SHA 315
China Business and Economy
State Capitaism
Westerners bring assumptions about business and government to China:
Governments must get out of economy for growth and prosperity
Governments in economy = bad business; no competition; government entrepreneurs = oxymoron
More prosperity = more democracy as business demands to control the economy and express political views
The rule of law and an effective legal system to protect private property rights is a prerequisite for economic growth – entrepreneurs will not take investment risks unless their property is secure from government takeover
Does China support these conclusions?
Naughton, 297-328
Ownership and Management of firms
What is the connection between TVEs and traditional SOEs?
Do they operate the same way?
Owned and Governed same way?
What does reform of TVEs mean?
Early form of state capitalism – easily transformed into an enterprise with state ownership and some exercise of control over management for state strategic purposes
Company Law of 1994
Legal basis for various ownership options
SOE reform – big bigger (strategic and scale economies) and small let go
What is the connection between opening the economy to more FDI and reform of SOEs during the 1990s?
Increase competition through market forces – use as a basis for weeding out
Some decline in State-controlled SOEs and TVEs
Rise of joint stock companies and FIEs
Many joint stock companies: state retains controlling share and sell shares in IPO
SASAC – state acts as mutual fund with big teeth; but nomenklatura role of Party undermines effectiveness as economic decision maker
Page 305 SOE profits
Chinese banks have to learn how to operate as real banks and discipline
firms with loans rather than bail out such “zombie” firms
Debt-equity ratio – 307
Government bailout of banks – inject funds and get ownership shares of weak-bad firms
Hard Budget/Soft Budget
Need to recognize the emergence of many firms that are market-based but state-owned
Also considerable abuse of ownership and managerial position in SOEs – asset stripping
Dickson
Wealth and Power
What were the purposes for the overt and covert incorporation of private entrepreneurs into the CCP?
Cooperation and cooptation
Surveys of capitalists and CCP on effectiveness of cooptation strategy show that it has worked to align viewpoints and capitalists have become among the CCPs biggest supporters.
Multiple studies of Chinese capitalists have confirmed these findings
Block organized demands for political change the CCP cannot control
Accommodate some and suppress others
Expectations that new capitalists will become agents for change and political advocates for democracy
Years after 1989, private firms were subject to some harassment and had difficulty having their private property protected
After 1992, this changed with rapid growth in private firms.
SEE CHART page 833
2001 Jiang Zemin moves to promote acceptance of private actors into the CCP
2004 constitutional protection for private property
TVEs become private – sort of – many are red hat collectives
1996-2001 massive restructuring of SOEs
Hu and Wen incorporate private owners in decision making and promotion
Red (hat) capitalists – about 1/3 of private entrepreneurs are members of the CCP A much higher proportion were members of the CCP before they became an entrepreneur (xiahai capitalists) than were recruited into the party after opening a business
See 838-40 for data on this latter group
Larger firms are more likely to be red hat; want young, male and well educated; women only if they are well educated
Membership in CCP brings more scrutiny from the Party
Red Hats also have a small but significant role in political positions
Converging policy preferences for Red Hats and CCP – data 848-851
ABSTRACT Is privatization in China leading to political change? This
article presents original survey data from 1999 and 2005 to evaluate the
Communist Party's strategy towards the private sector. The CCP is
increasingly integrating itself with the private sector, both by co-opting
entrepreneurs into the Party and encouraging current Party members to go
into business. It has opened the political system to private entrepreneurs,
but still screens which ones are allowed to play political roles. Because of
their close personal and professional ties, and because of their shared
interests in promoting economic growth, China's capitalists and communist
officials share similar viewpoints on a range of political, economic and
social issues. Rather than promote democratic governance, China's
capitalists have a stake in preserving the political system that has allowed
them to prosper, and they are among the Party's most important bases of
support.
