| Socialist market economy | |
| Simplified Chinese | 社会主义市场经济 |
|---|---|
| Traditional Chinese | 社會主義市場經濟 |
The socialist market economy (SME) is the economic system and model of economic development employed in the People's Republic of China. The system is based on the predominance of public ownership and state-owned enterprises within a market economy. The term "socialist market economy" was first used during the 14th National Congress of the Communist Party of China in 1992 to describe the goal of China's economic reforms. Originating in the Chinese economic reforms initiated in 1978 that integrated China into the global market economy, the socialist market economy represents a preliminary or "primary stage" of developing socialism. Despite this, many Western commentators have described the system as a form of state capitalism.
Description
The economic reform toward a socialist market economy is underpinned by the Marxist framework of historical materialism. In the late 1970s, then-Chairman Deng Xiaoping and the Communist Party leadership rejected the prior Maoist
emphasis on culture and political agency as the driving forces behind
economic progress and started to place a greater emphasis on advancing
the material productive forces as the fundamental and necessary
prerequisite for building an advanced socialist society. The adoption of
market reforms was seen to be consistent with China's level of
development and a necessary step in advancing the productive forces
of society. This aligned Chinese policy with a more traditional Marxist
perspective where a fully developed socialist planned economy can only
come into existence after a market economy has exhausted its historical
role and gradually transforms itself into a planned economy, nudged by
technological advances that make economic planning possible and
therefore market relations less necessary.
The socialist market economy is seen by the Communist Party of
China as an early stage in the development of socialism (this stage is
variously called the "primary" or "preliminary" stage of socialism),
where public ownership coexists alongside a diverse range of non-public
forms of ownership. The Communist Party of China maintains that despite
the co-existence of private capitalists and entrepreneurs with public
and collective enterprise, China is not a capitalist country because the
party retains control over the direction of the country, maintaining
its course of socialist development. Proponents of this economic model distinguish it from market socialism as market socialists believe that economic planning
is unattainable, undesirable or ineffective and thus view the market as
an integral part of socialism whereas proponents of the socialist
market economy view markets as a temporary phase in development of a
fully planned economy.
Cui Zhiyuan traces the theoretical foundations of the socialist market economy to James Meade's model of liberal socialism
in which the state acts as a residual claimant on the profits generated
by state-owned enterprises that are operated independent of government
management.
Proponents initially advocated a socialist market economy as a
necessary stage for the development of the economy to a point where a
planned socialist economy would become possible. Recent Chinese leaders
including Xi Jinping
(General Secretary of the Party from November 2012) have described the
building of the "socialist market economy with Chinese characteristics"
as the goal without any reference to a post-market socialist economy.
History
Marxism holds that, within the contradictions between the productive forces and relations of production, between practice and theory, and between the economic base and the super-structure, the productive forces…and the economic base generally play a principal and decisive role. Whoever denies this is not a materialist. — Deng Xiaoping, "On the General Program of Work for the Whole Party and the Whole Nation" (1975)
After the Great Leap Forward (1958–1961) and the ousting of the Gang of Four from power in 1976, Chairman Deng Xiaoping (paramount leader from 1978 to 1989) refocused China's efforts on economic growth
and on finding an economic system compatible with China's specific
conditions. However, in doing so he remained committed to the Leninist model of centralized political control and a one-party state.
Deng Xiaoping introduced the concept of the socialist market
economy in order to incorporate the market into the planned economy in
the People's Republic of China. Deng first used the term during a meeting with vice chairman of the United States Encyclopædia Britannica Company Frank Gibney and director of the East Asian Studies Institute of Montreal's McGill University Professor Paul Lin Daguang, asking: "Under socialism, there can also be a market economy.
[...] We can't say that this is capitalism. Our planned economy is in
the primary position; it integrates with the market economy, but this is
a socialist market economy". The Đổi Mới in the Socialist Republic of Vietnam later adopted the concept. Following its implementation, this economic system has supplemented the centrally planned economy in the People's Republic of China, with high growth-rates in GDP during the past decades having been attributed to it.
