A review article on ‘The Writing on the Wall: China and the West in the 21st Century’ (by Will Hutton)

Has capitalism been fully restored?

China is experiencing phenomenal economic growth as it opens up to the capitalist system. Remarkably, this policy is being driven by the Chinese Communist Party, in power since the revolution of 1949. This raises many questions: on the nature of China’s state and economy; on how long it can continue down this road; and to what final destination.

Will Hutton out his stall on the second page of the preface of his new book, when he writes: “The central argument in this book is that if the next century is going to be Chinese, it will be only because China embraces the economic and political pluralism of the West in general and our Enlightenment institutions in particular modified, of course, for the Chinese experience”.

The ‘West’ is synonymous with capitalism and ‘Enlightenment institutions’ equals capitalist democracy. He further states: “The current Chinese economic model is unsustainable, which will have important implications for the capacity of the Communist Party to run China as a single-party authoritarian state”. Moreover, “simple extrapolations of China’s continued growth at current levels for the next 40 or 50 years are misleading”.

Will Hutton, therefore, like a growing band of strategists of capitalism, is concerned that China, rather than acting as a massive blood transfusion for capitalism on a world scale, can turn out to have the opposite effect. It can enormously compound the problems of the system he defends and possibly act as a trigger for a systemic crisis. This is why Hutton has engaged in a two-year project of close observation and analysis of the development of China, culminating in this book, which is forensic – though not exhaustive by any means – on the process of capitalist restoration in China today.

Hutton describes, with an abundance of facts and figures drawn from numerous sources, the extremely contradictory character of the Chinese economy and state at this stage. Marxists have also been and debating the issues raised by Hutton, for instance in the ranks of the Committee for a Workers’ International (CWI), over the past period. The “direction of travel”, as the Financial Times writer Martin Wolf has commented, is clear: it is in the direction of a full capitalist economy.

However, as Hutton demonstrates, China has not arrived at this situation yet. This arises from the fact that the Chinese elite, ever since Deng Xiaoping, has embraced the idea of restoring elements of capitalism to China. The country has been engaged in an almost 30-year long process of restoring capitalism. But the Chinese elite and state, both those with ties to the former Maoist-Stalinist state and an increasingly capitalist sector and state, have been at pains to avoid the ‘big bang’ return to capitalism witnessed in Russia in the early 1990s and the dire industrial and social consequences which flowed from this. In an attempt to prevent the social upheavals that would flow from a capitalist ‘big bang’, the Chinese regime has created a society torn by conflict and contradictions. It now faces a different but no less daunting situation than that which confronted the Russian elite in the early 1990s.

Hutton states that China “is neither a communist nor a capitalist economy”. (p8) He writes: “There has been no top-down ‘big bang’ initiation of privatisation, price liberalisation and democratisation as in Eastern Europe”. (p95) At the same time, China has been engaged in “phasing out planning with as few losers as possible”. (p97) Therefore, China is not a planned economy, even one bureaucratically managed from the top by a Stalinist elite, like that which resulted from the Chinese revolution of 1949.

Specific features

Hutton, ever so politely and hesitatingly, separates himself from the sweeping condemnation of those like Jung Chang and Jon Halliday in their book, Mao: The Unknown Story, particularly when they brush aside the achievements of the planned economy under the Maoist-Stalinist elite. Hutton correctly states: “For the majority of Chinese, the revolution of 1949 ranks alongside the world’s other great revolutions”. (p86) However, at the same time, the character of this economy was not an exact copy of what had developed in Stalinist Russia. The very scale of the country (although the Soviet Union was bigger in its landmass), the size of its population embracing one-fifth of humankind, the remoteness of huge swathes of the country, with the majority of the population peasants, historically put its stamp on the character of Chinese society and the state form which existed at each stage. This led to a huge element of decentralisation, which even the Mao regime was not able to overcome. Moreover, Mao Zedong himself, unlike Joseph Stalin and the bureaucracy in Russia, while he zigzagged from centralisation to decentralisation, still always retained a large element of decentralisation which was inevitable given the cultural level and size of the country.