The CCP banned the recruitment of entrepreneurs into the Party in 1989, but during the 1990s, many local Party officials quietly co-opted entrepreneurs in violation of the ban. In 2002, the CCP revised its constitution to legitimize this informal practice. Both the informal co-optation and the formal endorsement of recruiting entrepreneurs were designed with two goals in mind: first, to seek co-operation between the state and private enterprises, which are responsible for most new growth and job creation, central elements of the CCP's claim to
legitimacy; and second, to prevent entrepreneurs becoming an organized
opposition.
Red capitalists:
the CCP's co-optation strategy has largely been successful. Because of their close personal and professional ties, and because of their shared interests in promoting economic growth, China's capitalists and communist officials share similar viewpoints on a range of political, economic and social issues. In short, rather than promote democratic governance, China's capitalists have a stake in preserving the political system that has allowed them to prosper. They do not pose an immediate threat to the CCP; indeed, they are among the Party's most important bases of support.
What does this say about the actual or potential antagonism between the CCP/Government and China’s private capitalists? Why are US capitalists so anti-government?
What is the existing explanation of how economic growth should lead to democratization? Role of independent power held by capitalists.
The CCP has not been a passive actor in this process, but instead has taken steps to prevent organized demands for political change emanating from outside the Party. It has selectively accommodated some interests while suppressing others. In particular, it has limited the types of organizations that can exist, allowing the ones it feels can be beneficial to its policy agenda and suppressing those it deems a potential threat to its political power. It screens which individuals are elected or selected for political posts, thereby deciding who can be active in the political system. It carefully monitors the flow of information via the media and the internet, and while dissenting views occasionally appear, they are normally quickly removed.
Only a fraction of the current generation of private entrepreneurs has both the ability and desire to confront the state in defense of their interests, and many of them have already found non- democratic means for promoting their interests.''8 Similarly, An Chen concluded that China's bourgeoisie ``have a taken-for-granted personal stake in preventing regime change,'' largely because of their corrupt and familial ties with the state. In China's transition economy, the winners in economic reform have supported further reform in that realm, but they have not supported political change. While individual entrepreneurs may be outspoken supporters of political reform, China's private entrepreneurs, like capitalists in other countries, have been generally ambivalent about the need for and benefits of democratization, preferring the authoritarian regime in which they have thrived to the uncertainty inherent in a new and untried political system.
From Fear of the Private Sector to Cooptation
As the post-Mao reform era unfolded, the private sector began to re-emerge,
initially comprising street vendors and very small-scale firms, and later
expanding to include much larger industrial and commercial enterprises. For
most of the 1980s, the private sector was limited to individually owned
enterprises (getihu). To avoid the appearance of ideologically proscribed
``exploitation,'' these enterprises could only hire fewer than eight workers,
although in practice many exceeded this limit. The ban on recruiting private entrepreneurs into the Party and the circumvention of it by some local Party leaders was a prominent source of inner-Party debate throughout the 1990s. During these years, entrepreneurs were subject to harassment and even
imprisonment for violating ill-defined laws and regulations concerning their
business activities, their private property rights were not protected by law, and
their factories and land could be confiscated without compensation. To protect
themselves, many private enterprises became ``red hat collectives'': they were for all intents and purposes privately owned and operated, but were formally
registered as collective enterprises, which are essentially state-owned enterprises under the control of local governments.
The rapid expansion of the private sector began in 1992, following Deng Xiaoping's much heralded ``southern tour.'' In the years after 1992, the number of private enterprises grew by 35 per cent per year. Together with the growth of the private sector came greater political and legal protection.
Why did the CCP embrace an expansion of the private sector in China? Did this mean the CCP was renouncing state enterprises and was not ready to reduce dramatically the role of the state?
Gallagher sees FDI stimulating competition, which was a seen as a way to inject dynamism into the economy. Was this also a way to promote state entrepreneurial capitalism?
