Capitalism with Chinese Characteristics

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Yasheng Huang (2008). Capitalism with Chinese Characteristics

Chinese Capitalism


If you are interested in this book, please make sure to buy it through our associate link here. It will not cost you any additional money and you will help The Confucian Libertarian to keep growing.


When in December 4, 2004 Lenovo Group acquired IBM’s PC division for $1,750 million –which has been recently followed by IBM Business servers by $2,300 million–, those yearning to worship idols with feet of clay hastened to state that the West had finally fallen. Richard McGregor from the Financial Times wrote that this was “a symbol of a new economic era, of how a fast-rising China had suddenly grown powerful enough to subsume an iconic American brand.” There were economists who spoke of an inescapable “new world order,” whereas Paul Krugman saw it as a serious challenge for the United States.

As the saying goes, China is a sleeping dragon bent to conquer a doomed capitalist world, both economically and culturally. Or so they say. Capitalism with Chinese Characteristics presents the opposite view: that the “functional-efficiency perspective on China” defended by many economists with mathematical models is false (p. 28) and that the economic reforms that had helped China to open up to the world had taken place in the 1980s but, contrary to common belief, they came to an end after June, 1989 –the date of the Tian’anmen Massacre.

Yasheng Huang, who teaches political economy and international management at the Massachusetts Institute of Technology, offers a well-documented synthesis of Chinese national archives, bank documentation, statistics on recruitment, etc., in order to shape a very different image of the economic processes of China:

“Private entrepreneurship, facilitated by access to capital and microeconomic flexibility, was at the center of China’s takeoff in the 1980s. The political system, then as now, was authoritarian, but it was moving in a liberal direction” (from the frontmatter).

The key to understand this shift of direction in Chinese economics in the 1990s is the existence of “two Chinas – an entrepreneurial rural China and a state-controlled urban China”, the latter being the one which took control of the economy after the Tian’anmen Massacre, reversing many of the rural reforms led by Deng Xiaoping after the turmoil of the Cultural Revolution (1966-1971). Economists have been looking in the wrong direction because “this reversal does not show up in the GDP numbers, [but] it shows up in the welfare implications of growth” (frontmatter).

Divided into five main chapters, Professor Huang’s book starts analyzing to what extent we can talk about capitalism in China and how the classical liberal economic theory can explain that a country with almost no private sector can have such an incredible growth. A personal anecdote at the beginning of the book is worth mentioning to illustrate the first point: when the author was conducting field research in Shanghai, he asked a government official about private entrepreneurs, but he obtained an astonishing answer: Why would a Harvard professor be “interested in those people selling watermelons, tea, and rotten apples on the street?” (p. ix).

First, the author dissects the circumstances of China during what he calls the eight years of “the entrepreneurial era” (1980-1988). After Lin Biao’s death in 1971, the policies associated with the Hobbesian Cultural Revolution started to be rolled back and, under Deng Xiaoping, rural entrepreneurs could finally open and expand their own businesses and, for the first time in many years, they were allowed to acquire and accumulate private property without risking prison. Although political change was remarkable for its absence, the public perceived a gradual increase of freedom due to changes in the financial system, especially in the most decentralized rural zones in the country. This was the authentic “Chinese miracle,” created in the 1980s by low-income entrepreneurs thanks to the liberalization of the market and the closure of unprofitable state companies (pp. 35 ff.).

However, the result of economic freedom is the desire of freedom in other non-economic areas: higher purchasing power implies higher opportunities for people through education and independence which, on the other hand, also reduces the level of state control. When you do not have to worry about what you are going to eat, former luxuries may become essential necessities. You may want a better car, a better house, and a better life. You want to express yourself freely because, well, now you have time to think and worry about many other issues. The 1980s financial liberalization was seen by the new students educated after the Cultural Revolution –some of them in foreign countries– as the backbone for new political reforms, which were meant to consolidate democracy, human rights and freedom of speech. Students in many cities demonstrated against the Chinese Communist Party between 1986 and 1989 (pp. 20 ff.). But the movement ended on June 4, with the People’s Liberation Army firing on students and unarmed civilians in Peking, Chengdu and, probably, other cities.

