One might have thought that the basic question “Is China capitalist?” would have been thoroughly settled by now after more than thirty years of market-oriented reforms. While few would answer this question in the negative, much recent scholarship has interrogated the degree to which China is capitalist (and whether or not it is becoming more or less so) and the appropriate label to capture its particular form of capitalism, with its increasingly apparent divergences from Anglo-American, free-market capitalism. Is China practicing bureaucratic capitalism (Meisner Reference Meisner1999), Market-Leninism (Kristof Reference Kristof1993), authoritarian capitalism (McGregor Reference McGregor2012), developmental authoritarianism (Pei Reference Pei2006), Sino-capitalism (McNally Reference McNally2012), “socialism from afar” (Zhang and Ong Reference Zhang and Ong2008), or some other hybrid form? Should China's reforms be understood as part of a global neoliberal turn or as driven by a different ethos? Similarly the extent to which China's system offers a sustainable or perhaps even progressive alternative to Anglo-American free-market capitalism has been widely discussed as well (see, for example, Arrighi Reference Arrighi2007). Finally, there is considerable disagreement surrounding the periodization of these transformations, their future trajectories, and the likelihood of China experiencing a homegrown financial crisis (or crises) similar in severity to the subprime housing crisis in the United States, the effects of which China was mostly able to temporarily evade. Several observers, such as Minxin Pei (Reference Pei2006), Carl Walter and Howie Fraser (Reference Walter and Howie2011), Huang Yasheng (Reference Yasheng2008), and Victor Shih (Reference Shih2009), have identified the makings of a financial crisis unique to China's economic system with perhaps even more potential for devastation than the financial crisis of 2008. Through a brief recounting of my own ethnographic research on China's entrepreneurs and a critical overview of some of these recent assessments of Chinese capitalism, I hope to offer both micro- and macro-level windows into “actually existing capitalism” in China today.
Despite the complexities of capitalist practice in China, many observers of China's economy depict it as largely a zero-sum game between market-driven entrepreneurial capitalism and state-dominated crony capitalism. Huang Yasheng's Capitalism with Chinese Characteristics (Reference Yasheng2008) perhaps best exemplifies this tendency. Huang argues that China's economic reforms in the 1980s helped unleash a wave of rural entrepreneurial activity that helped dramatically improve the living standards of China's peasants. He then sees a shift during the 1990s Jiang Zeming-led era towards policies that favored large, urban-based, state-owned companies and foreign-invested companies over smaller, rural private and collective enterprises. These policies served to stifle entrepreneurship, Huang argues, and have benefited cities at the expense of the rural areas, which Huang demonstrates with an impressive array of statistics documenting a decline in rural income, education, and health during the 1990s after witnessing sharp improvements in the 1980s. The shift towards policies favoring state control of the economy, Huang argues, have increased China's inequality, helped widen the rural-urban disparity, and provided opportunities for elite cronyism and corruption.
In a critique of Huang's book, Joel Andreas (Reference Andreas2010) argues that the rising inequality documented by Huang was caused not by the “state-led urban model” pursued by China in the 1990s but by increasing privatization at all levels of the economy—primarily the massive layoffs that resulted from the privatization of many state-owned enterprises (SOEs) and the privatization of rural township and village enterprises in the 1990s. In short, he views the decline in rural livelihood documented by Huang as the result of the inevitable logic of capitalism in which big firms push out the small, the cities dominate the countryside, and state protections for workers and small firms are eroded (74). Huang's solution to China's widening inequality is to return to the pro-market policies of the 1980s, which he claims benefited the entrepreneurially inclined peasants immensely. For Andreas the solution is the opposite; he calls for more state protections for Chinese workers and for small Chinese enterprises against both foreign capital and large Chinese enterprises. Arguing against Huang, he emphasizes the need to maintain state controls, in particular collective ownership of agricultural land and strong worker protections.
I recount this debate because I see it as illustrative of a tendency in much scholarship on Chinese capitalism to see a zero-sum game between the state and the market. Generally pro-market analyses fixate on how too much state control is holding back the pent-up entrepreneurial energies of the Chinese people, inefficiently allocating capital and generating economic contradictions that China will pay for in the future. Those writing from a Marxist perspective tell of how China has pursued a course of deepening marketization in accordance with “the logic of capital,” which is generating the familiar consequences—great concentrations of wealth in the hands of a few, decreased social spending, and social upheaval and unrest—that can only be ameliorated by state intervention (or, ideally, worker-led democratic control). Both of these accounts, however, share an overly simplistic notion of what both “state” and “market” mean in China, as my ethnographic excursion into the practices of China's entrepreneurs will demonstrate.
