China’s rapid economic rise and growing political influence have made it a major global power. After decades of market reforms started under Deng Xiaoping, China has transformed itself from an impoverished communist state into the world’s second largest economy (IMF 2022). However, China remains an authoritarian one-party state under the rule of the Chinese Communist Party (CCP). This combination of economic dynamism and political repression poses challenges as well as opportunities in China’s relations with the rest of the world.
To understand China’s trajectory, it is essential to examine the political economy of its authoritarian capitalist system. This refers to how the CCP regime harnesses both state control and market mechanisms to pursue rapid economic development while maintaining authoritarian political control. The CCP has crafted a distinct model of state-led capitalism that enables it to manage high growth rates through industrial policies and the promotion of state-owned enterprises (SOEs), while restricting political freedoms. However, China faces growing challenges including inequality, overcapacity, debt, and environmental degradation. The sustainability of its growth model has increasingly come under question.
This article provides an overview of China’s contemporary political economy, tracing how it has evolved from the Mao era to the reform period under Deng Xiaoping up to current day. It analyzes the role of the CCP and its evolving economic ideology and policies. The key dimensions explored include state-business relations, inequality, financial system, technological ambitions, environmental costs, and the long-term challenges facing China’s authoritarian capitalist model. Overall, this analysis illuminates how China has charted its own pathway as an authoritarian superpower, defying Western expectations of political liberalization. But growing contradictions in its development model may hamper China’s continued rise.
Maoist Era (1949-1976)
Following the Communist revolution in 1949, China was ruled by Mao Zedong and the CCP as a socialist planned economy modeled after the Soviet Union. Private property in industry, commerce and banking was abolished and collectivized. Capitalism was seen as evil, and class struggle intensified (Lieberthal 2003). The CCP exerted control over all sectors of society and the economy. Economic planning was centralized under the state, which set production targets, controlled prices, and allocated resources.
During the 1950s, China’s economy recovered rapidly under the First Five Year Plan (1953-57), registering annual growth rates over 10%. Industrialization was emphasized, with Soviet aid facilitating over 100 major industrial projects. However, Mao grew dissatisfied with the pace and pattern of development. He wanted to accelerate collectivization and catch up with the West more quickly (Lieberthal 2003). This led to the Great Leap Forward (1958-62), which aimed to rapidly transform China through mass mobilization into an industrialized communist society.
The Great Leap Forward was a disastrous failure. Agricultural collectivization into people’s communes undermined incentives, resulting in a massive famine with over 20 million deaths. At the same time, overly ambitious industrialization targets could not be fulfilled, wasting resources (Dikötter 2010). This caused a breakdown in the economy, with GDP shrinking by over 25% from 1960-62 and not recovering until the late 1970s. The turmoil also caused a rupture in Sino-Soviet ties.
In reaction to the Great Leap fiasco, Mao launched the Cultural Revolution from 1966-76. This was a sociopolitical movement aiming to revitalize revolutionary collectivism in China by empowering the masses to purge capitalist elements from the CCP and society. However, this resulted in radical social chaos, destroying China’s education system and decimating much of its cultural heritage while weakening the economy further (MacFarquhar & Schoenhals 2006).
By the end of Mao’s reign, China’s economy was devastated after years of political turmoil, misguided policies, and international isolation. Per capita income stagnated around $200 in one of the poorest countries (World Bank). Over 70% of the population lived in extreme poverty.
Reform Era under Deng Xiaoping (1978-1997)
After the disastrous Maoist experiments, reformist leader Deng Xiaoping initiated market reforms after coming to power in 1978. This marked China’s transition away from a planned economy towards “socialism with Chinese characteristics.” Deng’s reform and opening up shifted focus to economic pragmatism and institutions, opening China to foreign trade and investment. The household responsibility system dissolved communes, leased land to farmers, and linked incomes to output, boosting agricultural productivity (Naughton 2007). Township and village enterprises (TVEs) emerged in rural areas, catalyzing local industrialization outside the state plan. Special economic zones (SEZs) were established to attract export-oriented manufacturing from Hong Kong, Taiwan and beyond.
Reforms progressively expanded, with massive decentralization away from central planning. Private business was legalized, selection of managers based more on expertise, state-owned enterprises (SOEs) allowed to sell excess output at market prices, and price controls lifted. Trade barriers were dismantled, restrictions on FDI eased, and the economy opened to private banks and stock markets (Lardy 2014). Rural industrialization took off, exports surged, and GDP grew rapidly.
A dual-track system emerged, with plan and market tracks coexisting. The plan track preserved elements of the old system to maintain stability, while the market track drove productivity growth. This creative, incremental approach enabled reform without drastic dislocation (Naughton 2007). By allowing peasants and enterprises to keep profits after meeting planned quotas, economic liberalization was promoted while retaining socialist rhetoric and structures.
