By HO-FUNG HUNG*

This economic model resembles state capitalism under fascist regimes in interwar Europe and Asia.

China's model of state-led capitalism is unraveling – and it's unleashing a new authoritarianism. In 2008, before his first serious bid for the US presidency, Donald Trump expressed unreserved admiration for China's economic model. At that time, China was seen as a place where capitalists like him could freely seek profits without any regulatory restrictions:

In China, capitalists occupy hundreds of hectares of land, always dumping the dirt into the ocean. I once asked a builder: Did you get an environmental impact study? He answered me: “What?” So I asked, “Did you need approval to dump the waste at sea?” No, he told me.

In the same spirit as Donald Trump, in 2015, British billionaire Alan Sugar, presenter of the British version of The Apprentice, was horrified at the prospect that Jeremy Corbyn's Labor Party could come to power. It was then that he said: "if they come close to electing Jeremy Corbyn as prime minister, then I think we should all move to China".

For these business tycoons, China represented a haven of unlimited capital accumulation, a welcome rising superpower in which they could seek refuge after “socialist excesses” and the “political correctness” agenda brought down Western civilization.

But those days are long gone. China's state media now promotes a new direction for economic growth, which they call "common prosperity." Under this new doctrine, President Xi Jinping explicitly called for the strengthening of state guidance, as well as regulatory measures against the "unorderly expansion of capital".

Some commentators on the left have celebrated Xi Jinping's new policy as if it were a revival of genuine socialism. At the same time, Western politicians and financiers began to lament the alarming regression to statism and even the possible return of orthodox Marxism-Leninism. However, we still don’t know exactly what “common prosperity” means.

No socialism in sight

Although hastily abandoned under the pressure of widespread protests, Beijing's insistence on the draconian zero COVID policy by the end of 2022, with its blatant disregard for economic damage, demonstrates the current priority of the Communist Party of China (CPC) of state control. on economic growth. The verdict that the common prosperity program signals China's departure from neoliberal capitalism is not, however, far-fetched.

On the other hand, Xi Jinping has been at pains to dispel any speculation that his common prosperity program is intended to restore the kind of egalitarianism prevalent in the Mao period. In December 2021, Xi Jinping gave a speech at the Economic Labor Conference in which he attacked welfare. He promised that China would not opt ​​for a model that "would promote lazy people who want to earn without working", with explicit disparaging references to Latin American "populism". This hostility towards the well-being of the population could be found in any speech by any free market fundamentalist, in any capitalist country – occasional and rhetorical praise of Karl Marx and Mao Zedong aside.

As far as official ideology is concerned, on the eve of Mao's 125th birthday in 2018, the party dissolved Marxist study groups and labor activist organizations on university campuses across the country, even arresting their leaders.

Over the past two years, concrete measures associated with the common prosperity program include fining and even partially taking over the country's most successful tech companies and their subsidiaries. They also include the financing deprivation of some of the largest real estate developers. In a series of speeches on the proper place of private entrepreneurship under the new program, Xi Jinping reiterated that the party-state must maintain a paternalistic role over capital to ensure the nation's higher purpose.

He highlighted that “entrepreneurs must have a high sense of mission and a strong sense of responsibility for the country and the nation; closely integrate the company's development with the country's prosperity, the nation's growth and the people's happiness; and take the initiative to support and share the country’s concerns about its future.” He then cited a series of model capitalists from the 1950th century to the XNUMXs who regularly donated their wealth to support the political and military causes of the nationalist state builders, only to eventually turn their companies over to the state.

This economic model, based on the paternalistic orientation of the state over private enterprise, as well as a work ethic in which socialist welfare is absent, resembles state capitalism under fascist regimes in interwar Europe and Asia. But the similarity does not stop there. Many have pointed to the party-state's increasingly militant nationalist rhetoric, the persecution of minorities, the rise of the cult of the great leader, and the obsession with surveillance and total control of the population. The open and fervent reception, in recent times, by prominent official scholars of Nazi theorists like Carl Schmitt says it all.

Aggressive statism and nationalism after China's boom

This statist and fascist turn in China's political economy is not the result of Xi Jinping's personal preference, but is a result of the country's long economic crisis. China's export sector, dominated by private and foreign companies, has been the main source of profitability since China moved towards export-oriented growth in the mid-1990s, with the sector absorbing huge foreign exchange reserves.

These reserves have been the basis of the expansion of state bank credit, which has flowed mainly to state-owned or well-connected companies to support many of their fixed asset investments such as infrastructure, real estate projects and new steel mills and coal plants. As long as foreign exchange reserves grew, the CCP-controlled financial system could increase local currency liquidity in the form of generous bank loans without increasing the risk of devaluation and capital flight.

