The triumph of state capitalism

What kind of society is China? Steve Freeman analyses the facts and figures following his recent visit

The world is getting ready see the new China through the prism of the Olympic Games. So I was fortunate enough to visit Beijing, capital of the People’s Republic, earlier this year before it all kicks off. China has been transformed since a popular revolution brought Mao’s Communist Party to power in 1949. The party, with 73 million members, officially leads 1.3 billion people in the building of “socialism with Chinese characteristics”.

What kind of economy and society is it? Beijing is certainly a very modern city. It has a population of 15 million. It is ringed by six concentric, three-lane motorways, jam-packed with cars. There are three million of them, growing by a thousand per day, boasts ChinaDaily.1 A grey haze of pollution hangs over the city. In the 1970s pictures of Beijing showed almost everybody on bicycles. Just as we in the west are being encouraged to get on our bikes, Beijing has gone in the opposite direction.

One of the first things that struck me was how modern-looking the city is. Certain parts are like Canary Wharf, the home of London’s financial centre. Skyscrapers are occupied by banks, insurance companies, advertising agencies, international hotel chains and many of the famous brands you see in London. On the ground modern shopping malls are everywhere. It was impressive to see the transformation of what I had imagined from the 1980s as a relatively poor third world country.

The official English-language newspaper, the China Daily, tells the story of Jia Changzhen, who is leaving the city of Shenzen, fed up with having to fight to get paid. He explains the power equipment company he worked for had not given him his wages over five months: “Some of my colleagues are willing to kneel down and beg for their salaries. They have rent to pay and need the money simply to survive.” Although there are labour laws to protect workers, he says, these are not always guaranteed in private companies which make up the majority of businesses.2

Li Jian, a consultant in an electronics company, was given the job of legalising his company’s payment system because hundreds of workers have left. The company paid only the city’s minimum wage and no overtime pay. Many workers in Chinese cities are in effect illegal immigrants from the countryside and need work permits. Shenzen business was now suffering growing labour shortages and surveys showed that 18% of the city’s migrant workers had decided to leave and not come back.3

Another article tells of students at the Beijing film academy making a film about the lives of building workers on the site of the national stadium for the Olympics. The film deals with three migrants from Jiangsu province. The work on the upper part of the stadium is dangerous. Consequently they earn relatively high wages, over 3,000 yuan, or £214, per month, plus meals and accommodation. Work safety is a constant concern. One of the workers is saving for a new house to replace his old dilapidated home. He intends to save to buy a car.4 Such everyday stories are recognisable to us on the other side of the world. They could just as well have been stories about workers here.

Today the Chinese working class produces goods and services to the value of $7.2 trillion (gross domestic product). The reference point is the United States (GDP: $13.8 trillion). Four years ago 712 million Chinese working people, including about 170 million industrial workers, produced 13% of the world’s output.5 There are an estimated 325 million peasants.6 The size of the reserve army of labour is unknown, but the Chinese Academy of Social Sciences estimates this at 14% among urban residents.7


Despite the official designation of “socialism with Chinese characteristics” there is no doubt in my mind either from what I observed, from conversations with local people or from what I have read that China can be accurately described as “capitalism with Chinese characteristics”. This is hardly a novel designation.8

Let us begin with two sectors featured in capitalist economies - the financial sector and the productive sector. The financial sector extracts surplus capital and redirects it into profitable investment. It enables financial assets to be valued and ownership transferred. Despite its importance for capitalism it is unproductive and parasitical. Real wealth is generated by wage labour employed in the corporate or productive sector, which adds value in the production of goods and services.

Financial sector

China has three stock exchanges: Hong Kong, Shanghai and Shenzen. The Shanghai stock exchange (SSE) has a market capitalisation of nearly $2.38 trillion, making it the fifth largest in the world. The stock market has been undergoing a boom. Between 2005 and 2007, share prices rose by 400%. Some experts see this as evidence of a bubble - a ‘downward adjustment’ is waiting to happen.

