China is not capitalist

Image: Elyeser Szturm

By Alberto Gabriele and Elias Jabbour*

Response to the article by Branko Milanovic published in the newspaper El Pais.

The article “Is China really capitalist?” (El Pais, 15/04/2020) is a striking example of gross misunderstandings about what the really important differences between capitalism and socialism are.

Certain oversimplifications, even if they come from distinguished and well-meaning academics, not only create a lot of intellectual confusion. They also undermine and demoralize any attempt to find a way out of the deep pit of misery and despair into which multibillionaires are kicking the vast majority of humanity. Therefore, this type of article should be subject to strong criticism.

According to Branco Milanovic: “To be capitalist, a society must be characterized by the fact that the majority of its production is carried out using privately owned means of production (capital, land), that the majority of workers are wage earners (not legally bound to the land and who are not self-employed using their own capital) and that most production and pricing decisions are taken in a decentralized manner (i.e., not imposed on companies). China meets the three requirements to be considered capitalist”.

As for the third requirement, Milanovic (believes) demonstrates his thesis stating: “At the beginning of the reforms, the State set prices for 93% of agricultural products, 100% of industrial products and 97% of goods sold at retail. By the mid-1990s, these proportions were reversed: the market set prices for 93% of goods sold at retail, 79% for agricultural products, and 81% for production materials. Today, an even greater percentage of prices are determined by the market.”

These numbers (unlike many others in the article) are correct, but they are insufficient to prove Milanovic's thesis. On the contrary, they are fully consistent with the essence of China's socialist market model. In fact, the government does not set the price of ice cream. What we call market-compatible planning focuses more on key strategic objectives such as promoting investment and capital accumulation, (near) full employment, innovation and technical progress, protecting the environment, and implementing long-term mega-projects such as New Silk Road and Made in China 2025. Perhaps Milanovic is theoretically naive to understand this point.

Let's now come to the most obvious mistakes. Milanovic states: “(…) it is highly unlikely that the role of the State in total GDP, calculated in terms of production, exceeds 20%, while the workforce employed in public and collectively owned enterprises represents 9% of total rural employment and urban (...). Before the reforms, nearly 80% of urban workers were employed by public enterprises. Now, after a decline that continues to advance year after year, that share represents less than 16%. In rural areas, the de facto privatization of land under the liability system has turned almost all rural workers into private sector farmers”.

These statements are not true.

There has been no land privatization in China. The land is still owned by the State and, as Milanovic himself recognizes, “farmers are not wage earners, but mainly independent workers, framed in what Marxist terminology calls 'small mercantile production'” and, therefore, are not subject to capitalist relations of production.

As far as urban areas are concerned, basic official statistics paint a very different picture. The “China Statistical Yearbook” (AEC) presents annual data for all industrial enterprises above a certain size. They include two main titles, companies financed with domestic funds and companies with foreign direct investment. Companies with national capital include State, Collective, Cooperative, Privately Held Companies, Limited Liability Companies (SRL), Industrial Holdings (HI) and Private Companies (EP). Some SLRs are just state-funded corporations, but most are classified under the subheading “like other SLRs”.

Overseas companies include Hong Kong, Macao and Taiwan Funds (EEHKMT) and Overseas Funds (FE – “rest of the world”). Therefore, there are three groups of capitalist enterprises in China: EP, EEHKMT and FE. For each of them, the AEC also distinguishes several subgroups. For private companies in particular, these are five: (wholly) Private Equity Companies, Private Limited Companies (ESAP), Private SRLs, Private Industrial Participating Companies (SPIP) and other companies. For each type of data (number of companies, assets, production, earnings, etc.), the sum of these five labels corresponds exactly to the value attributed to PE as a whole, which unequivocally indicates that all other companies do not belong to the national private sector .

The only plausible interpretation of China's industrial statistics on joint ventures is that there is a substantial part of LSRs and SPIPs are not owned by domestic or foreign capitalists. This residual, but far from insignificant grouping is classified as Other LCRs and “…may include any degree of state ownership below full ownership” (Hubbard P., 2015, Reconciling China's official statistics on state ownership and control. EABER Working Paper Series Paper No. 120, p. 5)

In summary, most LCRs and SPIPs should be viewed as indirectly controlled joint ventures by the State. They are the result of the great process of corporatization carried out since the turn of the century and constitute the most crucial component of the socialist-oriented economic development strategy as it encompasses the evolution of property rights. Therefore, they are conceptually non-capitalist companies. In the industrial sector, non-capitalist enterprises include both directly (state enterprises, collectives, cooperatives, jointly owned state enterprises and corporations financed exclusively by the state) and indirectly controlled by the state.

That said, what do the AEC stats say?

The role of foreign direct investment (FDI) financed companies is important but not paramount and has been declining in the 2010s. SOEs have multiplied and are now by far the largest category in China's manufacturing sector in terms of number of companies. In terms of assets and production, they have also been growing, but on average they are still very small: EPs represent more than 25% of China's industrial capital and 45% of its production.

However, non-capitalist firms have consolidated their dominant position in terms of assets. Its share in industrial production has been declining, but at a progressively decreasing rate, which seems to have led so far to a substantial stabilization of around 48% of the total. Its share of profits and industrial employment has also stabilized at around 40%.

Elementary elaboration of other AEC data shows that the degree of capitalization of non-capitalist industrial companies is greater than that of FDI-financed companies and more than twice that of public companies. Since the mid-2000s, its labor productivity is also higher than that of domestic and foreign capitalist enterprises. Its average level of productivity is also healthy, although not as healthy as that of state-owned enterprises.

This overall performance of non-capitalist industrial firms is the result of very different trends in their two sub-components.

The capital-to-labour ratio of directly state-controlled enterprises more than doubles the industry average and continues to rise, as these enterprises carry the strategic burden of pushing China's capital accumulation beyond the limits it would face in an ordinary capitalist environment. For having to carry this cross for the good of the entire country, companies directly controlled by the state pay a price in terms of productivity and profitability indicators at the company level.

In contrast, joint ventures indirectly controlled by the state have a large degree of freedom to pursue market-oriented objectives. Therefore, they performed better (at least at the company level); they have invested heavily and their labor productivity growth rate has been the highest in Chinese industry, as they outperform state-owned and capitalist enterprises. In terms of profitability, indirectly state-controlled joint ventures perform better than their directly state-controlled counterparts, although lower than profit-maximizing capitalist firms.

Data on total employment (manufacturing and others) confirm that the quantitative relevance of the capitalist component of the Chinese economy should not be overstated. The proportion of urban workers employed in domestic and foreign private companies has been increasing and, in 2016, constituted more than 1/3 of the total. The share of rural workers employed by state-owned enterprises has also increased, reaching 16% in 2016. The overall proportion of workers working for capitalist enterprises has steadily increased, reaching over 25% in 2018.

However, more than 70% of workers in China are still self-employed or employed in non-capitalist enterprises and public organizations. Therefore, the vast majority of Chinese workers are not directly employed by capitalists (see Gabriele A., 2020 [forthcoming], “Enterprises, Industry And Innovation In The People's Republic Of China – Questioning Socialism From Deng To The Trade And Tech War ”, Springer).

China is not a perfect socialist society. Not even, and for various reasons, if taken in other dimensions, it cannot be seen as socialist in a complete sense. (taking into account, for example, the still slow results of ongoing efforts to combat inequality and environmental degradation). But it certainly isn't capitalist.

*Alberto Gabriele is a former UNCTAD economist. Independent researcher.

* Elias Jabbour Professor of International Relations and Economics at the State University of Rio de Janeiro (UERJ)

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