The contrast between Stalinist Russia and Mao’s China was quite stark in some features of planning in the economy. For instance, the prices of only 1,200 commodities were set centrally in China while under the Russian plan 25 million prices were bureaucratically governed from the centre. Moreover, control ‘from below’, not by the working class or poor peasants but by regional or localised bureaucracy, was quite pronounced under Mao. Hutton informs us that in 1970 Chinese provinces managed most state-owned enterprises, with central government running only 8% of industrial output. By 1975, provincial and local governments were responsible for about 60% of all state investment and for the greater part of the plan. Only key commodities like coal, timber and cement were organised from the centre. Hutton comments: “State-owned industries might have their inputs, outputs and prices set by the plan, but a report by the World Bank argues that 30,000 medium-sized and 150,000 small industrial organisations were largely free of the plan”. (p83)

These specific features of China did not cancel out the character of the country under Mao and even Deng initially as a planned economy, although with large elements of regional and local control. Similar factors play a part in China today, which complicates the task of understanding the precise stage at which the Chinese economy is currently. But Hutton declares bluntly: “The Chinese economy and the Chinese Communist Party are in an unstable halfway house – an economy that is neither socialist nor properly capitalist, run by a party that is neither revolutionary nor subject to the normal constitutional checks and balances of even China’s own Confucian past, let alone the Asian or Western present”. (p117) He further states: “The real preoccupation of the Chinese is shown in their unwillingness to privatise, to sell majority control of state-owned enterprises to private investors on the stock market, to reduce the party’s influence on the banking system”. (p97)

A considerable, purely capitalist sector has undoubtedly developed through the medium of foreign investments with nearly 90% directed towards the coastal provinces, particularly in the south, and two thirds of it in manufacturing. Fifty-five percent of China’s exports are made by foreigners and, generally, the more high-tech the industry the more foreign capital plays a decisive role. More than 80% of electronics and telecommunications exports are made by foreigners, as are 70% of plastics and 60% of electrical goods. This has, of course, resulted in China being dubbed as the ‘world’s workshop’ but, in reality, it is the mass assembler of goods manufactured elsewhere, particularly in neighbouring Asian countries.

A consistent complaint is that the massive exports from China – it could become the world’s leading manufacturing exporter by 2010 – have the label ‘Made in China’ but not ‘Made by China’, in the sense of native Chinese industry. This reliance on foreign direct investment (FDI) for growth is much higher than many of the ‘tiger economies’ in Asia in the period of their rapid development. This is one reason why China has not managed as yet to develop a significant number of international companies and ‘brands’, as the tigers and particularly Japan did at an equivalent stage of their development. Of the top 250 ‘competitive edge’ companies in the world, not one is Chinese. Of the world’s top 100 brands in 2005-06, according to Business Week, it also did not have one featured brand. And of the world’s top 300 companies ranked by research and development expenditure, China only had one company. One of the reasons for this, Hutton argues, is that while the Chinese state has encouraged and presently still tolerates massive FDI, because of the holding back of domestic Chinese capitalism – due to the hesitation and ‘mixed’ character of the economy – China has become increasingly part of a supply chain for other capitalist producers rather than ‘a player in its own right’.

The zigzags of the Chinese state are themselves determined by the fear of the governing elite that the already gathering mass discontent at the effects of a movement towards capitalism will result in the floodgates being burst open and the possibility of revolution developing. This itself determines the contradictory character of what Hutton correctly calls the process of a “transition to capitalism”. On the one hand, he explains that “there are some six million owners of private firms in China; about two thirds are former state officials”. (p137) Then again, Hutton points to the fact that the regime of Jiang Zemin, the forerunner of Hu Jintao, the current leader, ruled in 1998 that the PLA (People’s Liberation Army) which had been one of the leaders in developing production resources to help growth – running coal mines, airlines, telecommunications companies and hotels – was ordered to “divest itself of its businesses”. (p125)

It is interesting that the reason given for this by Jiang was that “the military must no longer be in business… otherwise, this tool of proletarian dictatorship will collapse, and the socialist state power will change colour”. (p125) Terms like “proletarian dictatorship” and “socialist state” are misnomers, do not accurately describe China, but Jiang’s comments do indicate, nevertheless, that even the present Chinese state – not just the economy – has a ‘mixed character’, with big remnants of the Maoist-Stalinist regime. This presents a challenge to Marxists in determining the character of the state at this stage.

The character of the state

From Karl Marx himself, scientific socialists have argued against reformists that the state in some way stands above classes, is ‘neutral’ and is capable of playing an ‘independent’ role from the ‘economically dominant’ class in society. This basic position retains all its force, particularly in societies like Britain and the advanced industrial countries where class divisions are starkly revealed and the state is clearly the instrument of the ruling class, the capitalists. The top echelons of this state – the civil service, army, police, etc – are drawn from the ranks of the ruling class or the upper layers of the middle class and are trained and schooled in the traditions and methods of the dominant class’s rule.