In 2007 the Shanghai stock market index topped 5000. It had risen 90% since the beginning of that year. The total value of Chinese shares (capitalisation) exceeds the GDP. The Chinese media were enthusiastic that this was “progress towards a more advanced stage of capitalism”.9In January 2008 share prices fell across Asia by about 10%. The Hang Seng index (Hong Kong) fell 5.4% on January 16 2008. But the Shanghai market fell by only 2.8%.10

Of the top 10 Chinese firms quoted on the SSE, seven are financial corporations, including banks and insurance companies - China Life, China Merchants Bank, Ping An Insurance and China Pacific Insurance. It is hardly surprising to find that one of the most profitable sectors is that of stockbroking and securities companies. China’s largest stockbroker, CITIC Securities, predicted net profits growth of over 400% for 2007. The Shanghai-based Haitong Securities posted net profit increases of 700%.11

China has some very large state-owned banks. The four biggest are the Industrial and Commercial Bank of China (ICBC), the Bank of China, China Construction Bank and the China Development Bank. These have been caught up in the sub-prime crisis. In August 2007 the Bank of China said it had a $9.6 billion exposure to US subprime mortgages and would put aside $151 million to cover its losses.12 The ICBC and China Construction Bank also had subprime holdings of $1 billion.

The Chinese government has told speculators not to worry because its banks are very profitable, with earnings growing by 40% per annum. They can ride out the storm because Chinese bankers have lots of money and not much to do with it. The China Development Bank (CDB) meanwhile announced it was taking a stake in Barclays and will have a seat on the Barclays board.13

Corporate sector

Today China is a ‘mixed economy’. Productive workers may be employed in state enterprises, foreign multinationals, joint ventures with Hong Kong and Taiwanese firms or in township and village enterprises (TVE). In the 1980s 100% of all capital was state-owned. By 2005 there were 140,000 state-owned enterprises (SOEs) employing about 40 million workers. These enterprises owned half of all industrial assets and produced about a third of the GDP.14

In the 1990s state planners set out to reform the state enterprises and build world class ‘corporate dragons’. The aim was to take 30 to 50 of the best SOEs and turn them into globally competitive multinationals.15 The number of SOEs was reduced by closures, mergers and privatisations. An estimated 20-30 million workers were made redundant.16 Now there is a group of 169 centrally controlled SOEs which are very profitable.

The Chinese market provides a vast opportunity to build a manufacturing base from which to go global. Chinese corporations have become multinationals. Take Hisense, a $3.6 billion consumer electronics group producing TVs for over 10% of the Chinese market. The firm also produces air conditioners, personal computers and telecomms equipment. It manufactures in Algeria, Hungary, Iran, Pakistan and South Africa and sells 10 million TVs and three million air conditioners per year in 40 countries. It is the best selling brand of flat TVs in France.17

BYD has become the world’s largest maker of nickel cadmium batteries. Johnson Electric, a Hong Kong-based firm, has half the world market in tiny electronic motors used in cameras and cars. The BMW series 5 has over 100 such motors to operate wing mirrors, open sun roofs, etc. Johnson produces three million such motors per day.18 Chery automobiles is China’s leading car exporter. It has plans to build factories in eastern Europe, the Middle East and South America. Lenovo has bought out IBM’s personal computer business.19


No country in the history of the world has had such rapid growth sustained over 30 years. Since 1978 GDP has grown by almost 10% per annum.20 The economy has doubled three times over. It is a pattern of capital accumulation that has no equal since capitalism began. Between 2003 and 2007 the growth of real GDP averaged 10.8%. In 2007 it rose by 11.9%. Although the rate is expected to slow down, the economy is still predicted to grow by 8.5% in 2012.

Rapid economic growth has enabled the state to direct investment into information technology and transport infrastructure. There are now 210 million internet users in China. With 500 million mobile phone users, China has more than Europe. Within a few months China will have more internet users than America. Yet the proportion of the population using the internet remains low at about 16%. Rapid growth is likely to continue for some time. Operating profit margins for leading internet firms are 28% in China, compared with 15% in America.21

The state is directing massive capital investment into transport infrastructure. Rapid economic growth has put massive strain on the transport system. The cost of transportation or logistics amounts to 18% of China’s GDP, compared to 10% in America.22 The pace of China’s rail and road construction is “mind-boggling”, according to a World Bank adviser. Between 2001 and 2005 more has been spent on roads, railways and other fixed assets than in the previous 50 years.

