By Matija Šerić
“Proudly carry the great banner of socialism with Chinese characteristics and fight in unity to build a modern socialist country in all aspects.” This is the motto of the Chinese Communist Party (CCP), which regularly appears in official documents and proclamations of People’s Republic of China. It emphasizes socialist character of the Chinese political and social system.
Although the Communist Party is in power in modern China, many analysts call China only a “nominally communist” country that has accepted the principles and practices of capitalism and left behind the communist-socialist form. Such a point of view is wrong. The Chinese economic model is definitely not the same as the Western capitalist model implemented in Europe and North America, and has numerous specificities.
With its official name, “Socialism with Chinese Characteristics” is an economic model that was adopted in 1978 and irrevocably changed China and the world. It was this model that unleashed Chinese potential to unimagined heights. China has become an economic superpower, but consequently also a powerful global force in geopolitics. At the same time, it did not give up socialist practices and ideals. What is the secret?
First of all, it should be emphasized that the Chinese did not become successful economists at the end of the 20th century, but in ancient times they proved themselves as a people with exceptional economic knowledge and skills. About 200 years ago, in 1820, China’s economy was the largest in the world. At that time, the political picture of the world was significantly different from today.
The United States was just beginning its demographic and territorial expansion, the Greeks began a rebellion against the Ottomans, Brazil declared independence from Portugal, and the first modern railroad opened in England, where the First Industrial Revolution was already in full swing. At the same time, in China, the Qing dynasty approached the third century of its imperial rule, and the Chinese had the largest share of the world’s gross domestic product.
China experienced stagnation and lagging behind the developed West in the second half of the 19th century and in the first part of the 20th century when it was torn apart by constant wars. However, everything changed in 1978, when the period of progress and catching up with America and Western Europe began. Today, China’s economy is the second largest in the world and the largest in terms of purchasing power parity.
People’s Republic of China at the time of Mao Zedong
“When the People’s Republic was founded, we inherited from old China a destroyed economy, literally without industry. There was a shortage of wheat, inflation was acute and the economy was in chaos. But we solved the problems of nutrition and employment of the population, stabilized commodity prices and united financial and economic efforts, and the economy rapidly recovered. On these bases, we started a large-scale reconstruction. What did we rely on? We relied on Marxism and socialism. Some people wonder why we chose socialism. We answer that we had to because capitalism would not take China anywhere. If we had followed the capitalist path, we would not have been able to end the chaos in the country or abolish poverty and backwardness. That is why we kept repeating that we must be committed to Marxism and preserve the path of socialism. However, by Marxism we mean Marxism that is integrated according to Chinese conditions and by socialism we mean socialism that is tailored to Chinese conditions and specific Chinese character.“
It was written by the creator of China’s economic reform, Deng Xiaoping, in 1984. However, even though the PR China was founded in 1949, for almost thirty years its economy did not use its capacities as it should (to put it mildly). Communist rule stabilized China and brought development, but blind devotion to the ideals of Marxism-Leninism did not bring economic progress, but an increasing lagging behind neighboring countries in the Far East (especially Japan, South Korea and Taiwan). China’s economy was badly affected by the moves of leader Mao Zedong whose experiments, the Great Leap Forward and the Cultural Revolution, instead of leading to progress and prosperity, led to disaster, misery, poverty and the death of millions. Those two experiments were so devastating and deadly that some consider Mao Zedong a greater villain than Hitler and Stalin, while in China today he has a kind of deity status (along with Deng).
Deng Xiaoping and market reforms in 1978.
However, Mao’s death in 1976 provided an opportunity for new ideas. The party leadership realized that China was far behind almost everyone in the region and had to do something. In December 1978, the Third Plenary Session of the 11th Central Committee of the CPC under the new leadership of Deng decided that the management of the economy would be changed. The new economic system will emphasize greater openness and cooperation with other countries, increase efforts to adopt world-leading technologies and equipment, and improve education for the purpose of modernization.
The need to reduce the level of central control and the importance of encouraging economic efficiency by removing bureaucratic obstacles was also recognized. China has become the center of world production, specializing in labor-intensive production oriented towards the export of cheap goods, which enabled an increase in production capacity. In short, China’s strategy was based on attracting and selling cheap goods around the world. The situation in 1978 was not favorable at all. At that time, three-quarters of industrial plants were under state control – large state-owned companies that were absolutely controlled by the state. A typical example of the Stalinist economic model. Collectivized agriculture stifled entrepreneurial freedom.
Starting with the abolition of the agricultural cooperative system, China gradually implemented reforms. The reforms liberalized prices, guaranteed greater autonomy to state-owned enterprises, increased the private sector, opened up trade and foreign investment, and developed the stock market and a modern banking system. But not least, local governments have been given greater powers in terms of fiscal autonomy along with incentives to attract investment and increase growth which has benefited the private sector very well.
From the initial reforms in 1978 until the global financial crisis in 2008, China’s economy grew at an average annual rate of nearly 10%, three times the world average. China’s GDP jumped from $147.3 billion in 1978 to $4.9 trillion in 2009. Since reforms have encouraged more efficient use of labor and capital, most of China’s growth can be attributed to an increase in overall factory output. Capital investments have also contributed to growth, although they are not sufficient by themselves.
