Published: 22:35, May 28, 2024 | Updated: 09:44, May 29, 2024
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China is a socialist market economy
By Ho Lok-sang

A Fudan University professor of international relations and its China Institute director, Zhang Weiwei, during one of his famous lectures, explicitly refuted the notion that China is an example of “state capitalism”. He explained that China’s economic system is intrinsically socialist. Even though China has adopted the market system to assist with its economic decisions about what to produce, how to produce, and for whom to produce, China’s system is not capitalist because China is not just after profit. It seeks to give its people and people in the world a good life.

Many China watchers think that the country has evolved from a socialist system to a capitalist system. 2007 saw the promulgation of the Property Law of the People’s Republic of China. Many of China’s enterprises have listed in Shanghai, Hong Kong, Shenzhen, and more recently Beijing stock markets.

China’s economic reform, announced in December 1978, has lifted China from a poor country into an upper-middle-income country. Since China’s accession to the World Trade Organization, the country’s manufacturing industry has grown at an amazing speed. Today China produces 28.1 percent of the world’s total manufacturing output, far ahead of that of the US at 16.6 percent and those of Japan and Germany at 7.5 percent and 5.8 percent respectively. China’s manufacturing prowess, not surprisingly, is perceived to be a “threat”. But China just manages to produce with greater efficiency and thus lower cost.

Many China-watchers reason that this tremendous success must be due to “unfair” trading practices that are backed by the Chinese government; so, China must be an example of “state capitalism”.

An easy and lazy conclusion is that China’s achievements must be based on “unfair” subsidies. But other countries are also subsidizing various industries. More important, except for perhaps the United States, subsidies come at a cost. Most governments have to raise taxes, and that raises the cost of living for workers and reduces after-tax profits for firms. The US, exceptionally, benefits from the status of the US dollar and can raise revenue through borrowing, including borrowing from the Federal Reserve. The US is in a much better position to subsidize its industries, which it does.

Even though China has adopted the market system to assist with its economic decisions about what to produce, how to produce, and for whom to produce, China’s system is not capitalist because China is not just after profit. It seeks to give its people and people in the world a good life

Critics of China point to the fact that China’s State-owned enterprises enjoy advantages compared to totally privately owned companies, especially in their access to credit. However, while China’s State-owned enterprises do enjoy some advantages, they also have many responsibilities that are considered socially desirable. China’s State Council Information Office in 2019 reported that a total of 96 centrally administered State-owned enterprises had offered targeted support to 246 poverty-stricken counties, or 41.6 percent of the total key counties under the national poverty-relief program. In addition, they had set up poverty alleviation funds up to 18.18 billion yuan ($2.51 billion) and invested 14 billion yuan in nearly 100 aid projects.

Paradoxically, while many critics call China a case of state capitalism, the US today still does not recognize China to be a market economy. China, however, always holds the market important, noting that “the private sector contributes more than 50 percent of the tax revenue, more than 60 percent of the GDP, and over 70 percent of the technological innovations; it also provides more than 80 percent of the urban employment and accounts for more than 90 percent of market entities in China”, according to a statement of the State Council Information Office in 2022. The same statement noted that the number of China’s private enterprises increased from 10.85 million in 2012 to 44.57 million in 2021.

China is a socialist market economy because capitalism pursues profits, while socialism pursues social betterment. Raghuram Rajan and Luigi Zingales of the University of Chicago published a book in 2003 titled Saving Capitalism from the Capitalists, pointing to the short-termism of a lot of business executives. Although not all capitalists are shortsighted, many are, and they are also liable to put pressure on the government to introduce policies that help them garner bigger profits, even at the expense of the public interest. The narratives that smoking is not unhealthy and that climate change is not scientific are cases in point. The late Milton Friedman famously argued in a 1970 New York Times article that businesses should only focus on making profits. He wrote that businesspeople who espouse corporate social responsibility (CSR) “are unwitting puppets of the intellectual forces that have been undermining the basis of a free society” and are “preaching pure and unadulterated socialism”. It was sad to see Friedman, a winner of the Nobel Memorial Prize in Economic Sciences, calling socialism incompatible with a free society. He really should have respected the freedom of free thinkers who can see the bigger picture and who stand up for CSR.

In real life, even in capitalist countries like the US, not all businesspeople have only profits in their minds, and in socialist countries like China, not all businesspeople care for the well-being of society at large. China’s leaders, however, are not beholden to vested interests as US leaders are.

In real life, in a socialist market economy like China, we saw the demise of Evergrande; in a capitalist market economy like the US, we saw the demise of Enron. There are not really that many differences between the two economies. We should fight short-termism together.

The author is director of Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.

The views do not necessarily reflect those of China Daily.