sources estimate that as much as 83% of "collectively owned" enterprises are in fact capitalist businesses.

If we compare even official figures for the state sector with the non-state sector of the Chinese economy the trend of development is striking. The share of state-owned enterprises in gross industrial output has fallen from 78% in 1978 to 53% in 1991 to 34% in 1995. The fact that the Chinese economy has grown at an average rate of 10% over this period, while only one-third of state-owned enterprises are profitable, leaves only one credible explanation: this growth has come from an increasingly dominant capitalist sector.

In 1925, Leon Trotsky, while serving on the Soviet Union's central economic planning body, wrote a series of article's in Pravda under the title "Towards Capitalism or Socialism?" in which he assessed the development of the Soviet economy under the New Economic Policy. In these articles, Trotsky wrote:

In order to answer properly the question of whether we are tending toward socialism or toward capitalism, we must first of all formulate this question properly. It may be divided logically into three sections: (1) Are the productive forces developing in our country? (2) What are the social forms in which this development is proceeding? (3) What is the rate of this development?

The first question is the simplest and also the most important. Neither capitalism nor socialism is conceivable without the development of the productive forces. War communism, the outgrowth of cast-iron historical necessity, soon ran its course after it brought the development of the productive forces to a standstill. The most elementary and imperative principle of the NEP was the development of the productive forces as the basis of all social movement in general. The NEP is regarded by the bourgeoisie and the Mensheviks as the necessary (but of course `insufficient') step toward unchaining the productive forces. The Menshevik theoreticians approved of the NEP as the dawn of capitalist restoration in Russia. They added: Either the NEP will overthrow the Bolshevik dictatorship (the "desirable" outcome) or the Bolshevik dictatorship will ultimately overthrow the NEP (a "deplorable" event).

...if it should turn out that as the productive forces develop, the capitalist tendencies increase or expand at the expense of the socialist tendencies, this expansion of the volume of commodity capitalist relations in the village might be of cataclysmic importance and might shunt our course of development definitely onto the track of capitalism...

The premise for a socialist economy is the nationalisation of the means of production. How has this premise stood the test of the NEP? Has the market distribution of commodities led to a weakening or a strengthening of the nationalisation?

...In the field of industry, the socialisation of the means of production is 89 per cent; together with railroad transportation, 97 per cent; in heavy industry alone, 99 per cent. These figures indicate that the system of ownership which resulted from nationalisation has not suffered any change at the expense of the state. [Leon Trotsky, "Toward Capitalism or Socialism?", Challenge of the Left Opposition (1923-25), p. 328-34]

While pointing out that this fact was "the very greatest importance", Trotsky explained that in assessing whether the NEP was leading toward capitalism, of no less importance was the question: "What percentage of annual production comes from socialised means of production?, i.e., how efficiently is the state employing the means of production appropriated by it?"

The figures for the Russian NEP contrasted dramatically with those I cited earlier in regard to China. In the six years following the introduction of the NEP in 1921, the Soviet economy grew at an annual rate of between 30-40%. Industrial output grew at an astonishing rate of between 50-60% a year. By 1927, the total value of industrial production was more than eight times greater than it had been in 1920.

During these same years, the share of industrial output from non-state enterprises continuously shrank – from 25% in 1922 to 20% in 1927. The share of retail trade handled by privately owned enterprises underwent a much more dramatic decline – from 78% of the total volume of retail trade in 1922 to 36% in 1927.

Since the initiation of pro-market reforms in China in 1978 the dynamic has been in the opposite direction. Today, in China there is a market for means of production, a partial market for labour power and the state monopoly of foreign trade has been largely dismantled. The state no longer directly allocates investment funds according to a conscious plan.

`One country, two systems'

However, it would be an exaggeration to say that China today has a capitalist economy. Around 70% of China's urban work force is still employed in state-owned enterprises that do not operate according to the law of value. In an economy governed by the law of value, i.e., by generalised commodity production, enterprises are driven by competition to maximise their profits, and hence to minimise their production costs. Investment flows out of enterprises and types of activity where profits are lower than average and into enterprises and types of activity where profits are at or above average. The fact that investment funds, allocated by state banks, continue to be diverted from the one-third of China's state-owned enterprises that are categorised as "profitable" to the remaining two-thirds, which are categorised as "loss-making", shows that the state sector is still not governed by the law of value.

