China in Transition

The 25th Anniversary of China's Market-oriented Reform - The end of public ownership

Chi Hung KWAN
Consulting Fellow, RIETI

This year, China celebrates the 25th anniversary of its start on the path toward modernization through reforms and market opening under the leadership of Deng Xiaoping, which began with the Third Plenary Session of the 11th Central Committee of the Communist Party of China in 1978. During this time, China has maintained its cloak of socialism while hotly pursuing capitalism. However, with economic realities increasingly diverging from the original ideals of socialism, new interpretations have been invented to match the circumstances of the times and whenever a new direction for reform was drawn up. In line with this, a dissolution of socialism, in order to create a new form, was attempted at the Third Plenary Session of the 16th Central Committee held in October this year, focusing on ownership reforms.

Traditional socialism is based on the three pillars of "income distribution in accordance with labor," "resource allocation based on planning" and "public ownership centering on state-owned enterprises." This runs counter to the characteristics of capitalism, which are "income distribution in accordance with production factors such as capital," "resource allocation based on market principles" and "private ownership." Unlike Russia, China did not opt to undertake shock therapy and shift to capitalism in a short period of time, but rather decided to take the path of gradual reform, switching the three pillars of socialism with those of capitalism one by one. First, between 1978 and 1992, the government implemented reforms that redistributed authority and profits to lower-level governments and companies. From 1993, it embarked on the introduction of the market mechanism, and the country has now entered the stage of ownership reforms centering upon privatization.

During the first stage of reforms between 1978 and 1992, the principle of income distribution in accordance with labor was gradually abandoned. In the agricultural sector, people's communes were disbanded and a contract system based on household units was introduced. Meanwhile, on the industrial front, authorities began to condone the pursuit of profit. The Chinese economy was invigorated as each economic entity began to pursue profit for its own sake. However, at this stage, state-owned enterprises and economic planning were still the leading players of the Chinese economy, and market forces, not to mention private ownership of property, were only tolerated as necessary evils.

After Deng Xiaoping's speech during his tour of southern China in 1992, the formation of socialist market economics was designated as a national goal at the 14th National Congress of the Chinese Communist Party held in the same year. Under a market-oriented environment, privately-owned firms grew rapidly, but many state-owned enterprises became unable to bear the intensifying competition, and their operations are continuing to slide. The problem of nonperforming loans at state-owned banks which extended loans to these firms is also worsening. As it became clear that the red ink at state-owned enterprises and the nonperforming loans would in the end become a burden on government finances and that private companies were far better than state-owned enterprises in terms of productivity and earnings, the authorities could not help but condone privatization. The privatization process that began with small and medium-sized firms is now beginning to spread to large companies.

In order to accelerate privatization, under the "decision on issues regarding the improvement of the socialist market economic system" adopted at the Third Plenary Session of the 16th Central Committee in October 2003, it was decided that public ownership through a shareholding system should take the place of state-owned enterprises as the mainstay of the economy. "Shareholding" in this sense signifies a mixed ownership that absorbs state-owned capital, collective capital and private capital. Depending on the circumstances, the role of state-owned capital in these shareholding firms may take the form of absolute shareholding or relative shareholding. As a result of this breaking away from traditional ideology, we are likely to see more capital participation in state-owned enterprises by foreign companies and private companies.

While the decision still maintains the wording "keeping public ownership as the mainstay of the economy," the party leadership has, by expanding the definition of public ownership, kept the pretext of socialism intact while embracing the substance of capitalism. Depending on interpretation, the shareholding system, which has been given the status of main form of public ownership, can include purely private firms such as the publicly-listed companies in capitalist countries. If the traditional definition is followed, it is not an exaggeration to say that China is no longer in a stage of socialism. However, under the new definition, one could even go so far as to say that not only China but capitalist countries such as the United States and Japan are also socialist nations that maintain "public ownership as the mainstay" of their economies.

November 10, 2003
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November 10, 2003