After initial experiments, more radical marketization was pursued from 1992 onwards after Deng’s Southern Tour reaffirmed reform. Remaining price controls were abolished. The fiscal system was overhauled, recentralizing revenue under the central government while granting local authorities greater autonomy. Township and village enterprises were privatized, fully exposing them to market competition. The socialist social safety net was dismantled, with enterprises responsible for their own welfare and benefits. SOEs were corporatized, subjecting them to harder budget constraints. This forced less viable firms to merge, go bankrupt, or lay off redundant workers, resulting in massive labor restructuring (Garnaut et al 2005).
Meanwhile, investment and trade were further liberalized. Restrictions on export processing zones were relaxed (Ge 1999). Southern coastal regions became the engine of export-led growth, transforming China into the “factory of the world” through low-cost manufacturing. Inflows of foreign capital and technology contributed greatly to productivity improvements. Entrepreneurship and rural-urban migration boomed.
Reforms dramatically accelerated growth, with GDP rising nearly 10% per year. China’s share of global GDP jumped from 2% in 1978 to over 12% by the late 1990s. It became the world’s seventh largest economy and leading recipient of FDI among developing nations (Lardy 2014). Poverty fell sharply from 53% in 1981 to 8% by 2001, reflecting rapid rural development. However, inequality also rose notably, as coastal regions advanced much faster than the interior. Social dislocation accompanied restructuring, with SOE layoffs leaving over 25 million workers unemployed (Giles et al 2005).
Overall, China’s move away from central planning and opening up unleashed entrepreneurship and dynamic growth. But this first wave of reforms also led to structural imbalances. Dependence on exports and fixed investment left China vulnerable to external shocks. State-led capital allocation generated overcapacity in many sectors. Loose credit fueled speculative investment and asset bubbles. And lack of an adequate social safety net exacerbated inequality. These issues would confront China in subsequent decades.
Building a Market System under Jiang Zemin (1998-2003)
Deng’s successor Jiang Zemin continued reforms in a pragmatic, piecemeal manner. With most prices liberalized, he focused on improving market institutions and addressing structural imbalances while maintaining political stability (Fewsmith 2001). Policy aimed to consolidate gains from the first reform wave while transitioning to a more mature socialist market economy.
SOE reform accelerated, with thousands of small inefficient firms privatized along with the breakup and recapitalization of larger ones. Remaining SOEs were recentralized under central government ministries, then restructured into joint-stock companies with diversified ownership. The goal was for the state to retain control of strategic sectors while exposing SOEs to competition and hard budget constraints (Steinfeld 2010).
Financial reforms sought to strengthen China’s banking system, dominated by four massive state-owned banks. Three policy banks were established to takeover government-directed spending from commercial lending. Joint-stock commercial banks provided new competition, while foreign banks gained greater access. Governance and regulation improved, though reforms remained gradual due to concerns over banking fragility (Lardy 1998).
Tax reforms also progressed, improving central revenue adequacy after earlier decentralization. A value-added tax system was implemented. Corporate, personal income, and inheritance taxes were introduced. However, the tax base remained narrow and local authorities relied heavily on land sales for funds (Ahmad et al. 2013).
Seeking to develop China’s impoverished western regions, the “Develop the West” policy provided infrastructure, environmental, and preferential investment incentives. This aimed to reduce regional inequality and expand domestic demand (Goodman 2004). Other reforms sought to improve the social safety net by dismantling state enterprise welfare systems and establishing government-run pensions, medical insurance, and unemployment benefits (Frazier 2004).
Jiang’s incremental reforms sustained rapid growth while attempting to address structural weaknesses. But China’s economy became increasingly imbalanced. Investment rose to dangerously high levels, accounting for over a third of GDP. Debt grew rapidly as firms and localities leveraged up. Non-performing loans burdened the state banking system. And corruption flourished due to lax supervision of rapidly growing enterprise autonomy. These issues would spur greater change under Jiang’s successor.
Building a “Harmonious Society” under Hu Jintao (2003-2013)
Hu Jintao focused on balancing China’s economic development and spreading its benefits more widely. His “scientific development” concept emphasized integrated, sustainable and equitable growth through focusing on human development, social services, and environmental protection (Lam 2006).
Hu’s policies aimed to enhance the government’s macroeconomic control capabilities and reduce regional, urban-rural and income inequality. Fiscal policy became more activist, with major infrastructure stimulus deployed to shield China from the 2008 global financial crisis. Social expenditures were expanded substantially on healthcare, education, and poverty reduction. A nationwide pension system was launched. Minimum wages and rural incomes rose rapidly, narrowing the urban-rural gap. Income inequality fell from a high Gini coefficient of 49 in 2000 to 47 by 2012 (Li & Luo 2013).