However, even though 70% of the urban work force is employed by state-owned enterprises, these now only account for 34% of China's total industrial output. The bulk of production in China today is carried out under the law of value. Moreover, even in the state-owned sector, the bureaucrats who manage the enterprises are no longer content with simply appropriating consumer goods. State officials, at all levels, are milking state assets and funds to acquire money with which to set up profit-oriented businesses.

In the mid-1980s Deng Xiaoping coined the phrase – "one country, two systems" – to assure the British imperialists and the Hong Kong bourgeoisie that in re-establishing its political control over Hong Kong, the Chinese bureaucracy would not abolish the colony's capitalist economic system. Today, this phrase applies to mainland China as well. One state rules over two economic systems: A rapidly growing private and quasi-private capitalist economy exists alongside of and has already displaced, in terms of output but not yet in terms of employment, the decomposing remnants of the old nationalised, planned economy.

The process by which this came about is described in some detail in the article by US academic Richard Smith on "The Chinese Road to Capitalism", reprinted in the last Activist from the May-June 1993 issue of New Left Review. Smith tries to fit his account of evolution of Chinese economic policy since 1978 into the Shachtmanite theory that the Stalinist bureaucracy in the USSR (and its cousins in Eastern Europe and China) was a historically new exploiting class based upon a distinct, new, bureaucratic-collectivist mode of production.

However, this theory, like the theory of "state capitalism", fails to account for the actual functioning of the bureaucratically managed nationalised, planned economies which existed in these countries and the specific character of the behaviour of the bureaucratic ruling stratum.

For example, both of these theories claim that this bureaucracy is characterised by the tendency to maximise the extraction of surplus labour from the workers. They are completely unable to account for the fact that once the bureaucracy as a whole has reached a certain level of satisfaction of personal consumption, managers of state enterprises under the Stalinised system of nationalised economy nearly always and automatically give in to the wage demands of their workers and turn a blind eye to idleness and absenteeism. There is no automatic pressure for these bureaucrats to extract the maximum surplus product from the workers. Rather, as Ernest Mandel pointed out in his 1990 polemic with the British SWP, there is pressure only to "avoid problems" in fulfilling the quotas in the bureaucratic plan. [see Ernest Mandel, "A theory which has not withstood the test of facts", reprinted in Dave Riley, Anarchism in `Marxist' Garb: An Introduction to the Politics of the ISO, p. 31.]

The old Soviet workers' joke "They pretend to pay us and we pretend to work", graphically captures the difference between a bureaucratically-run nationalised economy, and a mode of production in which an exploiting class, whether it is called "bureaucratic-collectivists" or "state capitalists", is driven to extract the maximum of surplus labour from the workers.

The Shatchmanite theory of a distinct bureaucratic-collectivist mode of production is also centrally flawed in that it fails to recognise the petty-bourgeois nature of the Stalinist bureaucracy and therefore cannot account for this bureaucracy's aspirations to a bourgeois lifestyle or the reactionary bourgeois values that pervaded its approach to all aspects of social life.

Despite the limitations of his theoretical framework – in fact, often in contradiction with this framework – Smith gives a reasonably accurate description of the development of Chinese economic policy since 1978. Here I can only give an outline of that development, highlighting the chief turning points.

From peasant market to market economy

In order to restore political stability after the chaos and near civil war conditions imposed on China by Mao Zedong's ten-year-long "Cultural Revolution", China's post-Mao leadership sought to stimulate the growth of the country's productive forces by implementing a policy that had many similarities with those of the Russian New Economic Policy of the 1920s.

Like Soviet Russia of the early 1920s, China at the end of the 1970s was a country where the overwhelming majority of the population were peasant farmers reliant on unmechanised production techniques. China's rapid industrialisation in the three decades after the 1949 revolution had been oriented toward the build-up of heavy industry to meet the armaments requirements of its military and the output of consumer goods for the ruling bureaucratic stratum. The mechanisation of agriculture and the consumer needs of the peasantry, which comprised nearly 90% of the country's population, had largely been ignored.