However, Marx also developed the idea of the ‘Bonapartist’ state which, while it ultimately represents the dominant class in society, can, under certain conditions – for instance, where there is a class deadlock – play a relatively ‘independent’ role, only defending the dominant class ultimately and not without sometimes striking blows against the class it ostensibly ‘represents’. Moreover, in societies less economically developed, particularly in conditions of extreme cultural backwardness, this Bonapartist character of the state can, at least for a period, play a mediating role, sometimes appearing ‘neutral’ in arbitrating between the classes and only coming down on one side, sometimes after a considerable historical period, when one of the contending economic forces and classes or groups it represents is clearly in the ascendancy.

Many of the states in the neo-colonial world in the 1960s and 1970s possessed some of these features. A number of them carried through significant nationalisation of industry, sometimes taking over the majority of industry – Libya, Algeria and others – and yet the states in these societies were not characterised by Marxists as ‘workers’ states’, even of the ‘deformed’ character described by Leon Trotsky in his analysis of Stalinism. Torn by contradictions, which threatened to consume these societies in virtual perpetual civil war, particularly with the withdrawal of direct military rule by imperialism, the state did play the role of mediator and occupied a certain ‘neutral’ position in developing ‘the nation’ for a certain historical period.

The present Chinese state shows some of these features today. Not just the Chinese economy but the Chinese state itself is of a ‘mixed character’, with significant remnants of the Maoist state machine retaining an important influence. This is entirely different to the state machine which ushered from the ‘big bang’ in Russia in the early 1990s, when the remnants of the pro-Stalinist bureaucracy were completely cleared out and the untrammelled rule of the ex-bureaucrats who had gone over lock, stock and barrel to capitalism ruled the roost, and have done since. Vladimir Putin came from the ranks of the KGB secret police (Komitet Gosudarstvennoy Bezopasnosti – Committee for State Security) but the former KGB state machine, which is an important base for him, reconstituted as the FSB, is rooted firmly in present-day Russian capitalism.

This, however, has not stopped this representative of Russian gangster capitalism from striking a blow at sections of the new Russian bourgeoisie – witness the attacks on former oligarchs like Mikhail Khodorkovsky – in the ‘interests’ of the Russian state and the ‘future of Russia’. Putin has been prepared to take significant ‘state capitalist’ measures. These have nothing in common with the ideas of ‘state capitalism’ of the SWP in Britain, but of those of Friedrich Engels’s ‘étatism’, the capitalist state stepping in to take over some sectors. Nor do they represent a harkening back to a planned economy. The renationalisation of some strategic industries, particularly in the energy sector, which were stolen from the Russian people in the early 1990s, is aimed at strengthening Russian capitalism and the bourgeois gang around Putin.

Confucian confusion?

The Chinese state, because of its halfway house position and therefore with a large state sector, reaches into society and the economy in a much more ‘controlled’ and pervasive fashion than even Putin’s Russia. Hutton points out: “Since 1998 the party has tried simultaneously to remodel, rationalise and streamline the state. The purpose is only partly to save money. In the main, the party wants to equip the state with structures better suited to regulate and monitor those parts of China’s economy, which it no longer directly owns or plans. The giant Soviet ministries, each responsible for an industry, have been abolished and their functions divided”. (p134) However, “ownership and direction are now delivered by the State-owned Assets Supervision and Administration Commission (SASAC), and a new network of generic regulatory agencies has been created to superintend areas such as environmental protection, intellectual property rights and workplace safety”. (p134)

It is not an accident that Confucian ideas, combined with Chinese nationalism, are used by the Chinese state as an ideological underpinning, given the collapse of ‘socialist ideology’ as the country moves towards capitalism. But the elite’s fear of what will result from this means that Chinese society is reflected in ambiguities and contradictions: “Despite budgetary discipline and the more streamlined state structures, the Chinese political system remains haunted by the ambiguities of communism becoming a post-revolutionary party running a post-revolutionary society and an economy in transition to a form of capitalism”. (p135) The harkening back to the Confucian system is shown in the appointment of state and particularly regional bureaucrats. In the pre-Maoist imperial era, senior officials were not allowed to govern their own town or province, and were regularly rotated out of office after a maximum of ten years. This has now been restored. Under both Jiang and Hu there has been a recentralisation of power because previous decentralisations were taken ‘too far’. It meant that at one stage only 8% of the total tax take of the state went to central government.