After the massacre, repression in the cultural and ideological sphere was severe and repercussions were to be felt up to this very moment. Censorship increased, nationalist indoctrination permeated everything, and history books were rewritten to accommodate these new policies. But the private sector was also sanctioned by the new leadership, who launched a systematic crackdown on entrepreneurship: private firms were shut down, credit was tightened, and rural entrepreneurs were over taxed by the state. During the “Tian’anmen interlude” (1990-1992) fixed-asset investment decreased from a 19.1% in the 1980s to 1.1% in 1992 (p. 21).

But to get the Chinese story Right there is one additional aspect we should understand about this period: the nepotism inherent in the Chinese institutions. The pre-Tian’anmen leadership came from rural centers –Zhao Ziyang, Wan Li or Tian Jiyun–; the post-Tian’anmen elite –Jian Zemin, Zhu Rongji, etc. –, however, came from the least reformed urban center: Shanghai (p. 41). Thus, new economic policies not only restricted the private sector, but they also benefited urban centers that were relevant to the government: Shanghai and the capital, Peking. Rural experiments were discontinued, administration became more centralized, and the income of families from rural areas declined to such an extent that a great percent of people from the most prosperous regions of China emigrated to other countries looking for better opportunities. It is not by chance that Chinese immigrants in Europe come from Zhejiang, Guangdong, and Fujian, the most flourishing provinces during the 1980s. Finally, the size of the government also increased exponentially and, together with it, bureaucracy and corruption.

Now, how did the new leadership fund their new projects, Peking and Shanghai? That is to say, how did the modern cities of the east coast get built under their authoritarian and restrictive measures, which meant moving back to Maoism? Who paid for it? Huang offers a conclusive answer: entrepreneurial rural China paid the prize, and not only economically. “China experienced a sharp rise in adult illiteracy between 2000 and 2005, all of which took place in the rural areas [….] there was an increase of 30 million illiterates”, about 3%. Likewise, poverty descended drastically during the 1980s, but rose again in 2001 (p. 43).

This brings us to the initial question: Lenovo. Huang shows that all these companies that year after year captivate Western economists are not a sign of China’s economic power but of its weakness, its hypocrisy, and its impracticability. Because Lenovo, Sina, UTStarcom, Ting Hsin, Asia Info and more than 500 other shining Chinese firms are registered as FIEs in Hong Kong –Foreign Invested Enterprises, or foreign-owned companies that, under the jurisdiction of the Foreign Equity Joint Venture Law, have a more liberal operating space than domestic private firms (others such as Galanz, Wahaha, or Haier, are either joint ventures or their product units are also FIEs).  As a matter of fact, in the 1980s the Chinese government denied Lenovo a production license in computer manufacturing, granting it to the Great Wall Group, a state owned enterprise. Lenovo moved to Hong Kong and started producing computers as a foreign firm and, after some time, the state sponsored Great Wall Group failed badly (pp. 4-5).

Chinese economic future does not seem very promising. If China does not reform itself quickly, corruption, real state bubbles, increasing illiteracy and poverty will cause it to suffer the same fate as many countries in Latin America (pp. 43-45). However, the post-Tian’anmen generation will not learn the lessons of the past. Censorship has increased in the last five years: Kate Winslet nude in James Cameron’s Titanic could be seen in 1997 but it was removed in the 2012 release in China; many Chinese websites which were sharing pre-1949 scanned books have been suspended or its access privileges limited (meaning that they can only be accessed from within China); and Hong Kong has received an alarming number of cyber-attacks on the occasion of the June 22 Civil Referendum. The economic reforms behind Lenovo’s position as a FIE did not bring more openness and entrepreneurship in China, but they resulted in increasing control over the foreign investment centers of Hong Kong (the so-called “White Paper”) and Taiwan, which has been labeled “A second Hong Kong” following the undemocratic and one-sided agreement between Ma Ying-jeou and Peking (the likewise so-called “Black Box”).

A note for libertarians: as Reihan Salam famously said, “the belief that we had much to learn from the Soviets was both dangerous and stupid. And much the same can be said for the current enthusiasm over China’s economic model.”


If you are interested in this book, please make sure to buy it through our associate link our associate link here. It will not cost you any additional money and you will help The Confucian Libertarian to keep growing.

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