The rural sector was formally organised in collectives, i.e., the so-called People's Communes imposed by the Mao regime's forced collectivisation of farming during the disastrous "Great Leap Forward" of the late 1950s. However, the actual production relations of the rural economy remained dominated by pre-industrialised family based production units, much like Russian agriculture at the beginning of the '20s. When the Chinese "communes" were dissolved in the early 1980s, the rural sector immediately reverted to a sea of petty producers, whose output could only be stimulated by enabling them to seek private profits through the sale of their produce, i.e., through replacing state requisitioning and allocation with markets. But such a policy inevitably opened up the road to class differentiation in the countryside and to the emergence of a class of small capitalist farmers who would also seek avenues to invest and accumulate capital in rural industries and trade.

In the series of articles written by Trotsky in 1925 that I quoted from earlier, he explained both the necessity and dangers of the NEP. He wrote:

Unless the productive forces grow, there can be no question of socialism. On the economic and cultural level that we now occupy, the development of the productive forces can be attained only by involving the personal interest of the producers themselves in the system of national economy. This is being done in the case of the industrial workers by making their wages depend on the productivity of labour...The peasant's personal interest is secured if only by the fact that he manages a private establishment and is working for the market. But this condition also involves difficulties.Wage differentials, great as they may be, do not introduce social differentiation among the proletariat: the workers remain workers for the state enterprises. With the peasantry the case is different. The work done for the market by the 22 million peasant establishments... leads inevitably to the creation, at one pole of the peasant mass, of wealthy and even exploiting establishments, while at the other pole we have a transformation of a section of our present-day middle peasantry into poor peasants, and of poor peasants into farm labourers.

When the Soviet government, under the leadership of the Communist Party, introduced the New Economic Policy... it had no illusions as to either the inevitable social consequences of the market system or the political dangers it brought with it...

The difficulty could hardly have been eliminated if the state had given up its direction of industry, commerce, and finance while the class differentiation in the village was advancing. For in that case, private capital would have strengthened its influence on the market, particularly on the peasant market, and thus accelerated the process of differentiation in the village and shunted our entire development onto the path of capitalism. [ibid., pp. 321-22]

The development of capitalist tendencies in agriculture, Trotsky pointed out, could only be counteracted if the socialist state strengthened its position in the fields of industry (including consumer-goods production), communications, finance, domestic trade and maintained its monopoly on foreign trade. This was in fact what happened in the Soviet Union under the NEP.

From 1925 on a sharp debate raged within Soviet Communist Party that divided the Bolshevik "Old Guard" into three distinct political tendencies that Lenin had already identified when they were in their embryonic stage in 1922-23.

One of these tendencies, headed by Nikolai Bukharin, expressed open illusions in the peasant market and advocated a policy of making increasing concessions to capitalist tendencies in agriculture. Already in 1922, this tendency had advocated abolishing the state monopoly of foreign trade. At the time, Lenin had observed that:

In practice, Bukharin is acting as an advocate of the profiteer, of the petty bourgeois and of the upper stratum of the peasantry in opposition to the industrial proletariat, which will be totally unable to build up its industry and make Russia an industrial country unless it has the protection, not of tariffs, but of the monopoly of foreign trade. [V.I. Lenin, Collected Works, Vol. 33. p. 458]

In opposition to Bukharin and Stalin, who was initially Bukharin's ally in this dispute, Lenin formed a political bloc with Trotsky. After 1923, Trotsky emerged as the chief spokesperson for the tendency within the Bolshevik leadership that fought to defend Lenin's policies and the interests of the Soviet working class.

The third tendency within the CPSU leadership, headed by Stalin, had already been identified by Lenin at the end of 1922 as adopting the outlook of and advocating policies in the interests of the stratum of privileged Russian officials that made up the personnel of the Soviet state apparatus. This bureaucracy – which, as Lenin put it, the Bolsheviks had taken "over from tsarism and slightly anointed with Soviet oil" – sought throughout the 1920s to increase and consolidate power and consumer privileges by manoeuvring between the major class forces in Soviet society, alternating between policies that strengthened the emerging capitalist farmers and private traders against the urban proletariat and policies that strengthened the proletariat against the so-called "NEPmen".