However, inequality between urban residents and migrant workers persisted. To address this, Hu abolished agricultural taxes, extended basic social services to migrants, and promoted more balanced regional urbanization (Chan 2013). Registration (hukou) restrictions on labor mobility were relaxed, enabling more migrants to settle in cities long-term.
Hu also responded to surging environmental degradation, as China’s unchecked industrialization polluted air, water and soil extensively. Laws and agencies were strengthened to curb pollution and promote conservation. Environmental targets became binding on local officials. A massive afforestation program sought to reduce desertification. Legal environmental standards were raised and better enforced (Economy 2007). But China remained highly emissions intensive.
Furthermore, Hu sought to cool an overheating economy and deflate asset bubbles by tightening credit and investment projects. Speculative lending was curbed. Interest rates were raised and banks required to hold more reserves. Capital controls limited hot money inflows. SOE reform resumed, with the corporatization and listing of major banks and enterprises, making them more market-driven and facilitating mixed ownership (McNally 2012).
While achieving more balanced and equitable growth, Hu failed to fundamentally alter China’s state-led, investment-dependent model. Local officials remained obsessed with GDP growth. SOEs still enjoyed preferential access to loans and resources. Financial liberalization progressed slowly due to stability concerns. Household consumption stagnated at around 35% of GDP – very low for China’s level of development. And without democratic reforms, frustration over corruption and inequality grew.
Reforms and Retrenchment under Xi Jinping (2013-present)
As Hu’s successor, Xi Jinping initially promised decisive market reforms. The Third Plenum in 2013 called for allowing markets to play a “decisive role” in resource allocation while strengthening the commercial orientation of SOE reforms (Fewsmith 2013). Interest rate controls were abolished. Private firms gained equal treatment to SOEs in many sectors. Mixed ownership of SOEs expanded, with moves toward public listing and sales of minority stakes to private investors (Lardy 2019). Further financial liberalization was planned, including internationalizing the RMB.
However, reform momentum slowed as Xi consolidated power and prioritized stability over change. His growing personality cult evoked echoes of Mao. Fewsmith (2021) describes this as a “retraditionalization” of Chinese politics, reasserting state control.
A harsh anticorruption campaign was launched, ostensibly to clean up graft but also serving as a purge of Xi’s rivals. Internet censorship and repression of civil society groups tightened. Local officials were recentralized under central control. A National Supervision Law created a new extrajudicial agency with broad powers to interrogate and detain cadres. All spheres of society came under renewed ideological indoctrination and discipline.
Economically, Xi reasserted a strong dirigiste state role. Reform plans were deferred as credit and stimulus were used to meet growth targets (Pettis 2021). SOEs regained prominence through mergers into massive conglomerates, sometimes absorbing private firms. Their role in technological upgrading expanded, with preferential access to finance and dominance of strategic sectors (Chen 2022). This “state advance, private sector retreat” (Lewis 2021) has increased the direct state role in investment, employment and output.
Xi has promoted new strategic industrial policies like Made in China 2025 to create national champions in advanced sectors like information technology, aerospace, electric vehicles, biomedicine and robotics. Through subsidized financing, tax incentives and trade barriers, China aims to move up the value chain and displace foreign multinationals in these areas (Kennedy 2022). The state has also expanded technological controls, using greater censorship, surveillance, data gathering and social credit monitoring to create an Orwellian “digital authoritarian” state (Polyakova & Meserole 2018).
Externally, Xi asserts a more expansionist posture, projecting power through the Belt and Road Initiative which finances massive infrastructure across Eurasia and beyond, creating economic influence for China. The creation of the Asia Infrastructure Investment Bank and BRICS New Development Bank reflect China’s aims to shape regional development financing on its own terms (Chin 2016).
However, Xi’s renewed statism has proven economically problematic. Corporate debt has soared to over 160% of GDP, raising financial stability risks (Biswas et al 2022). Zombie SOEs stay afloat through cheap state lending. Private firms face discrimination in access to credit and contracts. Innovation and productivity are hampered by subsidies and protectionism rather than open competition. Income inequality has risen, while growth rates – though still high by global standards – have fallen steadily from 10% to between 2-5% in recent years. Youth unemployment has hit record levels. The costs of failing to advance market reforms are becoming clearer.
Assessments of China’s Authoritarian Capitalist Model
China has charted a unique pathway to rising prosperity under authoritarian rule. But significant challenges confront its political economy due to intrinsic tensions between one-party control and market imperatives. Assessing this model requires analyzing its key strengths and weaknesses.
First, China’s state capitalist system has proven remarkably successful in mobilizing resources for economic development. The CCP regime has tailored institutions to overcome issues like weak property rights and contract enforcement that often hinder development in developing countries (Xu 2011). State control over finance allows channeling high levels of investment to priority sectors. SOEs serve as instruments executing industrial policy for technological upgrading (Steinfeld 2010). Government coordinates infrastructure and urban expansion. This developmental state role has catalyzed structural transformation.