On 1 July 2001, the 80th anniversary of the founding of the CCP, Jiang recommended that private entrepreneurs be allowed to join the CCP, ending a ban that he himself had announced in August 1989. Under the new leadership of Hu Jintao and Wen Jiabao, the CCP became more cautious in trumpeting the benefits of privatization, but no less determined to continue the process. In 2003 the Third Plenum of the 16th Central Committee followed up the earlier pledge to support, encourage and guide the development of the private sector by approving the equal treatment of public and non-public enterprises regarding investment, financing, taxation, land use and foreign trade, and committing the CCP to adopting ``a modern system of property rights,'' to benefit both the public and private sectors.
By 2004, over 90 per cent of TVEs were registered as privately owned.26 In many cases, privatization was more formal than real because many TVEs had been ``red hat'' collectives, but exactly how many fit this description is not known.
A growing number of entrepreneurs are red capitalists: in the late 1990s,
approximately 20 per cent of entrepreneurs were Party members, and by 2004,
that number had grown to almost 35 per cent. In comparison, less than 6 per
cent of the total population belongs to the CCP. The much higher concentration
of Party members among private entrepreneurs shows the growing integration of
political and economic elites in China.
target the owners of large-scale enterprises. These large firms employ more
workers and contribute more tax revenue to local coffers, and therefore are
particularly important to the local economy and more suitable for Party-
building efforts. Other factors that influenced the CCP's co-optation strategy are consistent with the Party's general criteria for recruiting new members: the CCP prefers young, male and highly educated candidates for membership. The growing integration of political and economic elites can be seen not only
in the institutional ties detailed above, but also in the converging policy
preferences on key issues related to development and its consequences.
Did the “privatization of SOEs in the 1990s get the government out of business and permit the economy to grow? Or,
Did the state retain substantial equity interests in many “privatized SOEs
Did the state enhance FDI and foreign presence in the economy to bolster competition for Chinese firms (hybrid) and thereby create red capitalists? Was the state trying to enhance the level of competitiveness of firms that retained connections to the government?
Sources of social support for China’s current political order: The “thick embeddedness” of private capital holders
Christopher A. McNally, Teresa Wright
Why hasn’t massive economic growth and the explosion in the size and economic power of the capitalist class led to radical political change?
Why hasn’t some form of cascading institutional change led to cascading political change?
contrary to conventional expectations, China’s capitalists appear to have little interest in pushing for systemic political reforms, but instead seem to seek to embed themselves in the party-state, thereby perpetuating Chinese Communist Party (CCP) rule.
this article investigates the nature and implications of the political embeddedness of China’s private capital holders. The embeddedness of these individuals is “thick” in the sense that it encompasses an inter- twined amalgam of instrumental ties and affective links to the agents and institutions of the party-state. Thick embeddedness therefore incorporates personal links that bind private capital holders to the party-state through connections that are layered with reciprocal affective components. Such close relations work against the potential interest that private capital holders might have in leading or joining efforts to press for fundamental political liberalization.
this “thick embeddedness” is not solely instrumental. Rather, instrumental ties are layered with guanxi and kinship ties – personal links that bind this group to the party-state through sentiment and a reciprocal affective component.
the key is that China’s leaders have successfully embraced and encouraged economic freedom while simultaneously restricting political freedom. In a somewhat more hopeful reading of the policies of post-Mao CCP elites, some argue that significant administrative reform has resulted in a party-state that is much more institutionalized, meritocratic, and responsive to public sentiments and grievances.
From a legal standpoint, private businesses in China may be divided into two groups: first are small enterprises with fewer than eight employees the getihu; second are larger enterprises with eight or more employees private entrepreneurs. Getihu typically run firms that involve family members and rely on very limited capital. In general, these entrepreneurs are not prosperous, but rather are situated within China’s lower classes. Thus, in official Chinese government documents getihu are not considered “private entrepreneurs” or “private capital holders.”
China’s private entrepreneurs are at the helm of the most dynamic and rapidly growing sector of the economy. Domestic private enterprises account for between one third and one half of China’s GDP, employ more than 100 million people, and, together with foreign-invested private firms, provide an estimated 75 percent of employment growth and 71 percent of Chinese tax revenues