The bureaucracy's manoeuvring within the battle of contending class forces that the NEP had unleashed was reflected by the Stalin faction's similar orientation in the political struggle within the CPSU. It consolidated its hold on power by manoeuvring between the pro-capitalist Bukharinite faction and the proletarian faction headed by Trotsky. When this conflict came to a head at the end of the 1920s, the Stalinist bureaucracy opted to remove all challenges to its power by politically suppressing both of the rival factions within the CPSU, and by subordinating the entire economy to its bureaucratic control through the forced collectivisation of agriculture on the one hand and the total elimination of all remaining elements of workers' democracy on the other.

In China, however, the NEP-type concessions to the capitalist tendencies in agriculture were implemented by a fully crystallised bureaucratic stratum that had unchallenged control of all the institutions of political power. The top echelons of this bureaucratic stratum, headed by the ruling clique around Deng Xiaoping, entertained and promoted even more illusions in the supposed wonders that could be worked by the market than the Bukharin faction had in the 1920s. Echoing Bukharin's 1925 call to the peasantry "to enrich yourselves" through the market, the Deng regime launched its pro-market reforms under the slogan "To be rich is glorious". Unlike the Russian NEP, the Deng regime's policy involved introducing market relations into the operations of state-owned industries.

Smith cites a People's Daily editorial from June 6, 1980 which extols the supposed universal virtues of market competition. "Competition", the CPC daily proclaimed, "forces leaders of an enterprise to strive to make the enterprise grow, to improve management, to raise the quality of products, to reduce costs and to put cheap but good products on the market. This forms a sharp contrast with the past situation in which `products were turned out as usual whether or not they found a market', `wages were paid as usual whether or not enterprises made a profit or incurred a loss' and people `shared food from the same big pot' under socialism".

Of course, real market competition could not be introduced between the state enterprises unless the bureaucracy was willing to give their managers a completely free hand in deciding what and how they would produce, to eliminate the range of welfare measures provided to workers by these enterprises (such as subsidised housing, food, etc.,), to end guaranteed employment to all workers, and to allow those state enterprises that ran at a loss to go out of business. Fear of the massive social unrest this would provoke in an economy where the state was the only employer, led the regime to repeatedly postpone its implementation.

Instead, the regime sought to rewin a measure of urban working-class support – particularly after the market reform reached an impasse in 1988 and runaway official corruption began to undermine its political credibility – by shifting the emphasis of state production from heavy industry to consumer-goods production and large-scale imports of consumer durables.

This was to be paid for in the same way that the Brezhnev regime in the Soviet Union had paid for its consumer boom in the late 1970s – through massively increased exports. Unlike the Soviet Union though, which had huge reserves of oil and natural gas available for export, China's underdeveloped economy had only one easily available but untapped resource – huge reserves of labour-power that were being forced out of agriculture as a result of market-driven increases in farm production.

In early 1988, the Deng regime launched a new policy initiative, called the Coastal Development Strategy, under which the entire coastal area, with its 200 million inhabitants was opened up for extensive foreign investment in an effort to promote an export-oriented economy. This had previously been experimented with in only four geographically limited Special Economic Zones.

Foreign firms were invited to set up labour-intensive, low-investment factories oriented toward exporting consumer goods. In these factories the workers, usually young women were lured to leave rural areas, would be deprived of all of the protections and social guarantees available to workers in the nationalised sector. The factory owners would not only have a free-hand to brutally exploit these workers, the Chinese authorities guaranteed to ruthlessly suppress any signs of worker resistance to the Dickensian working and living conditions these workers were subjected to.

This policy stands in sharp contrast to the conditions imposed on foreign investors that were sought as joint venture partners by the Soviet state during the NEP, or by Cuba today. In these two cases, foreign investors were sought in order to bring about improvements to the living standards and working conditions of the workers they would employed.