Second, China’s incremental, experimental approach enabled gradual reforms without major shocks. The dual-track system provided flexibility for cautious change. Reform sequencing focused first on less contested rural areas before tackling entrenched urban interests. Pragmatic policy adaptation reduced risks that rapid liberalization brings, enabling China to avoid the chaos seen in Russia’s “big bang” market transition in the 1990s (Naughton 2007). Gradualism allowed large productivity gains as sectors were exposed to competition, while managing resistance.
Third, openness to foreign trade, capital and expertise proved crucial to China’s takeoff (Lardy 2002). Export discipline made its industries more competitive globally. FDI facilitated technology transfer and integration into global value chains.
Fourth, high domestic savings rates, fueled partly by financial repression of households, enabled high investment with relatively low reliance on foreign borrowing (Yang 2012). This reduced risks from capital flow volatility.
Fifth, decentralizing fiscal revenue early on provided resources and incentives for local officials to promote economic growth. Keeping rewards aligned with performance was key to unleashing local initiative (Montinola et al 1995).
Finally, heavy investment in infrastructure, education and health facilitated economic development and improved human capital. Even critics admit China’s achievements in raising living standards for hundreds of millions out of extreme poverty.
However, China’s state capitalist model suffers from major flaws. First, despite reform, SOEs remain highly inefficient and absorb excessive resources due to preferential state treatment. Their soft budget constraints result in chronic overcapacity in many sectors, with supply outstripping demand. This leads to deflationary pressures, low returns on assets, and mounting corporate debt owed largely to state banks (Pettis 2013). SOE dominance stifles competition and innovation.
Second, financial repression depresses household consumption, as regulated interest rates transfer savings to productive investment but at a high cost. This suppresses domestic demand, making China overly dependent on export and construction-led growth. It generates insufficient employment, requiring rising wages to boost consumption. But this erodes China’s price competitiveness (Lardy 2014).
Third, despite gradual moves away from planning, the state retains controls over resource allocation through “directed lending” to SOEs and strategic sectors. Central and local officials Pick winners rather than allowing market forces to determine optimal investment. This leads to overinvestment in some industries like steel and solars panels far beyond demand. Government directives override commercial considerations (Pettis 2021).
Fourth, lack of rule of law and weak property rights deter private investment and innovation. Despite progress, courts remain subordinate to the party-state. SOEs enjoy impunity while private firms face arbitrary treatment. Cronyism and corruption in lending and administrative decisions breed inefficiency (Pei 2016).
Fifth, heavy state censorship suppresses information flows needed for analysis, oversight and accountability. Media controls and silencing of dissent restrict feedback on flawed policies.
Sixth, although China’s political system has proven resilient, its authoritarianism entails high costs. The need for repressive controls on information and civil liberties hinders creativity. It requires vast domestic security expenditure to monitor unrest and clamp down on dissent, with frequent human rights abuses (Zhu 2011). Democraticparticipation provides no release valve for grievances.
Seventh, despite some progress, environmental degradation remains alarming. China’s growth model is highly emissions intensive. Air pollution causes over a million premature deaths annually (Chen et al 2013). Water pollution threatens scarcity. Soil contamination from toxic waste and heavy metals affects cropland. Without transformational change, environmental catastrophes could endanger public health and food security.
Eighth, rising inequality threatens social stability. Rural-urban divides remain large. Limited social mobility and disadvantage for migrant workers stoke resentment. Regional gaps persist despite efforts at balanced development.
Finally, China’s aging demographics due to the one-child policy pose a huge burden for the future. The working age population has already peaked. Rapid aging will create an unfavorable dependency ratio, slowing growth and raising pension, healthcare and social costs.
Overall, China’s state capitalist model has enabled rapid industrialization but suffers from imbalances. Its corporatist, investment-driven economy faces rising contradictions between political control and market pressures. The costs of authoritarianism are becoming clearer over time even as the CCP tightens repression. China faces a major challenge in shifting towards a more consumption-driven, equitable and sustainable growth model.
China’s economic rise has been a defining story of the 21st century. The CCP regime has combined authoritarian political control with market reforms to generate decades of dynamism. But this state capitalist model suffers deep flaws. Persistent favoritism for SOEs breeds inefficiency and waste. Financial repression constrains household spending. Environmental costs are mounting. Inequality spurs resentment. And repression hinders innovation.
For all its achievements, China’s development model is rife with tensions. Transitioning to more open, competitive and inclusive institutions will prove challenging without greater political liberalization and rule of law. How China manages such tensions and contradictions will determine whether it stagnates as a “middle-income trap” or continues rising to advanced nation status in the coming decades. Either way, China’s governance model offers important lessons for developing countries seeking to blend state and market roles in national development.
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