These contradictions in the state are mirrored in the economy, as we have commented earlier. There is much dispute as to the exact percentage of the economy in the hands of the state or the private sector. This partly arises from the lack of internationally accepted accounting practices and statistics by the Chinese themselves. Nevertheless, Hutton is probably right when, basing himself on a number of authoritative studies, he concludes: “In collaboration with China’s National Bureau of Statistics, the OECD carefully analysed the 2003 survey of 180,000 industrial firms with turnovers in excess of five million renminbi ($600,000), which together make up 35% of Chinese GDP. Of these, 47.7% were state-owned or collectively controlled, only 13.3% were unambiguously private and 12% were foreign-owned companies. The OECD generously identifies the balance of 27% as privately controlled. For example, it counts legal person shares as non-state and de facto private, although this is factually and legally incorrect, and it interprets majority control by foreign investors of most joint ventures as meaning that the private sector controls the venture, although this too is unrealistic. Two thirds of new foreign direct investment is now done as a wholly-owned foreign enterprise (WOFE) because foreign investors are not prepared to have a contractual relationship with a minority Chinese partner who provides little of the capital but exerts de facto, and frequently counterproductive, control. It is doubtful that more than one third of the 27% the OECD deems as privately controlled would stand up to such a definition under scrutiny. More probably, about two thirds of China’s largest 180,000 enterprises are de facto state-controlled. This conclusion is broadly in line with the results of the study by the World Bank of listed companies cited above”. (pp146-7)

He further adds the telling comment: “China’s approach to private ownership means that attempting to assess how much of China is public and how much private is a fool’s errand because it cannot capture how the party is trying to develop Leninist corporatism”. (p147) Hutton frequently resorts to this phrase ‘Leninist corporatism’ to describe the Chinese regime. It is a contradiction in terms. Lenin had nothing in common with ‘corporatism’, of a capitalist state intervening in the workings of capitalism without in any way infringing the system. Lenin based himself upon the overthrow of capitalism through the self-activity and democracy of the workers’ movement. He established with the Bolsheviks and Trotsky the most democratic state in history, with the election of officials, the right of recall, workers’ and peasants’ councils, after the overthrow of tsarism and capitalism in October 1917.

However, Hutton is correct when he describes the “party-state” as being at the centre of a “spider’s web” of control. Political direction is exercised by the state and the party, with those industries it considers strategic – telecommunications, energy, transport, iron, steel and metal production, automobiles, etc. In order to build an international presence it is encouraging the creation of 57 business groups as strategic pillars of the Chinese economy. Hutton says that, in a sense, this is the “Chinese version of the South Korean chaebol or the Japanese keiretsu. Each group has its own house bank. The two largest groups are in petrochemicals (Donglian and Qilu Petrochemical Groups), and the third largest is steel (Baosteel)”. (p147) But this is not an exact copy of South Korea or Japan. The chaebol quite clearly originated from capitalism and were and are controlled by family groups, which is not yet the case in China. The party is prepared to loosen control in ‘less strategic’ sectors or enterprises, “but the shareholder and accounting structure is such that at any time the party can regain control if it is necessary”. (p148)

Even in privately owned multinationals, such as Huawei, “emerging as a fast-growing manufacturer of wireless equipment and software with a strong commitment to R&D”, the company is “not free from the long arm of the party-state. It operates with a $10 billion line of credit from the China Development Bank; has close links with the Red Army; and, to win business in China’s protected telecoms markets, it is reported to have given controlling shares to the provincial telecoms companies with which it trades. But without transparency, nobody knows where de facto control resides”. (p153)

No-win situation

Hutton is a strong advocate of capitalism, although rejecting some aspects of neoliberal barbarism, and a firm opponent of ‘utopian’ communism or socialism. He wants to sweep away all the ‘ambiguities’ of present-day China and engage in ‘Enlightened’ capitalist democracy. However, the very ‘halfway house’ economy and state is itself a product of the fear of the Chinese elite for what would happen if the control of the state was swept away and untrammelled capitalism became the norm throughout China. Once the state began to demolish the ‘iron rice bowl’ of the Maoist regime and introduce elements of capitalism, the ‘surplus’ population, both in the state sector and the closed-down sections of the economy, and from the rural areas, would have to be absorbed into a growing industry in order to prevent a social explosion. According to Hutton, China has to create 24 million jobs each year in order to avoid this scenario (almost equivalent to the combined population of Belgium and the Netherlands).

Moreover, the attempt of US imperialism in particular to force on China a significant appreciation of the value of the renminbi could seriously undermine this growth rate. The capitalist consensus is that the Chinese currency is ‘undervalued’ against the dollar by anything from 15% to 40%. If the Chinese authorities allow a revaluation to the top figure of 40% it would mean a rise in the value of the renminbi compared to the dollar and China would lose a massive proportion of the $1 trillion reserves, largely in dollar assets, it presently holds. This would be the equivalent of a loss of 3.5% of China’s gross domestic product. At the same time, Chinese agricultural prices, which are now keyed to world market prices, would fall from an already low level if the renminbi was to rise. This would hit rural incomes and would have a disastrous effect on the agricultural areas. This in turn would accelerate the already intense pace of the movement of the rural population to the cities.