Within this model, privately owned enterprises have become a major
component of the economic system alongside the central state-owned
enterprises and the collective/township village enterprises.
The transition to a socialist market economy began in 1978 when Deng Xiaoping introduced his program of socialism with Chinese characteristics.
Initial reforms in decollectivising agriculture and opening the economy
to foreign investment in the late 1970s and early 1980s later led to
large-scale radical reforms, including corporatization of the state
sector, partial privatisation of some enterprises, liberalisation of
trade and prices and dismantling of the "iron rice bowl"
system of job security in the late 1990s. With Deng Xiaoping's reforms,
China's GDP rose from some US$150 billion in 1978 to more than
$1.6 trillion in 2004, with an annual increase of 9.4 percent.
Analysis
Many
commentators and scholars have described China's economic system as a
form of state capitalism, particularly after the industrial reforms of
the 1980s and 1990s, noting that while the Chinese economy maintains a
large state sector, the state-owned enterprises operate like private
sector firms and retain all profits without remitting them to the
government to benefit the entire population. This makes the rationale
for widespread public ownership questionable as well as the
applicability of the descriptor "socialist" and has led to concern and
debate regarding the distribution of state profits.
However, starting in 2017 as part of its state-owned enterprise
reform program the central government began to encourage state-owned
enterprises to start paying dividends to the government. Other reforms
have transferred state-owned assets to social security funds to help
finance pensions and the Shenzhen municipal government has proposed
using their state-owned enterprises to finance a social dividend-type of
system for its residents.
Chinese economist Cui Zhiyuan
argues that James Meade's model of liberal socialism is similar to
China's socialist market economy and can be used to make sense of the
model. Meade's model of market socialism involved public ownership of
firms with independent management where the state acted as a residual
claimant to the profits generated by its enterprises, but it did not
exercise control rights over management and operations of its firms. The
benefits of this model are that the state would have a source of income
independent of taxation and debt, enabling a reduction of the tax
burden on individual incomes and the private sector while promoting
greater equality. Cui points to the Chongqing experience with municipal
state-owned enterprises enabling high social expenditure alongside low
taxes and extremely high rates of growth as validation of the socialist
market economy model. The Chongqing model used state enterprise profits
to fund public services including housing, providing the main source of
public finance enabling it to lower its corporate tax rate (15% compared
to the 33% national corporate tax rate) to attract foreign investment.
Market socialism versus capitalism
Julan
Du and Chenggang Xu analyzed the Chinese model in a 2005 paper to
assess whether it represents a type of market socialism or capitalism.
They concluded that China's contemporary economic system represents a
form of capitalism rather than market socialism because financial
markets exist which permit private share ownership—a feature absent in
the economic literature on market socialism—and because state profits
are retained by enterprises rather than being distributed among the
population in a social dividend
or similar scheme, which are central features in most models of market
socialism. They concluded that China is not a market socialist economy,
but it is an unstable form of capitalism.
Another analysis carried out by the Global Studies Association at
the DePaul University in 2006 reports that the Chinese economic system
does not constitute a form of socialism when socialism is defined as a
planned economy where production for use
has replaced production for profit as the driving force behind economic
activity, or when socialism is defined as a system where the working
class is the dominant class which controls the surplus value produced by
the economy. The Chinese economy also does not constitute socialism in
the sense of widespread self-management or workplace democracy.
The study concluded that as of 2006 capitalism is not the dominant mode
of organization either and it is instead partially a pre-capitalist
agrarian system with almost 50% of its population engaged in
agricultural work.
As of 2015, Curtis J. Milhaupt
and Wentong Zheng classify China's economic system as state capitalism
because the state directs and guides all major aspects of the Chinese
economy—including both the state and private sectors—while not
collecting dividends from the ownership of its enterprises. They note
that Chinese state-owned enterprises and privately owned enterprises
share many similarities with respect to state subsidies, proximity to
state power and execution of government policy objectives. Within the
state sector, the emphasis is more on government control than on the
ownership of assets.