Symbolising the investment boom, Beijing’s new airport is ready for the Olympics. Designed in the shape of a Chinese dragon, you can see it as you descend from the clouds. The world’s largest terminal is three kilometres long and with floor space 17% bigger than all the terminals at London’s Heathrow combined.23 It was built in four years by an army of 50,000 workers.

Air passenger traffic has increased from seven million passengers in 1985 to over 185 million in 2007. By 2020 the state plans to build another 97 airports to add to the 142 already in operation. Since the 1990s China has built the world’s second biggest motorway express network, comparable to America’s interstate highway system in length. At the end of 2007, some 53,600 kilometres of toll expressways had been built. The ministry of communications can claim with justification that China’s motorway builders achieved in 17 years what took developed western capitalism 40 years to accomplish.24

These roads are not ‘socialist freeways’. They are ‘marketised’, with traffic-slowing toll booths. ‘Socialist’ China is responsible for 70% of the world’s tolled roads. Prices are the highest in the world. Not surprisingly, lorries are routinely overloaded to cut costs. This contributes to making Chinese roads among the most dangerous in the world and the most costly to maintain. There were 89,000 deaths in 2006.

China’s railways carry 25% of the world’s railway traffic on just six percent of its track length. Chinese state capital is now undergoing the biggest expansion of railway capacity undertaken by any country since the 19th century.25 The 115-kilometre journey from Beijing to Tianjin, its nearest port, will be reduced to half an hour with the advent of a bullet-train link. Work began in January 2008 on a 1,300-kilometre line between Beijing and Shanghai. It will reduce travel time by rail between the two cities from ten hours to five.26

In building bridges and ports the state has chalked up more world-busting achievements. Shanghai is the current world-record holder for the longest structure, the 32-kilometre Donghai bridge. It links the city with Yangshan, a port being built on two flattened islands. Even bigger will be the world’s longest sea-crossing bridge, due to open in 2008: a 36-kilometre, six-lane highway across Hangzhou Bay. It is about the same length as the Channel Tunnel and will cut travel time in half between two of China’s busiest ports, Shanghai and Ningbo.27

New colonies

In 2007 the Congolese government announced that Chinese state-owned firms would build or refurbish various railways, roads and mines around the country at a cost of $12 billion. They would do this for the right to extract copper ore of an equivalent value. This investment was more than three times Congo’s annual budget and roughly 10 times the aid provided by western donors.28

The booming Chinese economy has been forced along the path identified by Lenin’sImperialism, the highest stage of capitalism. Hunger for natural resources has set off a global commodity boom.29 With about a fifth of the world’s population, China now consumes half the world’s cement, a third of its steel and over a quarter of its aluminium. Shipments of iron ore, for example, have risen by an average of 27% a year for the past four years.

China has doubled its own production of iron ore since 2003. It is now the world’s largest producer. Steel production rose by 15% last year. Since 2000, China has roughly tripled its steel output. With 37% of global output, it is by far the world’s biggest producer. It accounts for about three-quarters of the global growth in steel production between 2000 and 2005.30

China cannot dig up iron ore fast enough to supply its hungry steel mills. Imports of iron ore have been growing rapidly from 148 million tonnes in 2003 to 375 million tonnes last year. They now account for half the world’s seaborne trade in iron ore.31

In 1990, China consumed 2.4 million barrels of oil a day. It exported a surplus of 400,000 barrels. Now China uses up seven million barrels a day and imports half of this. It is estimated that by 2030 it will guzzle 16.5 million barrels, mostly imported, and more than Saudi Arabia currently produces.32

From Australia to Canada, Indonesia and Kazakhstan, Chinese firms are buying up oil, gas, coal and metals, paying for the right to explore for them or buying up firms that produce them. This has helped to fuel a commodity boom and economic growth in African and Latin American economies. In 2006 Angola was receiving so much aid and investment from China that it decided it no longer wanted money from the International Monetary Fund. In Sudan, China is investing in oilfields and buying up the oil.33

Australia is the world’s biggest exporter of iron ore and coal. It exports diamonds, zinc, lead, gold, nickel, manganese and copper. Western Australia grew by 11% in the year up to September 2007, faster than in China itself. Australian miners cannot dig quick enough to satisfy the dragon’s hunger. Ships are queuing off Australia’s biggest coal port, Newcastle, to load cargoes destined for China. At one period in 2007 the line was 79 ships long.34


In terms of rapid and sustained capital accumulation and economic growth the Chinese state and the Communist Party have been very successful. But everywhere the Chinese working class is not free. There is no democracy. What limited social rights workers had gained are under threat. The triumph of state capitalism is not the liberation of the working class but its further enslavement. In what sense then can we speak of ‘triumph’?