Socialism with Chinese characteristics
Socialism with Chinese characteristics differs from the original socialism advocated by Karl Marx and Friedrich Engels, from Soviet and Mao socialism. The uniqueness of the Chinese form of socialism has its roots in the unique historical heritage and other Chinese specificities from culture to politics.
According to the classical authors of Marxism, a prerequisite for the development of a socialist society is a well-developed capitalist system. However, China started building socialism in 1949 as a semi-colonial and semi-feudal society. Therefore, Chinese conditions are very different from the assumptions understood by the founders of Marxism. This is a huge difference that allows Chinese socialism to have its own characteristics. In short, Chinese socialism is a special form of socialism that is justified and based on the backward economy and society of China at the time when the communists took power in the middle of the 20th century. Since the market reforms began in 1978, the Chinese Communist Party has done everything to continue adjusting the basic principles of socialism with Chinese characteristics. Summarizing the successes and failures of socialism in China and other socialist countries, the CCP has successfully opened and begun a unique path of socialism with Chinese characteristics.
The phrase “Socialism with Chinese characteristics” was first coined by reform architect Deng Xiaoping at the 12th National People’s Congress in 1982. Deng rejected the historical view that a market economy is synonymous with capitalism and that socialism can only be achieved through central planning. “A planned economy is not a definition of socialism because it also exists in capitalism, so the market economy also happens in socialism. Planning and market forces are both ways of controlling economic activity,” Deng explained.
More precisely, socialism is a set of common rules adopted by the Chinese Communist Party, while Chinese characteristics are the basic principles of socialism in which it is really embodied in China. Economically, China is committed to the free market and entrepreneurship while public (state) ownership predominates. Politically, China has maintained a one-party system in which the CCP still has a monopoly. China is politically just as communist today in 2023 as it was in 1993 or 1973, although there is liberalization, but there is no multi-party system and no classical democracy. Culturally, China has maintained socialist values at its core while simultaneously appreciating differences and expanding common ground.
China has lifted m
ore people out of poverty than any other country
At the beginning of market reforms in 1978, China was a poor country. It had a GDP per capita similar to that of Zambia: less than half the Asian average and less than two-thirds of the African average. China had such strong annual GDP growth that GDP per capita increased 83 times from $155 in 1978 to $12,813 in 2022. This had the effect of lifting 800 million people out of the scourge of poverty.
An extraordinary achievement that no other country has done. In China’s urban centers, poverty has been virtually eliminated. But China’s growth has been driven by coastal cities in the east while progress in rural areas in the west has faltered. Per capita income is still below the world average, so there is still plenty of room for improvement.
The fact that the UN achieved its Millennium Development Goal of halving the number of people living in poverty was achieved largely thanks to China, whose share in the reduction of the world’s poor population was 75% between 1990 and 2005. The result is not at all surprising since China had about 18% total world population. With a current population of 1.4 billion, China is the second most populous country in the world. North and South America, Western Europe, Australia and New Zealand have the same number of inhabitants.
The global financial crisis and new challenges
While the growth of the Chinese economy until 2008 and the World Financial Crisis was based on profits gained from production, since the beginning of the crisis, growth has slowed down and is primarily driven by investments. Feeling the effects of declining exports due to the global recession, the Chinese government enacted a stimulus package with a huge amount of spending on infrastructure and construction. Capital investment helped spur growth, but since 2011, additional capital has become the only source of increased output as factory productivity has declined.
However, a growth model based on excessive loans and investments is unsustainable in the long term. In fact, China’s debt increased from 7 trillion in 2007 to 28 trillion in 2014. Facing weaker global demand and high debt, China is facing the challenges of the need to reorient its economy away from exports and foreign investment to a model that places greater emphasis on consumer spending (although that solution is not necessarily a good one and exports should be and remain China’s main trump card). This is a common problem facing developing economies that want to make the leap from middle-income to high-income.
Problems in the public sector
Among the fastest growing sectors of the economy are healthcare, technology, education and entertainment, which are gaining importance in economic planning. The slow growth of China’s GDP after 2009 is seriously affecting heavy industries such as steel, coal and cement industries. These are sectors of crucial strategic importance for the central government under which the state-owned companies are located.
Today, these sectors are overloaded and low productivity. Since the 1990s, state-owned companies have been consolidated through closing redundancies and merging multiple companies into one, but capacity cuts stopped when the 2008 crisis hit and the government began a program to mitigate the effects of the financial crisis. The construction of new companies and equipment was financed even though market demand did not require such moves. State-owned companies are less profitable than private ones and their share of losses has increased since 2010. However, state ownership of the economy, which has been increasing since Hu Jintao’s administration came to power in 2003, has not decreased but increased further after the outbreak of the Global Financial Crisis.