Proponents of the socialist market economy compare it to the New Economic Policy in Soviet Russia that introduced market-oriented reforms while maintaining state-ownership of the commanding heights of the economy. The reforms are justified through the belief that changing conditions necessitate new strategies for socialist development.
According to Li Rongrong
in 2003, chairman of the State-Owned Assets Supervision and
Administration Commission of the State Council, China's socialist
economic system is underpinned by the foundational role of public
enterprise:
Public ownership, as the foundation of the socialist economic system, is a basic force of the state to guide and promote economic and social development and a major guarantee for realising the fundamental interests and the common prosperity of the majority of the people… The state owned economy has taken a dominant place in major trades that have a close bearing on the country's economic lifeline and key areas, and has propped-up, guided and brought along the development of the entire socio-economy. The influence and control capacity of SOEs have further increased. State owned economy has played an irreplaceable role in China's socialist modernisation drive.
Other Marxist analyses point out that because the Chinese economic
system is based on commodity production, has a role for private capital
and disempowers the working class, it represents a capitalist economy. Classical Marxists
believe a socialist commodity economy (or a socialist market economy)
is contradictory. Other socialists believe the Chinese have embraced
many elements of market capitalism, specifically commodity production
and privatisation, resulting in a full-blown capitalist economic system.
Although many enterprises are nominally publicly owned, the profits are
retained by the enterprises and used to pay managers excessively high
salaries rather than being distributed amongst the population.
Characteristics
Enterprise and ownership types
Public
ownership in the socialist market economy consists of state-owned
assets, collectively owned enterprises and the publicly owned shares of
mixed enterprises. These various forms of public ownership play a
dominant role in the socialist market economy alongside substantial
private and foreign enterprises.
There are a few major forms of state-owned enterprises in China today:
- State-owned enterprises: commercial enterprises established by either the central government or a local government, where managers are appointed by the government or public bodies. This category only includes wholly state-funded and managed firms. Most state-owned enterprises are not entities of the central government. Central government state-owned enterprises are subunits of the State-owned Assets Supervision and Administration Commission (SASAC).
- State-holding enterprises: state-holding, or state-controlled enterprises, are publicly listed firms where the state owns a large share or a controlling share within the firms, thereby exerting influence on the management of the firm. These include firms that receive foreign direct investment.
- State joint ownership enterprises.
State sector
The
socialist market economy consists of a wide range of state-owned
enterprises (SOE) that represent one form of public ownership. Beginning
with the 1978 reforms, in the 1980s during the industrial reforms state
enterprises were gradually corporatised and transformed into joint-stock corporations
with the state retaining either full or majority ownership of their
shares. By the early 2000s, most major SOEs in non-strategic sectors
were listed on the Shanghai and Hong Kong stock exchanges and some SOEs
adopted mixed ownership structures where the central government and
various other state entities—including state banks, other SOEs,
provincial and local governments—own varying degrees of the firm's
listed shares alongside foreign and private shareholders. The result has
been a highly diffuse form of public ownership where state-owned
enterprises are owned by various different government entities, agencies
and other state-owned enterprises. This makes gauging the true size and
scope of the state sector difficult, particularly when SOEs with mixed
ownership structures are taken into account. In 2013, the public sector
accounted for 30% of the number of firms in China, but 55% of assets,
45% of revenue and 40% of profits.
In 1996, China implemented a comprehensive series of industrial reforms termed "Grasping the large, letting go of the small".
These reforms involved closing unprofitable state enterprises, merging
smaller enterprises and privatization of other small-to-medium
enterprises. Centrally owned SOEs were reformed into joint-stock
companies with the aim of delegating more authority to SOE managers.
SOEs at all levels shifted their primary focus to profitability and
shedded their social welfare function of providing social services and
benefits to their workers in what was known as the "Iron Rice Bowl"
system. The State-owned Assets Supervision and Administration
Commission (SASAC) was formed in 2003 to oversee the management of the
large centrally owned state enterprises.