Turn toward capitalist restoration

After the upsurge of worker unrest in 1988-89, of which the student protest for democratisation of China's political system in Tiananmen square in mid-1989 was only the most visible expression, the Deng regime decided to allow the capitalist tendencies that had developed in the countryside and in the urban coastal areas, uninhibited freedom to flourish.

In his speech to Beijing delegates attending the CPC congress last month, Chinese Premier Li Peng gave an account of the evolution of the Chinese central bureaucracy's economic orientation. His remarks were summarised as follows by the official Xinhua news agency:

Li noted that the Chinese Communist Party made an important decision to take economic development as the centre of the party's basic line after the ten-year "Cultural Revolution". It is the first great step in the emancipation of the mind, he said.

He said the second great step in the emancipating the minds of the Chinese people is marked by the talks made by Deng Xiaoping during his south China tour in 1992. The talks resulted in China's moves to establish a socialist market economy as a goal in economic restructuring suggested by the 14th National Party Congress later that year.

While Li Peng obviously feels no embarrassment in claiming to be a "Communist" while giving such a thoroughly idealist account of the Chinese ruling circles' road to becoming adherents of the capitalist market economy, his account does indicate when the qualitative turn was made to consciously embark upon the restoration of capitalism. From an orientation toward trying to use the market to stimulate the growth of the productive forces, the ruling circles of the Beijing regime turned in 1992 toward an orientation toward the restoration of capitalism. This orientation, summed up in their proclaimed goal of creating a "socialist market economy", was unanimously endorsed by all the top civilian and military officials at the 14th National Congress of the Communist Party of China held in late 1992.

A capitalist state

While the process of capitalist restoration is not yet completed in China, there is sufficient evidence for us to conclude that this is the conscious orientation of those who hold political power in China, and that therefore China, like Russia and the former Soviet bloc countries of Eastern Europe, is a capitalist state.

A year ago, at our June 1996 plenum, we adopted a report which stated:

We have made the analysis that in all the ex-Soviet bloc countries the bureaucracy no longer defends, even badly, socialist property forms (i.e., state ownership of the decisive means of production, allocation of economic resources to socially established priorities through centralised planning, and a state monopoly of foreign trade) against forces seeking to restore capitalist relations of production. To the contrary, the state officials – the unelected army generals, police chiefs, judiciary, and the permanent officials of the civil administration – as well as the managers of economic enterprises are consciously seeking to transform themselves and their relatives into capitalists. Implicit in such an analysis is the position that these regimes are no longer "socialist states" or "workers states" and that what now exists in Eastern Europe and the former Soviet republics are capitalist states carrying through a bourgeois counter-revolution in the sphere of property relations.

An objection to such a characterisation is that capitalist relations of production have not been restored in any of these countries and that state property continues to be the dominant property form. But all this proves is that the apiring bourgeois elements in these countries are still relatively weak. It does not answer the question of the class nature of the state power in these countries, that is, whose class interests does the state power in these countries serve and promote? The state power in these countries today clearly serves and promotes the interests of a (still emerging) capitalist class. For Marxists, the only correct label for such a political regime is a capitalist state. [The Activist, Vol. 6, No. 7, p. 9]

The only difference between what is happening today in Russia and the former socialist states of Eastern Europe, is that the Chinese bureaucrats-cum-capitalists still call themselves "Communists". In both cases though, the bureaucracy has dismantled the planned economy and is using state property to carry out a massive process of primitive accumulation of capital. The state, i.e., the bureaucracy, is not resisting, but promoting this process of capitalist restoration.

One of the clearest proofs that the People's Republic of China today is a capitalist state is the political integration of Hong Kong into China.

Following the Stalin-Hitler pact in August 1939, the Soviet army occupied the Ukrainian and Belarussian inhabited territories of eastern Poland. These territories were to be incorporated into the USSR. In an article written in September 1939, Trotsky wrote:

Let us for a moment conceive that in accordance with the treaty with Hitler, the Moscow government leaves untouched the rights of private property in the occupied areas and limits itself to `control' after the fascist pattern. Such a concession would have a deepgoing principled character and might become a starting point for a new chapter in the history of the Soviet regime; and consequently a starting point for a new appraisal on our part of the nature of the Soviet state.