“State control” can mean many different things according to the ethos of state actors. States can be “developmental” or “predatory” (Pei Reference Pei2006). They can abide by their policies, rhetoric, and laws or they can act in ways that disregard them entirely (Kipnis Reference Kipnis2007, 386). State control of the economy is ideologically justified by the Chinese Communist Party (CCP) as state control in the name and for the benefit of the nation as a whole. Yet state institutions in China have frequently been co-opted for the private benefit of officials or well-connected entrepreneurs, such as in the notorious Yuahua case of the late 1990s in which the entire customs administration of Fujian Province effectively became a department serving Lai Changxing's Yuanhua Group (see Wank Reference Wank2002). SOEs, for example, possess an administrative architecture that could theoretically foster a relatively egalitarian market socialism. Instead they have emerged as vested interests controlled by elite families that pose serious obstacles to reforms that would benefit the public.Footnote 1 In principle, profits from SOEs could be used to fund social welfare, but rather than pay dividends to the central government, increasingly SOEs behave much like any private corporation in retaining the bulk of their earnings.Footnote 2
State-imposed controls of the economy can theoretically help shield ordinary Chinese from the sharp edges of the global market and the highly uneven playing field of domestic capitalism. But these same controls can also facilitate the dispossession of ordinary citizens and accumulation by both private and state-owned firms. To cite another key example, state and collective control of land has largely facilitated the seizure of land and housing from millions of rural and urban residents, rather than prevented it.Footnote 3 This is not the inevitable outcome of state control, but rather a product of an ideological shift among state actors away from collectivism and the increasing power of informal state-business networks (which I describe below) in China's real estate market. A Chinese lawyer succinctly captured this contradictory relationship between ideology and practice in China, stating, “The power elites use ultra-leftist methods to appropriate assets, often under the name of the environment, or justice, and once they've got them, they share them among themselves in an ultra-rightist way” (quoted in Garnaut Reference Garnaut2012, chap. 5).
Beyond States and Markets
In this section I hope to offer an alternative approach to the “state vs. market” framing of Chinese capitalism upon which many analysts rely. I argue for the necessity of moving beyond both the fetishism of the market as the only means of fostering “real” growth on the one hand, and the telos of capital, often glossed as neoliberalism, on the other. One way of transcending this dichotomy is by returning to the question of ethos, or the “ghost in the machine,” at the heart of capitalism in China (Appadurai Reference Appadurai2011). In the most basic terms, the question can be formulated as “does the global spread of capitalist institutions and practices also entail the spread of an ethos?” Or are these institutions (“systems” in Arjun Appadurai's language) capable of accommodating a variety of ethos, allowing for or enabling multiple, perhaps contending, ghosts in the machine? As Appadurai (Reference Appadurai2011, 526), following Weber, points out, spirit cannot be mechanically derived from the system or its “devices.” Both “change over time . . . often without reference to each other.” Thus we should not assume in advance that as China has linked up with the systems of global capitalism it has necessarily embraced and internalized its corresponding ethos. I find it useful to think of two ethos permeating Chinese capitalism: the national quest for global recognition and power (which I discuss in the second half of this essay) and the moral economies of the networks of government officials and entrepreneurs who organize and control China's nationalist-inspired growth machine.
Let me illustrate the latter with an anecdote. My research from 2002 to 2006 examined the ways in which entrepreneurs' business ventures and social networks were often deeply intertwined. I recall a conversation with a Chinese entrepreneur who had recently returned home after obtaining a PhD in the United States. Over glasses of tea, he outlined a sophisticated business plan to establish a company that provided lab services for Chinese hospitals throughout the country. At the end of his presentation, he stated matter-of-factly, “Now, if I can just get a princeling (taizidang) on the board of directors then I'll be all set.” This last statement is significant: In his essay on the global financial system, Arjun Appadurai (Reference Appadurai2012, 14) asks us to explore the “sources of this divinatory confidence” of today's high-finance actors. In China, the sources of divinatory confidence are clear. In the words of my entrepreneur friends, it is beijing or “background,” that is, one's familial and social ties and their degree of political connections. China's entrepreneurs, sometimes deliberately and strategically, other times by coercion, work ceaselessly to embed their firm's activities into politically powerful social relationships, and in the case of the entrepreneur I mentioned above, even into the kinship ties of the ruling elite.Footnote 4 To give another example from my fieldwork: A common shareholding arrangement is to provide a significant number of free shares to someone who has the right political connections to make sure that project can be realized. The significance of these relationships has increased rather than declined over the past decade. As one of my informants stated, “To do business in China today ability alone is not enough; guanxi alone is not enough. You've got to have both.”