However, much of the debt-driven fixed-asset investment is redundant – Chinese leaders have warned of debt and overcapacity in the economy since the late 1990s. They have proposed reforms such as depriving inefficient companies of cheap loans from state-owned banks. But as recklessly expanding sectors became cash cows and quasi-fiefdoms controlled by different factions of the party-state elite, these reforms gained little traction.

When China's long export-led growth boom faltered in the 2008 global financial crisis, the Chinese government unleashed an aggressive monetary stimulus program that led to a strong recovery driven by debt-financed fixed asset investment. The weakening of the export engine and the redoubled expansion of investments financed by state banks in 2009-2010 created a debt bubble no longer accompanied by the expansion of foreign exchange reserves. Between 2008 and the end of 2017, China's outstanding debt rose from 148% of GDP to more than 250%. The surge in lending amid the 2020 pandemic further pushed the share to more than 330%, according to one estimate.

The apartments, coal plants, steel mills and infrastructure financed by this huge debt are nothing more than excess capacity, as they will never be profitable. After the 2009-2010 recovery, corporate profitability continued to fall in all sectors, both in the private and state sectors.

Falling profits make loan repayments challenging, creating a debt time bomb. As such, China has run out of room for growth through debt-financed fixed asset investment, while growth in the export sector has failed to recover to its pre-2008 level.

Overcapacity, falling profits and rising debt across the economy were behind the stock market meltdown and capital flight that drove the sharp devaluation of the Chinese currency in 2015-16. The economy stabilized in 2016 only with the further tightening of capital controls.

The banking system also injected rounds of new loans into the economy to prevent it from slowing down too much. However, a large portion of these loans were used to roll over existing loans. These recurrent borrowing spurts brought a new buildup of debt to the economy without adding new dynamism. Many companies have become addicted to loan zombies.

With the interruption of the robust growth of the economic pie, the state sector increased its grip on the private sector and foreign companies. The “advance of the state sector and retreat of the private sector” (guojin mintui) amid the general economic slowdown is, in part, an effort to help state-owned enterprises grow at the expense of private and foreign companies. The policy has exacerbated inter-capitalist competition between the US and China, leading to a US-China inter-imperial rivalry reminiscent of the UK-German rivalry a century earlier.

When Xi Jinping came to power, he was expected to pursue an economic liberalization agenda. Official media in the early days of Xi Jinping's reign discussed financial liberalization reform to deprive unprofitable but privileged companies of credit. State newspapers have published articles, believed to be endorsed by Xi Jinping, to call for “supply-side structural reform”, which “sounds less like Marx and Mao than Reagan and Thatcher”.

All too soon, however, any expectations for the return of a Deng Xiaoping-style set of market reforms were dashed. So strong were vested interests in the state that Xi Jinping had little choice but to double down on policy in support of the continued expansion of state-owned or state-linked enterprises to the detriment of private and foreign ones. Today there is broad consensus that the statist turn of the Chinese economy, although predating Xi Jinping, accelerated significantly with him in power.

The spiral of statism and the economic crisis

In the name of the common prosperity program, Beijing has cracked down hard on giant private companies such as Alibaba and Tencent, founded by private entrepreneurs and incorporated in the Cayman Islands. The crackdown included preventing Ant Group, Alibaba's fintech arm, from launching an overseas IPO at the last minute; it also included the imposition of a hefty antitrust fine on Alibaba itself; in addition, it included adding severe restrictions on technology companies in collecting data and providing services; and the prohibition of for-profit school tutoring companies.

Under this initiative to curb the growth of private capital, Beijing controlled the financing of private developers in 2020. Isolated from new sources of financing to roll over growing debt, many developers suddenly fell into solvency crises, with that of Evergrande, a leading company in the sector , being the most watched. As a solution, the Chinese government would have considered breaking up and restructuring Evergrande in the form of several state-owned companies, nationalizing the economy's largest developer. This is consistent with the state's recent attack on other giant private companies, with the possibility of bringing them, or at least part of them, under state ownership or control.

However, while leftists may applaud some of these interventions in the abstract, judging by the profit-oriented operation of other state-owned or state-linked companies such as Sinopec or Huawei, it would be naive to expect any newly nationalized companies to revive socialist mandates. such as full employment and well-being for workers, as they were forced to do under Mao.

Robust economic performance, expanding employment and rising incomes have been the Communist Party's main claims to legitimacy since the 1990s. Without them, the CCP must find an alternative way to ensure the survival of its regime. In this context, redoubling the party-state's efforts to take direct control of the economy, resorting to aggressive nationalism, even at the cost of worsening the economic crisis, becomes a rational approach. As such, China has likely now entered a long period of economic slowdown, tighter statist control, and belligerent nationalism.

*Ho-Fung Hung is a professor of political economy at Johns Hopkins University. Author, among other books, of Clash of empires.

Translation: Eleutério FS Prado.

Originally published in the magazine Jacobin USA

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