An additional complication is that the ability of the rest of the world – particularly the US – to absorb the huge export growth of China is coming to an end. Protectionism, in any case, is likely to grow apace in the US, given the burgeoning trade deficit of $700 billion, $200 billion of which is accounted for by China. Hutton’s thesis is that every year China postpones a decision to limit its accumulation of foreign exchange reserves means that, when a revaluation comes, it will suffer an even greater loss while, at the same time, a deceleration of growth will inevitably expose the weakness in the banking sector, with massive unperforming loans. Hutton contends that China is in a “no-win situation: float [the renminbi] and accept a deceleration of growth, or don’t float and accept a deceleration of growth, if not immediately then eventually”. China, in effect, faces the same dilemma as “Japan experienced as a result of banking weakness in the 1990s”. (p166)

Triggering revolt

There are many other interesting aspects of Hutton’s analysis on the economy but the main political conclusion to be drawn from this book is that China is heading for an almighty social bust-up, in effect a revolution. One of the themes is that a new ‘Tiananmen’ (similar to the revolutionary explosion of 1989) is on the cards. Hutton’s means of avoiding this are, as we have explained earlier, ‘Enlightenment values’. However, the very remedy which he suggests could be the trigger for opening the floodgates of revolution in China. ‘Reform’ from the top has, in history, often acted as the impetus for ‘uncontrolled’ mass movements. This is not only possible but likely in the case of China. The right to strike, democratic elections, a free press, would not be the ‘shock absorbers’ that Hutton maintains.

Under a long-established advanced capitalism, capitalist democracy can act as a lightning conductor for channelling the opposition of the masses into safe channels. That is not the case in China nor is it similar to the situation of the early 1990s in Russia. Then, after the travails of Stalinism, the illusion that Russia could enjoy West German or American living standards rapidly took hold. In answer to this, CWI supporters in Eastern Europe and Russia said: ‘Yes, via Bangladesh’. This prognosis was entirely correct and, if anything, underestimated what transpired as large parts of the former USSR and Eastern Europe have reverted to a position worse than Bangladesh in some respects. But the Chinese masses have had almost three decades of capitalism and, moreover, of the most brutal, despicable variety. Skilled workers’ wages in Guangdong and the other capitalist sectors are one tenth of those, on average, in the advanced capitalist world, and for unskilled workers something like one thirtieth!

The ground has been ploughed by the 87,000 ‘mass incidents’ in one year, big protests by the Chinese workers and poor rural masses. They will accept a fighting democratic programme. Because of the contradiction between the state and private sector, the programme for this struggle will, of necessity, assume a combined character. The present ‘halfway house’ state combines some of the worst features of Stalinism and capitalism. It must be completely dismantled; it is incapable of ‘reform’. In the state sector, Chinese workers will demand workers’ control and management, the formulation of a democratic plan drawn up by committees of workers and the poor rural masses, including the reintegration through renationalisation of viable sections of state industries which have been closed down. In the private sector, including in foreign-owned factories, the working class will demand nationalisation under democratic control and the integration of all industries into a democratic workers’ plan of production in the economy and society in China. This is the most ‘enlightened’ policy for the Chinese masses.

In its day, the ‘Enlightenment’ in Western Europe played an enormously progressive role in the struggle against feudalism. Many of the ideas of the Enlightenment philosophers were an idealisation of the interests of the rising bourgeoisie. The working class, also in its rise, inscribed on its banner democratic rights. The experience under capitalism of the last 200 years, however, is that democracy on a capitalist basis is truncated, hampered and sometimes fatally undermined unless the economic and social basis of society is changed. The irony of China today is that the elimination of landlordism and capitalism gave enormous advantages to China – Hutton admits that, as a result of this, China has a “first-rate infrastructure” – which the capitalists are now attempting to utilise, both in China and worldwide, to give a new lease of life to their system.

Nothing but misery for the many and untold riches for the few are possible on the basis of a resurgence of Chinese capitalism. On the other hand, a new Chinese revolution, albeit with a confused consciousness of the masses to begin with, after the dark age of Stalinism and now the brutalities of 30 years of the attempt to reintroduce capitalism, will be grandiose in its scope and effects on the world. The CWI will follow the struggles of the Chinese masses and assist them in every way in order to achieve a victory in this, one of the decisive sections of the world working class.

‘The Writing on the Wall: China and the West in the 21st Century’ (by Will Hutton), published by Little Brown, 2007, £20

This article will be published in the April edition of Socialism Today

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