Entrepreneurs with whom I worked in Chengdu constantly used the Sichuan dialect term goudui to describe the instrumental courting of an official for business purposes. In the context of increasing competition for state patronage resulting in overbooked social schedules for the business and political elite, only those who can successfully “court” an official into offering his or her patronage or cooperation have a distinct advantage. Despite the seemingly instrumental purpose of business entertaining, the goal of successful goudui is precisely to transcend the interested nature of the relationship, to inject sentiment into what initially is a relationship of cold calculation. Entrepreneurs conceived of their entertaining as attempts to transform interest into affect and attempts to transform commensurable forms of value (like luxury gifts and money, which can be provided by anyone) into incommensurable, particularistic forms rooted in sentiment and moral obligation. Entrepreneurs bragged about their goudui skills and connections not in terms of notions of debt or lavish expenditure, but in the language of relationships (renqing) and sentiment (ganqing). This is why most of these relationships should not be conceived of in terms of just bribery. Goudui is thus not simply an exchange of power for money.
In this context, entrepreneurship often took a very different form from how it is idealized in economics textbooks. Rather than proceeding along the lines of “I have an idea; now what resources (capital, connections, etc.) do I need to realize it?,” it often following this logic: “Given the connections I have and their respective advantages, what kind of business can I do?” While profit can be derived quite directly from well-cultivated relationships, entrepreneur-official networks were highly vulnerable—to anti-corruption campaigns, to competing social obligations, and just to the general fragility of any relationship rooted in a complex mix of sentiment and self-interest. Among the entrepreneurs with whom I worked, this uncertainty was the animator of growth in a very explicit sense. As one entrepreneur put it to me, “the word ‘fear’ is always in the back of every entrepreneur's mind in China.” The only hedge against shifting market, political, and social environments was to get bigger—to grow one's business and to expand one's web of connections.
Thus, the entrepreneurs I knew, and this will be no surprise to anyone who works in China, spent much of their days and nearly all of their evenings cultivating relationships with partners, state enterprise managers, bankers, and government officials, occasions that are usually referred to as yingchou throughout China. Most of this entertaining—banqueting, drinking, singing karaoke, visiting saunas—was viewed as a form of work essential to generating networks of financial, social, and political support.Footnote 5 Even entrepreneurs who made their initial fortunes independent of state connections and assistance eventually end up enmeshed in official networks to order to maintain their enterprises and ensure their political and financial survival. Capital, business opportunities, illicit income, and extralegal protection all flow through these networks. Ironically, however, this reliance on networks for both protection and new opportunities exacerbates entrepreneurs' vulnerability. The power of their official patrons eventually withers—they either move on to other posts, are subject to anti-corruption probes, or both. As new leaders move in, a whole new wave of entertaining and courtship is needed to cement new ties and alliances. Even businesspeople whose fortunes are well-established risk social invisibility and dwindling access to new business by not engaging in this ritualized wining and dining. To refuse to entertain and be entertained is to undermine the foundations of their current and future financial success. As one entrepreneur bluntly stated to me, “Entertaining is my job” (Yingchou jiushi wode gongzuo). This incessant, obligatory yingchou constitutes what I have come to think of (with apologies to Weber) as the “iron cage of entertaining” in China. Just as Weber's Puritan wanted to work in a calling but we are forced to do so, so did China's early entrepreneurs perhaps take some pleasure in banqueting with a few cadres as they greased the wheels of a bureaucracy still suspicious of market activity. Yet they were unaware of the inflationary cycle of business entertaining they would unleash.
As Maoist political ideology has lost its salience in people's interpersonal relationships (among state and non-state actors alike), gendered notions of interpersonal morality and authority, rooted in the discourses of kinship and renqing, have increasingly served to legitimate everyday forms of power and ethics in China. Among the businessmen I worked with, relationships of male solidarity with their partners, clients, and official patrons were often couched in a rhetoric of brotherhood, paternalism, mutual aid, and yiqi (a sense of honor in interpersonal relationships). Business entertaining can thus be understood as attempts to embed market relationships in the template of fictive kinship, or in the case of the entrepreneur I mentioned above, into the very real kinship ties of the national elite.