Modern SOEs are operationally very different from those in the
1990s. SOEs are much larger in size and fewer in number, with central
government-owned SOEs clustered in "strategic sectors" including
banking, finance, mining, energy, transportation, telecommunications and
public utilities. By comparison, provincial and municipal level SOEs
number in the thousands and are involved in almost every industry
including information technology and automobiles design and production.
State sector reform is an ongoing process in China. As of 2017, the
Communist Party of China has rejected the Singapore model of
Tamasek-style state investment companies for China's SOEs, where SOEs
operate solely to maximize profits on a commercial basis. In particular,
China maintains that centrally owned SOEs also pursue national and
industrial policy objectives.
As a result of recent reforms to increase profitability and unload
debt, the government reported the profits of central government-owned
SOEs rose by 15.2% in 2017.
Despite becoming increasingly profitable, SOEs in China have not
paid dividends to the state, causing some analysts question the
rationale for public ownership in the first place.
As part of SASAC's ongoing reforms, SOEs will now be encouraged and
required to pay a higher portion of their profits as dividends to the
state, with some state-owned assets being transferred to social security
funds to help finance pensions for China's aging population. This is part of a broader reform effort of restructuring the state sector to become a source of finance for public services.
As part of the SOE reform goals outlined in 2015 by SASAC, SOEs are to
be classified as either commercial or public service entities, with the
former being required to distribute a higher proportion of their profits
as dividends. Dividend payments are set to rise from 5-15% to 30% by
2020.
Private sector
Privately
owned enterprises (POEs) are recognized as one of the components of the
socialist market economy alongside state, collective and individually
owned enterprises. The private sector has played an increasingly large
role since the adoption of the 1994 Company Law. Additionally, the
boundary between public and private enterprises have blurred in China as
many publicly listed firms are under mixed ownership by various state
and non-state entities. Additionally, private sector firms that operate
in industries targeted for growth often receive favorable loans and
preferential government treatment while SOEs in non-strategic sectors
might be exempt from subsidies. As an example, ZTE Corporation
is a majority state-owned enterprise that was forced to rely on equity
markets whereas its employee-owned private sector competitor Huawei
is viewed as a "national champion" and therefore received major state
funding from state banks. Like their state-owned counterparts POEs are
expected to follow state policies and are subject to party control,
suggesting that the distinction between public and private ownership is
not a meaningful distinction to make for understanding China's economic
model. As of 2015, state control and state-directed development (in both
public and private sectors) is the overriding feature of the Chinese
economic system that plays a more substantial role than the public
ownership of assets.
While the private sector has been accorded a role in the
socialist market economy and has greatly increased in size and scope
since the 1990s, the private sector does not dominate the Chinese economy.
The exact size of the private sector is difficult determine in part
because private enterprises may have a minority of their stock owned by
state entities and because of different classification standards used
for classifying enterprises. For example, in the first quarter of 2016
the National Bureau of Statistics of China
reported fixed investment by private firms at 35% by wholly state-owned
SOEs at 27%, with the bulk of the remainder belonging to non-wholly
state funded limited liability corporations.
Economic planning
By the early 1990s, Soviet-type economic planning
had been replaced with market relations and markets became the
fundamental driving force in the socialist market economy, with the
State Planning Commission being reformed into the National Development and Reform Commission in 2003. Indicative planning and industrial policies have substituted material balance planning
and play a substantial role in guiding the market economy for both the
state and private sectors. The planning system consists of three layers,
with each layer using a different planning mechanism.
Compulsory planning is limited to state-owned enterprises
operating in strategic sectors, including research, education and
infrastructure development plans. Compulsory planning outlines targeted
outcomes and the supply of raw materials and financial resources needed.
Contractual planning sets objectives and the overall means of achieving
these goals and then negotiates with enterprises and local governments
to establish detailed objectives and how resources are to be allocated
to the targeted sectors. Indicative planning operates at the lowest
level of the planning system, where the government outlines industrial
targets and then uses market instruments (tax exemptions, subsidies and
favorable bank loans) to induce firms in the targeted industry to meet
these targets.