It is more likely, however, that in the territories scheduled to become a part of the USSR, the Moscow government will carry through the expropriation of the large land-owners and statification of the means of production. This variant is most probable not because the bureaucracy remains true to the socialist program but because it is neither desirous nor capable of sharing the power, and the privileges the latter entails, with the old ruling classes in the occupied territories. [Leon Trotsky, In Defense of Marxism, p. 60-61]

No one in Hong Kong, and certainly not its capitalist residents, has exhibited the slightest fear that the replacement on July 1 of this of the British garrison by units of the Chinese People's Liberation Army would be followed by the expropriation and statification of capitalist property. The capitalists' attitude of calm endorsement of Hong Kong's handover to Chinese political control both in the lead-up to this change and since was a dramatic contrast to the panicked scramble by the capitalists to flee Saigon in April 1975 as the army of the north Vietnamese socialist state moved to assert Hanoi's political control over southern Vietnam.

The Hong Kong capitalists' willingness to accept the Beijing regime's promises to leave Hong Kong's capitalist economic system untouched for at least 50 years was obvious not based on blind trust. Their previous experiences of doing business with this regime had clearly left them in no doubt that they would have no fundamental conflict of interests with the Chinese authorities.

Over the last 10 years, there has been a rapid economic fusion between Hong Kong and China. During this period, more than half of Hong Kong's export-oriented, labour-intensive industries were moved into southern China to exploit the cheap labour available there. By 1992 Hong Kong capitalists employed 3.5 million factory workers in southern China, compared to only 400,000 in Hong Kong itself. While Hong Kong's capitalists have heavily invested in southern China, mainland China's capitalists and bureaucrats-cum-capitalists have made Hong Kong their financial centre.

When Beijing took political control of Hong Kong from the British colonial authorities, it made no effort to replace the capitalist state apparatus with its own personnel. It left the capitalist regime there, including the police force, judiciary and civil administration, intact. It appointed local tycoon Tung Chee Wah as chief executive of the Hong Kong Special Administrative Region and appointed a provisional legislature that was stacked out with the city's leading business men and women. The Beijing regime clearly sees no contradiction between incorporating Hong Kong into its political system and maintaining capitalist rule there. That's because there is no contradiction between the property forms and the class interests that the Chinese state is promoting and the property and class relations that the Hong Kong state authorities are based upon and defend.

Worker resistance

The Chinese working class, like the workers of Eastern Europe and the former Soviet Union, exhibits strong egalitarian sentiments and will inevitably resist the bureaucracy's attacks on the social benefits that were the legacy of the social revolutions which replaced capitalism with the nationalised, planned economies.

This resistance may slow the process of capitalist restoration down but it can only halt and reverse this process if the workers unite in action to smash the capitalist states that now rule over them, and replace them with workers' states. This cannot be accomplished without the political leadership of a mass revolutionary workers' party which, in the course of the day-to-day struggles of the workers, imbues them with a socialist consciousness.

Today in China the most immediate obstacle to beginning the process of assembling such a revolutionary leadership is the totalitarian stranglehold the Chinese bureaucracy retains over political life. Fractures and conflicts are bound to develop within the bureaucracy as it transforms itself into competing private owners, and these will provide cracks in the regime's totalitarian rule through which the workers can win openings for the workers to independently organise themselves and debate the way forward. But, as with the situation in Eastern Europe and the former Soviet Union, we should not expect the Chinese workers to rapidly overcome the legacy of decades of bureaucratic paternalism and Stalinist miseducation.

`China fever' fades

Following Jiang Zemin's report to the CPC congress, Western journalists like Callick are again peddling the idea of huge foreign investment opportunities opening up in China. The sheer size of China's population has always caused Western capitalists to believe that once they can gain access to all those "consumers" all their marketing problems will be solved. In a note to the third volume of Marx's Capital, Engels pointed out how English capitalists thought they could stave off recession indefinitely once China was opened to their exports. Engels wrote: "In 1843 the Opium War had opened up China to English trade... `How can we ever produce too much? We have 300 million people to clothe', I was told at the time by a Manchester manufacturer." [see Karl Marx, Capital, Vol. 3, Penguin edn, p. 534.]