Private sector – the main driver of the economy
Between 2010 and 2012, private sector companies produced between 2/3 and 3/4 of China’s GDP and accounted for 90% of China’s exports. The tertiary sector now accounts for the majority of GDP, with financial services accounting for more than 80% of economic profits. The tertiary (service) sector is, after all, the largest source of employment because it employs 47% of employees, 24% in agriculture, and 28% in industry.
Such a situation arose thanks to recent events. By increasing incomes, citizens’ spending is focused on services. For example urban households spend 40% of their spending on services such as education, healthcare, entertainment and travel. This is a jump of 20% compared to the situation 25 years ago.
New and slower but more sustainable growth
Since Xi Jinping was enthroned as China’s new president in 2013, he has repeatedly emphasized his commitment to structural reforms, calling for slower but more sustainable economic growth. The redirection to market consumption led to a decline in production output and infrastructure projects.
During the Xi era, the Chinese government continues to use SOEs to serve non-market goals, and CCP control over SOEs has increased while taking some limited steps toward liberalization, such as increasing mixed ownership of SOEs. Chinese e-commerce grew more slowly than that of the EU and the US, with significant growth from 2009 onwards. In late 2020, China signed major free trade agreements with the EU, as well as 15 different Asia-Pacific countries. In 2020, in the midst of the corona crisis, China was the only major world economy that experienced GDP growth: 2.3%. In 2021, China’s GDP growth reached 8.1% (the highest in a decade), and China’s trade surplus reached a record 687.5 billion USD. Last year GDP growth was 3%. The trade war with the US that began under the Trump administration has resulted in increased economic ties between China and the European Union.
China’s gross savings is at the level of 45% of GDP and is among the highest rates in the world. However, future reforms will need to reduce that figure to encourage more spending. The share of consumption in GDP is currently around 40% of China’s GDP. In contrast to the Chinese, for example, American gross savings amount to about 17% of GDP, and the consumption of American citizens makes up 2/3 of GDP.
These data show how different the Chinese and Americans are. One of the problems is that the richest 5% of Chinese save about 70% of their income. A more equitable taxation system that reduces social inequality in China would help reduce the savings rate and stimulate more consumption. Finally, to encourage entrepreneurship the government will need to shift its support away from large state-owned companies to develop more equitable financing and reduce borrowing. Also, it should attract larger foreign investments in the stock market, which would lead private companies to the necessary financial resources.
China – the world’s largest exporter and the world’s second largest importer
Currently, China’s economy is an upper-middle-income economy. It is a socialist market economy guided by the government’s strategic five-year plans. According to estimates for the current year 2023, in terms of nominal GDP, the Chinese economy is the 2nd in the world (19.3 trillion USD), and according to GDP PPP, the Chinese economy is the largest in the world with 33 trillion USD and has held that status since 2016. China’s share in world GDP is 18%. As of 2010, China is the world’s largest exporter and second largest importer of goods, as well as the fifth largest exporter and third largest importer of commercial services. Of the world’s 500 largest companies, 145 are headquartered in China.
China’s largest trading partners are the USA, the EU, Japan, South Korea, Taiwan and India. China is among the world’s largest providers and recipients of foreign direct investment. In 2022, China’s foreign direct investment amounted to US$146.5 billion – an increase of about 1% compared to 2021. Most of these investments went to Asia, sub-Saharan Africa, Europe and North America. Much of China’s investment comes in the form of development financing.
Beijing’s emphasis on foreign investment is part of efforts to create the New Silk Road. In 2021, China attracted USD 181 billion in foreign direct investment. China has gone from being a country of the poor to a country of the rich. According to Forbes estimates, in April of this year China is the second country in the world in terms of the number of multibillionaires, with 495. The USA has the largest number of multibillionaires: 735. China is the first country in the world in terms of foreign exchange reserves: $3.4 trillion.
Many equate Chinese socialism with capitalism and call China a quasi-socialist state. In fact, they claim that it is capitalism with Chinese characteristics and not socialism. However, the Chinese economic model is definitely quite different from Western capitalism. Mainly due to the fact that central planning is still present and the state is a key factor that dictates how and in which direction not only the public but also the private sector will develop.
Since the socialist market reforms and opening to the world in 1978, practice has proven that the combination of state ownership and the private sector is the right choice for freeing up capacity and developing productivity in modern China. Guided by the theory of socialism with Chinese characteristics, China has become one of the world’s most developed economies. Fascinating progress and improvement in the standard of living of ordinary citizens has been recorded in the last five and a half decades.
By 2030, China is expected to have the largest economy in the world again after 200 years. The authorities led by President Xi Jinping will have to continue to pursue the structural reforms begun by Deng Xiaoping more than thirty years ago. It will be necessary to increase domestic consumption, reduce savings and debts, reform the state sector and achieve balanced growth and prosperity for all citizens. However, these transition tasks will not be easy. The Chinese economic model can be an exemplary form of alternative to the Western capitalist economic model that dominates the world today. With the help of reforms, cheap labor, knowledge, skills, innovation and resourcefulness, China has become an economic superpower. However, it has not only remained a cheap factory for American goods within globalization, but has successfully turned economic power into political power. The Chinese can hope to become the first geopolitical superpower to dethrone the US in 10 or 15 years.