Beyond Privatization
The particular economic and political conditions of reform-period China in which state officials and entrepreneurs (both the legitimate and illegitimate types) have become increasingly dependent upon each other both to achieve state goals and to enrich themselves has contributed to the evolution and institutionalization of informal networks as a means of consolidating power and appropriating both public and private resources among the elite. As He Qinglian (Reference Qinglian1998) has argued, while the transformations in China's economy during the reform era have largely been interpreted under the rubric of privatization and the spread of markets, the “privatization” of state-controlled enterprises, assets, and land has rarely proceeded according to an idealized market logic. Rather, the transfer of state assets into private hands during the reform period has in large part followed the dictates of moral economies based on kinship (both real and fictive), bureaucratic hierarchies, and ideals of interpersonal morality such as brotherhood and mutual aid. Writing about the increasing collusion between the bureaucratic and entrepreneurial elite during the nineties, He Qinglian (Reference Qinglian2001, 56) highlights the centrality of relationships and morality to their business dealings:
It goes without saying that the situation involving rent-seeking activity in China is deeply rooted in our nation's traditional culture. In Chinese culture the tendency is to ignore the public good altogether and concentrate solely on personal relationships and the all-important network of personal connections. Throughout Chinese history personal ties are created by “cementing relationships with gifts” (lishang wanglai), an action that ensures that virtually every profitable exchange in any human relationship carries some moral overtones.
What I take from this quote is not simply that “traditional Chinese culture” serves as a template for organizing relations among the elite, but rather that members of the elite have strategically employed guanxi techniques of relationship building in their political and economic projects, transforming the cultural idioms of guanxi in the process. In the midst of what some observers have seen as a wave of privatization and neoliberalism, well-connected businessmen and state officials employ modes of exchange and distribution that organize “the market” to their advantage. These modes of exchange and the informal networks on which they rely are key to the consolidation of power and the “private” appropriation of state resources during the reform period. He Qinglian (Reference Qinglian2001, 53) goes on to argue:
The fact is that what has emerged in China is a system for distributing resources that is rooted in neither a purely planned nor a market-based economy. Instead, rent-seeking activities that lead to acquisition of capital and other forms of wealth rely on a highly elaborate and informal network or web of social connections. . . . Informal networks of social relationships are, in short, a major resource, in that they are the key mechanism for mobilizing and directing the flow of wealth, making them not just of great economic significance, but also critical to the way in which China goes about handling its raw materials and other such social resources.
For He Qinglian, an economist with faith in the inherent efficiency of unhindered market forces, these networks represent a distortion of the proper workings of market mechanisms. Rather than creating wealth, they lead to “enormous waste and squandering of resources” (He Reference Qinglian2001, 60). According to He, the wealth they do generate is purely the product of rent seeking or the manipulation of personal and kin relationships. She critiques the current system in China as a “legal state ruled by men” (renzhide fazhi shehui) as opposed to a “legal state ruled by law” (fazhide fazhi shehui) (56).
In short, I would argue that the moral economies of guanxi networks, rooted in kinship, bureaucratic hierarchies, and gendered alliances based on mutual aid, are at the very heart of “capitalist” development in China. This is not to say that they are “moral” in the sense of being somehow more fair and equitable, but rather that these networks are institutions with their own roles, rules, obligations, and entitlements that structure business transactions rather than being structured by them. Among the (overlapping) business and political elite, these moral economies serve to exclude outsiders and consolidate power. They create a limited network of exchange that disadvantages competitors and grants special privileges to insiders. These elite networks exploit different modes of exchange and forms of authority in realizing both state-driven development goals and private enrichment. A well-connected entrepreneur might persuade his official patron to use the state's legal regime to punish a business competitor just as a real estate developer, after a few banquets with a local official, might gain insider access to state-appropriated land.
In such a context, I would stress the importance of seeing capitalism in China as embedded in these power structures and their corresponding moral economies: the formal and informal patronage networks of the party-state, the blood ties of the central leadership, and the local-level entrepreneur-official networks forged and maintained over bowls of abalone soup and glasses of Wuliangye.Footnote 6 While the finance and business literature views these networks as corrupt distortions of markets, other more critical observers simply see them as another formation of “actually existing capitalism.”
National Rejuvenation and State Capitalism
Having provided a micro-level view of Chinese capitalism, I now offer a more macro-level view of this system. Since the 2008 financial crisis in the United States, China has become a useful foil for critics of our financial system from all over the political spectrum. China's willingness to spend on stimulus, the high savings rate of the Chinese people, the banking system's vast foreign currency reserves (over US$3 trillion), and the decisiveness of its government leaders in the face of economic crisis have all been pointed to as signs of China's prudence compared with U.S. profligacy. Given that China is currently the largest foreign holder of U.S. Treasury bonds at $1.25 trillion, deficit hawks frequently play up the threat of China “owning” the United States if the U.S. government fails to reel in spending.Footnote 7 Similarly, Western pundits frequently stoke fears that the overwhelming success of the Chinese model of authoritarian state-led development (sometimes referred to as the “Beijing consensus”) might prove to be a more attractive model to developing countries than the free-market liberal democracy promoted by the United States and its allies for half a century (see Bremmer Reference Bremmer2010). The increasing activeness and aggressiveness of China's foreign diplomacy (so-called “soft power” initiatives) have only increased such fears. For example, in 2009 and 2010, China's lending to foreign governments and companies surpassed that of the World Bank. A recent New York Times op-ed titled “China's Economic Empire” nicely sums up this growing sentiment in the West. The authors warn, “The biggest threat from Beijing is the aggressive spread of state capitalism,” and proceed to explain the dire consequences of this threat:
By buying companies, exploiting natural resources, building infrastructure, and giving loans all over the world, China is pursuing a soft but unstoppable form of economic domination. Beijing's essentially unlimited financial resources allow the country to be a game-changing force in both the developed and developing world, one that threatens to obliterate the competitive edge of Western firms, kill jobs in Europe and America and blunt criticism of human rights abuses in China. (Araujo and Cardenal Reference Araujo and Cardenal2013)
In a similar vein, European and American companies have increasingly complained to their governments and the World Trade Organization (WTO) about their inability to compete with Chinese companies that enjoy government subsidies and significant regulatory latitude. They feel that “they must compete not with Chinese firms but with the Chinese state” (The Economist 2011a).