In the 1970s, when US President Richard Nixon re-established diplomatic relations with China there were similar fantasies among Western, particularly American, manufacturers. "A billion Chinese – all drinking Coke!" How could Coca-Cola ever produce too much?

After five years of actual experience of investing in China, however, many foreign business owners are no longer so euphoric. An article in the June 21 Economist presents a sobering contrast to much of the media hype about the fabulous profits to made investing in China:

Remember all those presentations on doing business in China, peppered with charts showing growth lines snaking forever upwards? Transfixed by a vast emerging economy with 1.2 billion consumers, foreign investors have pumped more than $100 billion into China since economic reforms were redoubled in the early 1990s. Now many of those investors are wondering when, if ever, they might see a return on their money.

According to the Economist, "China fever" is beginning to abate, with foreign direct investment declining for the first time in a decade – from $42 billion last year to $30 billion this year.

"Most companies", says the Economist, "describe their China projects as a `long-term investment', now usually a euphemism for `we're losing money'." The article goes on to report:

More than half of the forms questioned in a recent survey of multinational companies in China by the Economist Intelligence Unit... admitted they were disappointed by their performance in China...

Although Asian investors, especially the overseas Chinese, are reckoned to have the edge in China, they also have problems. A study by Taiwan's Ministry of Economic Affairs found only 38% of Taiwanese investments in China to be profitable.

What's the cause of these problems? According to the Economist it's that perennial capitalist malady, overproduction, or more precisely, overcapacity. "In many cases," the article notes, "firms had assumed that investing in China would provide some kind of balance to their `mature', oversupplied domestic markets. Unfortunately, their competitors had exactly the same idea. Although the Chinese economy is growing, production capacity has grown even faster. The result is that many industries are using only a small portion of the capacity they have built."

A table over the page gives an industry by industry breakdown of capacity utilisation in China in 1996. Factories producing refrigerators and cooking oil products were operating at 50-60% capacity; those producing tape recorders, washing machines, bicycles, sugar and cameras were operating at 38-50% capacity; those producing colour television sets, were operating at 25-38% capacity; while factories making electric power equipment, personal computers and microwave ovens were operating at below 25% capacity.

The article gives some particular examples of the problem. For example, "Beer", it says "was once reckoned to be the surest thing to sell to 1.2 billion Chinese. Yet Foster's, an Australian brewer, increased its losses in China last year to A$17m ($13m)". With some 60 foreign-invested breweries trying to out-bottle some 800 local ones, "China is going to be a bloodbath", it quotes an executive of Singapore's Asia Pacific Breweries as saying.

An accompanying article, describes the massive overcapacity in the car-making industry in China. "Eight foreign car companies between them have 15 joint ventures making vehicles in China", the article reports. "But none is really making money, and prospects for doing so are receding into the distance...

As recently as 1993, 96% of all vehicle sales in China were to government departments or state-owned enterprises. The trickle of private buyers since then has seen car sales growing at around 20% a year, compared with overall vehicle sales growth of only 8%." But, the Economist adds, "this is from a tiny base... the total market for cars is below 400,000 a year. This is largely because China's average income per head is only $600 per year."

The car industry in China, it points out, "could produce 1m vehicles but sells less than half of that. China has more than 100 vehicle makers; Germany has only five firms in a market ten times bigger".

Much of the boom in the sales of consumer durables such as colour TV sets, VCRs and CD players over the last five years in China, as Richard Smith points out in his article in the March/April 1997 issue of New Left Review, also reprinted in the last Activist, has been due to the large amount of disposable income that Chinese workers employed in state-owned enterprises have because of the state subsidies on a whole range of their basic necessities of life.

While many Chinese workers earn only the equivalent of US$400 a year, the average Chinese urban household only has to spend the equivalent of US$10.90 a year for housing, electricity, water and gas.

But as state subsidies are gradually removed and Chinese workers are compelled to pay market prices for housing, medical care, education, and transportation, the money they have available to spend on consumer durables will drastically decline. As the Economist pointed out at the end of its article, "For many [foreign] companies [that have invested heavily in China] it could be a long and lonely wait with little to admire but those faded growth charts on the wall."