China's Economy Dances Between Communism and Capitalism

China is a country of extremes. European cars swerve through traffic barely missing battered Soviet-era motorcycles laden with bounties of plastic and metal recyclables. College students carrying iPads walk past street vendors selling 15 cent eggs in various states of decomposition. While this clear dichotomy is understandable considering the rapid growth of modern China’s economy over a relatively short time period, it is no less startling. And nowhere is this coexistence of extremes more apparent than in China’s official economic policy: a “socialist market economy with Chinese characteristics.”

Washington Post columnist Eugene Robinson instantly recognized the contrast between the socialist assertions and the “hyper-capitalist” feelings that exist today in China. Robinson notes, for example, how the famous portrait of Mao Zedong in Tiananmen Square seems dated in the shadow of the swirling business atmosphere of Beijing. Since the Chinese economy opened up to allow private enterprise in 1978, businesses and companies have sprung up and found considerable success amidst the fierce competition that exists in many strata of society. Private businesses have to compete constantly to fight for market share, both internationally and domestically, with little concern about government intervention. These businesses realize that their competitors will gladly leave them behind as the economy develops.

On the other hand, the Communist Party of China (CPC) carefully directs the country’s growth. Buttressed by government subsidies, state-owned enterprises (SOEs) maintain a dominating presence in the domestic market — largely in the banking, transportation, telecommunication and energy sectors — and often prevent competition. In all, the public sector accounts for approximately 30% of China’s economy. Government presence in the market is apparent in its regulation of the RMB and reserve requirements for banks. Though regulations for the latter have been loosening steadily in an effort to encourage loan availability, SOEs usually receive preferential treatment.

However, many Chinese are quick to rebuff indiscriminate claims that China’s economic system is inferior to those in the West. While deficiencies have been noted in a coauthored report by the World Bank and the Development Research Center of China’s State Council, the system does have its benefits. One oft cited example is the government’s careful direction that helped the Chinese economy weather the global economic crisis. China experienced double-digit GDP growth from 2003 to 2007—hitting a high of 13%. Then in 2008, the government launched a $586 billion stimulus plan. Mr. Cheng Siwei, a prominent Chinese economist and Chairman of China’s International Finance Forum, posited that this strong-arm approach helped insulate China from instability abroad and protected a 9.2% growth, when it could have dropped as low as 2.4%. The centrally controlled market economy allowed the government to disperse the funding quickly with acute oversight and influence as the investments were financed by state backed enterprises. 

The southwest city of Chongqing provides an interesting example of the advantages and disadvantages of this capitalist-socialist- system. Chongqing has lead news stories in recent weeks as its former party chief, Bo Xilai, was recently deposed amidst a high profile political scandal. However, before this upheaval, Chongqing’s GDP experienced rapid progress with 16.4% growth from 2010 to 2011. Many foreign analysts dismiss this rate as dependent on the municipality’s aggressive government spending, mostly on infrastructure and affordable housing, which has increased the city’s debt. Some analysts also question Chongqing's long-term sustainable growth. But, Bo’s economic implementations did not solely focus on public projects and social housing. Rather, as he did in the 1990's serving as mayor of Dalian, a prominent coastal city in northeast China, Bo successfully encouraged a sizable presence of foreign technological companies in Chongqing. The government directed but emphasized business expansion, and cultivated high-tech development. Closely following the tenets of a state directed economy, Chongqing quickly developed into an economic hub while also staying mindful of the lower class.

There is a pride in the benefits that this socialism with Chinese characteristics provided—lifting millions out of poverty, navigating the financial crisis in 2008, and establishing China as the world’s second largest economic power. Still, with these successes in mind, many predict that the government seems to be heading towards greater free market reform, as the World Bank and China State Council report recommends. Premier Wen Jiabo recently voiced a similar desire in a speech he gave in March, calling for increased political and economic reforms. But while change might be in China’s future, people are hesitant to forget the accomplishments of their past and present, and the conversation in the West would be wise to recognize this pride.