This sentiment marks a shift from just over ten years ago when China was a new member of the WTO and seemed committed, if somewhat reluctantly, to a global free-market consensus. Some were confident that WTO-initiated economic reforms would inevitably engender liberal political reforms in China as well. In trying to persuade Congress to support China's efforts to join the WTO in 2000, Bill Clinton claimed that China's admission to the WTO was likely to have “a profound impact on human rights and political liberty” (The Economist 2011b). To many observers, the slow erosion of the welfare state in the United States and parts of Europe, the austerity-based programs crippling parts of the European Union, the increasing financialization of business and state practices, and the penetration of accountability and audit techniques into institutions around the world have indicated the inexorable rise of a global neoliberal regime (Comaroff and Comaroff Reference Comaroff and Comaroff2000; Harvey Reference Harvey2005). Many China scholars have applied the adjective “neoliberal” to both the Chinese state and its economic policies (e.g., Anagnost Reference Anagnost2004; Rofel Reference Rofel2007; Yan Reference Hairong2003). The rise of the private, export-driven sector of China's economy has coincided with the rise of neoliberal globalization, as China has become the first choice for companies from the Global North looking for cheaper labor and production costs. As Hung Ho-fung (Reference Ho-fung2009, 10) states, “Were it not for the outsourcing of industry from the Global North and the latter's mounting appetite for low-cost manufactured imports, the PRC would have found it impossible to export its way to prosperity.” In a few decades, China has become the world's largest trading partner and the world's largest exporter. (It is the European Union's largest trading partner and second only to Canada in trade with the United States.) Given the coinciding of China's development into the world's factory with the rise of globalization, post-Fordism, and flexible accumulation, it has been tempting for scholars to lump China in with the global neoliberal turn, presuming a pro-market, foreign-capital friendly state “dictated by the needs of capital.” As Donald Nonini (Reference Nonini2008, 150) points out, however, “one of the virtues of ‘flexible capitalism’ as outlined by Harvey and others is that it can and does function within and across different logics of rule—including Anglo-American neoliberalism and Chinese market socialism.” While many scholars have more or less presumed the deepening of market mechanisms, economic reforms, and integration with the global economy in China, China's march towards neoliberal Anglo-American capitalism now appears far from inevitable.
In the past few years, a rising chorus from the financial and business world seems to be saying the opposite of what the neoliberalism scholars presumed: China used to be a hospitable place for foreign capital; it used to want to reform in our image; but increasingly it refuses to play by the rules set by the Global North. These critics claim that state control of the financial system is distorting market mechanisms, leading to the inefficient allocation of capital (Bremmer Reference Bremmer2010; McGregor Reference McGregor2012; Walter and Howie Reference Walter and Howie2011) and crushing China's entrepreneurs (Huang Reference Yasheng2008). Hung Ho-fung provides a useful way of conceptualizing this shift. He states: “What distinguishes these two periods is not the nature of Chinese state capitalism, but its relation to global capital. Subjugated to global capital in the first stage, Chinese state capital became more independent and defiant in the second. This changing balance of forces tallies with the many recent complaints from US corporations about being bullied by the Chinese authorities and discriminated against in favor of native SOEs” (Hung Reference Ho-fung2011, 143). Clearly, China's version of state capitalism is not “in transition” to the form favored by the West but rather constitutes a political-economic formation with its own domestic and global dynamics. In many ways, the financial crisis of 2008 gave the Chinese leadership even more confidence in the superiority of their form of state-managed authoritarian capitalism to the laissez-faire capitalism of the United States. In the most basic terms, the CCP hopes to maintain the embeddedness of the market in state structures that it controls in order to ensure that the market is harnessed to serve political goals, such as fostering indigenous innovation, maintaining social stability, and preserving CCP rule (not to mention the unstated goal of enriching elite families). As China has become less reliant on foreign investment in recent years, it has been able to more assertively promote and protect its own companies and interests, much to the annoyance of the Global North.