Twenty years ago the USSR collapsed and American capital ruled the world. Privatisation and free markets were proclaimed as the only rational means of organisation. It was not just that socialism, identified with state ownership, was dead, but even limited public ownership or state enterprise was simply an anachronism. Many western bourgeois writers on China assume that state capital was by definition moribund. It simply could not work.

The only option was complete privatisation and market rule. In Russia, Yeltsin engineered a Chicago-inspired shock therapy as the quickest route to prosperity. China did not fall into line with that theory. Of course, Chinese capital engineered its assault on workers’ rights through factory closures, redundancies and privatisations. Just as Thatcher attacked the welfare estate in the UK, so the Maoist welfare state, the ‘iron rice bowl’, was dismantled.

But just as we adjust to the triumph of free markets a different picture is starting to emerge. It is surely an ironic twist of fate that Wall Street, the flagship of private capitalism, has been bailed out by state capital - funds from state investors. Merrill Lynch received $6.6 billion and Citigroup $14.5 billion. Much of this state capital from Asia and the Middle East was provided to save American bankers from the subprime crisis.35 Free market enthusiasts are not so cocky now.

State capital

Chinese state-owned corporations have been climbing the rankings of the largest firms in the world. The state-owned Industrial and Commercial Bank of China has recently overtaken Citigroup as the world’s biggest bank by market value. No fewer than three of the world’s top six firms are Chinese state enterprises - in addition to ICBC, there is PetroChina and China Mobile. China now has six of the world’s largest 25.

PetroChina is China’s largest company by asset value. If it were to sell shares, it would soon overtake Exxon and Mobile as the world’s largest oil business. In addition Sinopec and the China National Offshore Oil Corporation (CNOOC) are major oil companies which operate in more than 12 countries. CNOOC, for example, is Indonesia’s largest offshore oil producer.

The fact that China Mobile is the sixth largest company in the world indicates that the new China has a strategic position in information technology. The Sinosteel Corporation is China’s leading raw material and service provider which saw its sales increase by 83% last year and its profits rise by 180%. China’s largest steel maker, Baosteel, is a state-owned multinational with operations in Australia, India and South Africa.36

According to the theory of free market capitalism, this simply cannot happen. The world has turned upside down. Will Hutton’s recent book Writing on the wall shows that privatisation played no part in China’s growth before 1997. Chinese domestic growth came from township and village enterprises in the 1980s. We cannot deny the role of foreign multinationals. But what about Chinese private capital?

Hutton cites a World Bank study of firms listed on the stock exchange. He says: “At first sight it seemed that the state had relinquished control of more than 90%. However, once the labyrinth of the share structure had been unravelled, the opposite was the case. The state had de facto control of 84% of the listed companies”.37

Sovereign-wealth funds

The argument about state capitalism was focused for the post-war period on the USSR. For most socialists, state capitalism ended with the collapse of that regime. Yet capitalism moves on. New forms arise whilst we are thinking about other things. The recent development of sovereign-wealth funds is a case in point.

Sovereign-wealth funds are a new form of state capital - capital funds owned by states and invested internationally. We are used to thinking of state capital in national terms, whether it was British Rail, British Gas or the Lenin No2 Steel Works. Today we have 29 sovereign-wealth funds with capital assets worth about $2.9 trillion.38

State capital can no longer be identified primarily with Russia, the German Democratic Republic or even North Korea. The Abu Dhabi Investment Authority of the United Arab Emirates is worth $875 billion. It is the biggest pool of state-owned capital. Norway has $380 billion from its pension fund. Then there is Singapore’s $330 billion and Saudi Arabia and Kuwait. None of this has anything to do with socialism, bureaucratic or otherwise.

Although this form of state capital makes up only two percent of the world’s $165 trillion of traded securities, these funds have a lot of financial firepower. They own more equity than private equity firms and more funds than hedge funds.39 Sovereign wealth or state capital is growing fast and making its mark rescuing the private banks that came a cropper in the subprime crisis.