Thus, the second animating ethos of capitalism in China is nationalism: the long-standing quest for national wealth and power, which rejects market fundamentalism in favor of a set of policies predicated on maintaining firm state control. Capitalism in China serves state-driven goals of achieving national wealth and power (fuqiang) and rejuvenation (fuxing), goals of Chinese intellectuals, reformers, and political leaders since the late nineteenth century. The kind of market fundamentalism still hanging on to a thread of hegemony in the United States simply does not have, nor has it ever had, the same prominence in China. From the beginning of China's reforms in the late 1970s and early 1980s, its experiments with markets and its opening to foreign investment have always been cautious and measured, a far cry from the shock therapy employed in Latin America and elsewhere. At the start of reforms in 1979, markets were viewed as “capitalist means” of attaining “socialist ends” (Meisner Reference Meisner1999, 453). In many instances, China has succeeded in reaping the benefits of foreign capital—technology transfers, investment, employment, etc.—without having to sacrifice sovereignty in return. Chinese policymakers have always treated foreign capital with a measure of apprehension—initially requiring foreign multinationals to enter into much-hated joint ventures with state-owned companies. More recently, the Indigenous Innovation (zizhu chuangxin) campaign of 2006 reasserted the CCP's commitment to protecting SOEs and restricting market access for foreign enterprises. Only after outcries from foreign multinationals who viewed it as “a blatant blueprint for massive technology theft” were some of its terms watered down (McGregor Reference McGregor2012, 5).
Once viewed as part of a dying, inefficient planned economy, China's SOEs have regained domestic prominence and increasing international stature since the early 2000s. Despite the fact that many are publicly traded in overseas stock markets, the Chinese state is still the majority shareholder in these companies, which are overseen by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC). Their CEOs are appointed by the CCP's Organization Department, the same bureau that appoints all other CCP officials. They control all industries deemed of strategic and national importance: steel, petrochemicals, transportation, utilities, and virtually all banking and financial institutions. Despite being state-owned, they are expected to be run like profit-minded businesses, although their ability to do so sometimes conflicts with other policy goals of the Chinese party-state.Footnote 8 For the most part they are domestically oriented rather than export oriented, although in recent years their global presence has expanded dramatically as they pursue business, investments, and resources overseas. They enjoy a practically unlimited supply of low-interest loans from state-owned banks, monopoly market positions, and subsidies, which has led many Western companies to complain about their unfair advantages.Footnote 9
State control of the economy does not end with SOEs. China in many ways fits into the “East Asian Development Model” of state-governed economic growth, in which government ministries strive to promote policies that support export-oriented domestic industries and sustain high-speed economic development. However, the complexities of Chinese state administration, with conflicting interests at the national and local levels, as well as between various ministries, and competition among SOEs make coherent planning and implementation of national-level economic policy extremely difficult (McNally Reference McNally2012, 754). Furthermore, heads of SOEs, as Party-appointed officials, often outrank the ministers who are meant to monitor them. In the mid-1990s the policy of “grasping the large and letting go of the small” (zhua da fang xiao) led to the bankruptcy or privatization of thousands of small SOEs while a smaller number were consolidated into the large SOEs one finds in China today. Given their close ties (some based in kinship) to central leaders, SOEs have become powerful vested interests in China, with a set of interests at odds with China's private export sector and sometimes with the interests of the nation as a whole.Footnote 10
In addition to the SOEs, two other key features of Chinese capitalism signify its departure from the free-market ideal: China's strict capital controls and the yuan's fixed exchange rate. Chinese citizens are prohibited from moving more than US$50,000 out of the country each year, although billions of dollars flow out of the country through various illicit channels. A Chinese investment banker once described China's capital controls to me as comparable to a “casino where you can't cash out your chips.” This limit on capital flows helps maintain stability in the financial system and facilitates state control of the banks. Capital controls are also one reason, among others, that the Chinese real estate market has been overheated for so long. Other than the domestic stock markets (which have offered virtually no long-term gains) and Chinese banks (which provide a negative return on deposits when one factors in inflation) there are few other places for China's new rich to park their money besides real estate. Secondly, in addition to the capital controls, the yuan trades at a fixed rate, which has helped keep Chinese exports cheap and labor costs low, leading the U.S. government to accuse China of being a “currency manipulator.” While economists cite these features as key enablers of China's looming financial crisis, they are also widely credited with helping China to emerge from the 1997 Asian financial crisis relatively unscathed (Liew Reference Liew2005, 332).
The Growth Machine
Thus one finds in China a regime committed to restoring China to global prominence armed with the financial controls to realize this dream. Despite the dynamism of China's private sector, which accounts for 90 percent of new jobs, state-directed investment accounts for over half of China's GDP. In the wake of the 2008 financial crisis, China's government unleashed a $586 billion stimulus, larger than that of the United States in both relative and absolute terms, mostly in the form of low-interest loans to local governments undertaking infrastructure projects. Although this spending props up growth numbers in the short term, many question the degree to which it will be productive or sustainable in the long term. (Former premier Wen Jiabao famously described China's economy as “unstable, unbalanced, uncoordinated, and unsustainable” [Xinhua Reference Agency2007].) China's rapidly expanding cities, fed by both migration and urban resettlement policies, no doubt need infrastructure, but many point to China's mushrooming ghost cities and empty industrial parks as evidence of the excessiveness of this investment. Some new infrastructure might boost local economic development and therefore lead to increased government revenue, while other projects might become proverbial “bridges to nowhere.” Many experts fear a mounting local government debt crisis if many of these projects prove financially unsuccessful.
What is clear, however, is that this state-directed investment generates considerable wealth for officials and well-connected entrepreneurs and is the prime enabler of corruption. Obtaining contracts to undertake these massive projects is incredibly lucrative and requires a mix of bribes, entertaining, and connections. Frequently the initial winner of the contract then goes on to sell it to someone else. Sometimes contracts are sold multiple times before they finally reach the subcontractor actually performing the job, who now must complete the job with a significantly smaller budget if he is to turn a profit.Footnote 11 This contracting system is in many ways responsible for an epidemic of what Chinese citizens refer to as “tofu dregs construction” (doufazha gongcheng): shoddily built roads, bridges, and buildings that prematurely deteriorate or dramatically collapse, the most famous and tragic instance being the substandard schools that crumbled during the 2008 Wenchuan earthquake. This investment-driven growth, along with the capital controls mentioned above, has also contributed to the massive real estate bubble in cities like Beijing and Shanghai, which have witnessed some of the highest housing price to income ratios ever recorded.Footnote 12 It is also responsible for driving up global commodity prices, which have been a key source of growth for the economies of Australia, Canada, and Brazil—countries that supply many of the raw materials for China's construction boom. Given its role as the driver of growth in both China and elsewhere, one banker referred to China's property market as “the most important sector in the known universe,” a frightening statement given the widespread acknowledgment of China's real estate bubble (The Economist 2012).
Property development is where we see all aspects of China's state capitalism at work: growth- and project-hungry local governments; the state-controlled banking system; entrepreneurs employing luxury gifts, bribes, and entertaining to win deals; and angry ordinary Chinese who are often forcibly removed from their homes and excluded from any piece of the investment pie. Perhaps the single biggest cause of unrest in China today is (often illegal) seizures of land by local governments for redevelopment. Land is still owned by the state (or collectives in rural areas), although there is a market in use rights. Sale of land use rights is the single biggest source of revenue for many localities, and many local officials have come to view state or collective land as in some sense theirs for the taking (Hsing Reference Hsing, Zhang and Ong2008). Local officials frequently collude with private developers to acquire land from residents at well-below market prices, often relying on violence and intimidation to force reluctant residents to move. Engaging in these property development projects serves several purposes for local officials: it creates revenue for the local governments, which can be used to fund other projects for their official portfolios (zhengji); it boosts economic growth rates, which are a key factor in officials' assessment for promotion; and it provides the illicit grey income, gifts, and dinner invitations officials rely on to maintain a lifestyle commensurate with their status. The party-state, individual officials, and entrepreneurs alike have a vested interest in this growth machine: it generates (at least in the short-term) employment; economic growth; windfall profits for the connected; and tangible, albeit somewhat shaky, evidence of China's modernity to the outside world.
Conclusion: Looming Crises?
As Jeffrey Wasserstrom (Reference Wasserstrom, Weston and Jensen2000) acutely observed, China scholarship can often be divided into “noir” and “sunshine” versions. Following Wasserstrom's terms, writings on finance in China, from books to blogs, have taken a decidedly noirish turn in the past few years. Carl Walter and Fraser Howie's Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise (Reference Walter and Howie2011) perhaps best captures this foreboding mood: China continues to ignore the market at its peril, and its day of judgment is coming in the form of a massive correction. Both authors are investment bankers who were directly involved in the overseas stock listing of some of China's biggest SOEs. They follow a narrative similar to Huang's Reference Yasheng2008 book but with a different periodization: while once China seemed destined towards liberal capitalism (if not liberal democracy), especially during the height of reformist Zhu Rongji's reign as premier (1998–2003), beginning with the Hu-Wen regime in 2003, China reversed course by bolstering the state sector and the power of the SOEs. Red Capitalism in many ways reads like an extended rebuke to China for refusing to conform to an American-style financial system. As punishment for this sin, Walter and Howie predict that constant state interference in the financial system will generate a massive banking crisis.