In 2007 China decided to set up its own fund of state capital called the China Investment Corporation (CIC). It was sent out with $200 billion to spend. The CIC invested $3 billion in Blackstone, a private equity group. This asset was soon devalued by $1 billion in the recent credit crunch. However, these funds are also buying assets and funding activity in Africa and Australia.40 We are witnessing the internationalisation of Chinese state capital.

How has China grown?

Why has Chinese capital been able to accumulate at such a rapid rate that it has transformed itself and is having a major impact of the world economy? One expert from China Economic Quarterly put the source of the surplus to a “unique combination of first world infrastructure and third world labour costs”.41

Three factors stand out - investment, workers’ wages and internationalisation. First China has a high rate of investment at about 45% of GDP.42 This is a pattern which has its parallel with the old-style Soviet system. In the USSR consumption was severely restricted in favour of investment and military spending. The Chinese state has kept up the pressure on working class consumption.

Restricted consumption means relatively low wages. Chinese capital has access to a massive pool of cheap labour. Some estimates have claimed that there are almost 200 million underemployed people in the countryside who can be drawn into industry. It will be years before this labour is absorbed.

The Economist says: “Nor is China close to running out of cheap labour … there are shortages of managers and skilled workers, but it will take at least another decade before China’s surplus rural labour is fully absorbed by industry. It is true that average wages have jumped by 15% over the past year, but productivity in manufacturing has been growing faster still, so unit labour costs have fallen”.43

Migrant workers from rural China make their regular pilgrimage to the cities to find work. There is a vast movement of around 20 million people which has fuelled the manufacturing boom in southern China.44 Hutton argues there are 150 million migrant workers in Chinese cities working long hours in terrible conditions.45

The Great Wall

The third factor absolutely central to accumulation has been the ‘globalisation’ of the Chinese economy. The ‘Great Wall’ has been broken down by trade. The process of opening up the Chinese economy was begun under Mao and was accelerated after 1978 by Deng Xaou Ping. Today China has one of the most open economies in the world. It now produces 70% of the world’s photocopiers, 70% of computer motherboards, 50% of the DVD players, 30% of personal computers, 25% of TV sets and 20% of car audio equipment.46

China was transformed into an export platform as western capitalist firms began outsourcing activities to reduce costs. In 1990 the ratio of exports to GDP was 16%. By 2003 it had risen to 36%.47 Net exports account for 35% of growth since 2005.

Since 1990 there has been a rapid increase in foreign direct investment (FDI) flowing into China. The share of foreign-owned production in China’s manufacturing sales grew to 31% by 2000. In 2002 China became the largest recipient of FDI in the world.48 China became a major supplier of cheap goods to the USA, symbolised by the success of low-cost Wal Mart.

Chinese revolution

If we are to understand the Chinese economic miracle, we need to go back to the revolution of 1949, which brought Mao and the Chinese Communist Party to power. How was this revolution connected to present-day ‘capitalism with Chinese characteristics’? We can divide the intervening 59 years into the Maoist period (1949-78), followed by the opening of China to the world market after Deng Xaou Ping came to power (1978-89). Finally we have the period from the Tiananmen Square demonstrations and their bloody repression to the present (1989-2008).

How should we view the Maoist period, known as the ‘iron rice bowl’? The real comparator is with India. India had a similar-sized peasant population and its own revolution in 1947. What is clear is that the Chinese revolution triggered more rapid economic development. It was a popular democratic revolution. Like any revolution in the mid-20th century, it was carried out under the ideology of Marxism. But red flags and singing ‘The Internationale’ does not make communism.

The Chinese revolution destroyed the old system of landlordism. Land was nationalised. This was far more effective than anything that happened in India, whose revolution turned into a reactionary muslim-hindu civil war. The Chinese revolution acted like a forest fire, burning the old system and preparing the virgin soil in which capitalism could take root. Dealing with the land question, establishing a unified state, free from foreign domination, with a single currency and central bank and educating a workforce are essential for capitalism.

All this was achieved by state direction, with popular support thanks to the social programmes of education and welfare. The policy of the ‘iron rice bowl’ placed emphasis on developing agriculture and heavy industry. Despite failures and disasters like the Great Leap Forward and the resulting famine, this period laid the basis for subsequent growth. State ownership and planning played the historic role assigned to the bourgeoisie.