Despite the authors' bias towards U.S.-style finance, they offer a compelling and ultimately persuasive account of a looming debt crisis in China. Unlike the crisis that hit the United States, however, the debtors are not homeowners, but local governments and SOEs that borrowed vast sums during the 2009 stimulus.Footnote 13 Official estimates put local government debt at ten trillion RMB, but some estimates have put it as high as twenty trillion RMB (or 40 percent of GDP). This money is used primarily for infrastructure projects that help prop up the growth numbers that are a key component in the assessment of officials for promotion. If these investments fail to generate sustained economic growth, many local governments may need the central government to bail them out, which it appears to be very willing to do in the short term. The ability of state-controlled banks to bail out local governments and roll over bad loans, however, depends on the vast savings of ordinary Chinese citizens and profitable private enterprises. But this savings rate is destined to drop due to a number of factors: China's shift to a consumption-driven growth model, loss of faith in the banks, an aging population, decline in revenue from exports, or all of the above (Hung Reference Ho-fung2011, 142). The authors argue, as have many other critics of China's financial system, that it is ultimately China's “heroic savers” who are able to keep the system going, as their vast deposits maintain liquidity in a fragile system. Rather than being a product of a “cultural mentality,” this high savings rate is largely due to sky-high housing prices relative to income, a poor social safety net, and repressed wages, all ultimately the products of government policies.
A second related, looming crisis involves the so-called “shadow banking system,” which includes wealth management products (WMPs) and other opaque and off-the-book loans. Private entrepreneurs have a difficult time acquiring loans from state-controlled banks, which prefer lending to large SOEs. Because loans are very difficult to come by for small and medium-sized private enterprises, many rely on this largely unregulated underground banking system. As a result, SOEs have gone into the loan business themselves in many parts of China, often lending to private trusts at much higher interest rates than they pay the banks. The trusts then loan to other enterprises (including companies owned by local governments) at even higher rates. These loans and investments are repackaged by the trusts as WMPs with fixed returns to Chinese investors who are desperate for investments outside of the stock market and traditional bank deposits. Given the risky, under-regulated nature of these investments, some fear that these shadow loans could become the collateralized debt obligations of China's future financial crisis. Ironically, in both of these instances, the firm state control over the financial system has prevented any crises from developing so far. The state has started to take action against WMPs by arresting several bank officials and has shown a readiness to roll over local government loans to avoid a debt crisis.
I would like to conclude by returning to the question of whether or not Sino-capitalism offers a viable alternative to the Anglo-American capitalism whose sixty-odd years of hegemony are beginning to waver. It has no doubt succeeded in bringing hundreds of millions of people out of poverty and furthering China's economic, political, and cultural integration with the rest of the world. It has also been remarkably successful in maintaining domestic control over the economy. (The degree to which it has resisted conforming to the norms of Wall Street is evidenced by the chorus of complaints from the business and finance world over the past few years.) From the perspectives of economic equity and environmental justice, however, it has generated massive crises and contradictions, which it may not be able to contain. Property bubbles, government debt crises, land grabs, ecological devastation, and systematic corruption are its direct products. State capitalism has the architecture in place for a more just system—SOEs could serve as engines of revenue for social welfare—but the rise of SOEs as vested interests themselves and the power of informal elite networks over economic policy make it unlikely that they will serve their intended purpose anytime soon. Rather than viewing PRC state capitalism as an alternative version of capitalism, perhaps it would be more fruitful to view it as a mirror to be held up to our own system that helps debunk the myths that blind us to the realities of actually existing capitalism in the United States—reliance on state intervention, cronyism, and the centrality of social capital and state support to entrepreneurialism.
Returning to the question of global capitalisms in Asia around which this set of papers is framed, I offer this concluding thought: Despite the growing fetishization of the market in financial worlds, the growing penetration of market mechanisms into virtually all domains of life, and the ways in which global commodity chains render us increasingly interconnected, we should remind ourselves, as Karen Ho (Reference Ho2005) urges, not to take market ideology at face value. Instead of seeking markets as abstract, homogenizing forces imposing their own logics of efficiency, we need to empirically investigate the ways in which markets are grounded in “specific practices and locales that can be thickly described” and in culturally and historically specific structures and ethos (Ho Reference Ho2005, 68). Only then can we move beyond free-market ideology on the one hand and Marxist functionalism on the other.