If we view this period in Chinese history as ‘socialism’, in which the working class ruled China through soviets, we have to explain how the working class was removed from power. But if we can recognise the difference between a peasant-based Maoist Communist Party and the rule of the working class then there is no problem. In the Maoist period China remained a peasant-dominated rural society. The state began the task of employing industrial wage labour. It could hardly yet be called full-blown capitalism.

The Maoist period was no more than the primitive beginnings of ‘capitalism with Chinese characteristics’. Bourgeois ideologues like to paint the Maoist period as a complete disaster because they view any revolution with fear and disdain. But their theory cannot explain the higher rate of accumulation than a more conservative India. It is worth quoting Will Hutton, who gets to the heart of the issue. He says: “Today’s China could not have started from nothing in 1978".49

It didn’t. Charlie Hore continues Hutton’s theme. He says: “The economy was not a complete failure under Mao Zedong. There was substantial economic growth, and both living standards and life expectancy rose substantially after 1949.”50 In the 1980s the township and village enterprises encouraged by Maoist decentralisation began to blossom. It was Mao who welcomed Nixon to China as the political beginning of the opening up to the world market.

The events in 1989 in Tiananmen Square add one more piece to the jigsaw. First it shows that the workers, students and intellectuals did not have political power. With the development of capitalism in China ordinary people wanted more freedom and more rights. The working class needs democracy if it wants liberation. But the proto-democratic revolution was crushed. The multinational corporations recognised one stable power in China. It was not the working class. Since the 1990s foreign direct investment has flowed in more freely to exploit the workers.

Back to the working class

How can we understand what is happening in China? Is it private capitalism, market forces, and multinationals replacing socialism with capitalism? Is it proof that state capital, one-party rule and central state planning really works after all? The issue is not which is the best type of capital. The question comes back to the working class.

The one factor missing from view, unseen and unknown, is the working class. In 60 years the Chinese revolution freed the peasants to become workers. The real source of all this accumulated capital has been the hard work, sweat and toil of millions of new workers. For capital, China is a vast pool of cheap, exploitable labour.

I have concentrated on the accumulation of capital. But on the other side of the coin is proletarianisation. China is becoming a working class country. That should fill us with optimism for the future. It is the struggles of the new working class that will make the world a different place. Surely that is an argument for Chinese workers to support a new international revolutionary democratic communist party.


1. China Daily January 19 2008.
2. China Daily January 18 2008.
3. Ibid.
4. Ibid.
5. The Economist October 2 2004.
6. C Hore International Socialism spring 2008, p147.
7. Mobo Gao The battle for China’s past London 2008, p178.
8. See G Chin Building capitalism with Chinese characteristics York, Canada, 2003; and N Holstrom, R Smith, ‘The necessity of gangster capitalism: primitive accumulation in Russia and China’ Monthly Review February 2000.
9. The Economist September 1 2007.
10. China Daily January 17 2008.
11. Ibid.
12. The Economist September 1 2007.
13. Ibid.
14. The Economist March 25 2006.
15. The Economist January 8 2005.
16. The Economist March 25 2006.
17. The Economist January 12 2008.
18. Ibid.
19. Ibid.
20. The Economist September 29 2007.
21. The Economist January 31 2008.
22. The Economist February 14 2008.
23. Ibid.
24. Ibid.
25. Ibid.
26. Ibid.
27. Ibid.
28. The Economist March 13 2008.
29. Ibid.
30. Ibid.
31. Ibid.
32. Ibid.
33. Ibid.
34. Ibid.
35. The Economist January 17 2008.
36. China Daily January 18 2008.
37. Quoted in C Hore International Socialism spring 2008, p141.
38. The Economist July 26 2007.
39. Ibid.
40. The Economist January 17 2008.
41. The Economist January 8 2005.
42. The Economist September 29 2007.
43. The Economist August 4 2007.
44. The Economist March 13 2008.
45. Quoted by C Hore International Socialism spring 2008, p149.
46. Ibid.
47. M Hart-Landsberg, P Burkett China and socialism: market reforms and class struggle New York 2005, p121.
48. Ibid p48.
49. Quoted by C Hore International Socialism spring 2008, p142.
50. Ibid.


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