What Chinese Capitalists Owe to Mao Zedong

Ho-fung Hung

China did not develop capitalism during the 18th century, despite having a market economy as strong as Britain’s. The raw material for China’s 20th-century capitalist takeoff came from an unlikely figure: Mao Zedong.

Mao Zedong (1893–1976). (Universal Images Group via Getty Images)

Interview by
Daniel Denvir

Capitalists need the state. Without the state’s help, the wealthy often cannot accumulate the resources necessary to begin capitalist production (what Marx called “primitive accumulation”) — even within market economies.

In sixteenth-century England, the process of primitive accumulation began with the state-sanctioned enclosure of common lands; it continued for several centuries, as European monarchs empowered merchants in exchange for wartime financial assistance. By the eighteenth century, a small class of English merchants had hoarded much of the country’s capital and land. We all know what happened next.

According to the sociologist Ho-fung Hung, eighteenth-century China also had a thriving market economy, but its political elites suppressed the merchant class’s accumulation of capital: no primitive accumulation, no industrial revolution. In his Marxist scholarship, Hung explores the implications of this history on China’s ascendancy as global economic superpower. His books include The China Boom: Why China Will Not Rule the World, City on the Edge: Hong Kong under Chinese Rule, and Clash of Empires: From “Chimerica” to the “New Cold War.” The future, for Hung, is not Chinese world dominance, but a return to the kind of capitalist-imperialist rivalry described by Vladimir Lenin in Imperialism, the Highest Stage of Capitalism.

Earlier this year, Hung sat down for a two-part interview with The Dig, a podcast from Jacobin. Hung and Dig host Daniel Denvir covered Chinese political-economic history from the pre-Qing period to the present, lingering on the sixteenth-century silver trade, the International Monetary Fund (IMF)’s entrapment of developing twentieth-century economies, and the impacts of the 2008 financial crisis. In this first part of the interview, which has been edited for clarity and concision, Hung shows how Mao-era efforts to consolidate urban industry and restructure the rural economy sparked China’s explosion into an export giant. You can listen to part one of the interview here; you can listen to part two here or read an edited transcript here.

Daniel Denvir

One key puzzle of your book is “why capitalism did not emerge spontaneously in eighteenth-century China, which was the most prosperous and admired market economy in the early-modern world.” Let’s start by reviewing how capitalism did emerge in Europe and theories as to why that happened.

You write that a market economy is not inherently a capitalist one, nor does it automatically lay the groundwork for a capitalist takeoff. Before we get to the history, let’s define some basics. What is the relationship between a market economy and capitalism?

Ho-fung Hung

In academia and in many people’s conceptions, markets and capitalism are the same thing. But as the French historian Fernand Braudel pointed out a long time ago, markets and capitalism are not only different, but are in many ways antithetical to one another, because they operate with different logics.

Marx formulates the market economy, or commodity exchange, as C-M-C: you have a commodity or a product, you exchange it for money, and then you use the money to trade for other commodities or products. This is a market exchange. You produce a pair of shoes and trade it for money, and then you use the money to buy food.

But capitalism is different, because in capitalist activities, the motivation is profit and accumulation. As Marx points out, it is M-C-M’, meaning you have a pot of money, you trade it for some products, and then you sell the products for a larger sum of money. So, the whole purpose of capitalism is to accumulate more and more money for the sake of accumulating money.

Braudel showed a long time ago that this kind of profit-making activity often requires a large corporation — and even the help of the state or a monopoly — to ensure that your profitability continues enlarging and your wealth accumulates.

We can think about the distinction between the market and capitalism using the analogy of a farmer’s market and a grocery store. In the traditional farmer’s market, people are trading things with one another for money and using money to buy things. But in a gigantic grocery corporation like Safeway or Giant, all the profit is accumulated and reinvested by the store. Profit is the central goal of these monopolistic operations, which run on a very different logic from a market. So that is the basic distinction between the market and capitalism.

Daniel Denvir

The state is key here, particularly when it comes to the coercive process of resource concentration known as primitive accumulation. How did the interstate system of early modern Europe create the conditions for states to support capitalist primitive accumulation?

Ho-fung Hung

In a market situation, after people find out that money is useful, naturally some people will want to accumulate more and more of it. So capitalism can emerge from a market economy, but the capitalist system will not automatically emerge from the market economy. In many world civilizations, whenever some merchants emerged from the market economy to accumulate wealth for its own sake, there were some kind of moral sanctions or religious sanctions or political sanctions against them.

We see this a lot in the Catholic Church, in the Islamic religion, and in Confucianist China: many rulers saw wealth accumulation as destabilizing the social fabric and creating disruption. So there was a lot of discrimination against merchants or moneymaking classes. At some times and in some places there were even laws against this kind of activity, protecting the precapitalist natural order of things.

What happened in Europe is that at some point, the continent fell into chronic warfare between states. Whether they are monarchies or republics, these states need financing for their war efforts, as they find out that war is costly. If you lose a war with a rival in the international system, people will rebel, and there are a lot of consequences. So they have to fight wars and win those wars. And in order to do that, they need to raise capital to finance the war in the form of bond issuance; they sell bonds to merchants and to bankers, so that they can recruit mercenaries and develop or buy advanced weapons.

In this European situation, the calculus of the ruler changes. In most other world civilizations, and even in most parts of medieval Europe, the ruler is concerned about social stability and political hierarchy, so sanction and discriminate against merchants and moneymaking classes. But in a chronic war situation, the ruler becomes more interested in winning that external war than in maintaining internal social stability.

If you win a war, you can take in a lot of plunder and enhance your rulership; but if you lose a war, then you lose your head. It was this wartime dilemma that urged the ruler to e`ish an alliance with the moneymaking class, because they are the only people resourceful enough to finance the war effort. From this the so-called capitalist state is born.

And this is one key reason why the market economy, which is actually universal in many places in the world from the medieval period to early modern times, only led to the rise and dominance of capitalist activities in Europe.

Daniel Denvir

Why is primitive accumulation conceived of as this historically specific moment, so critical for capitalist takeoff?

Ho-fung Hung

Primitive accumulation, called “original accumulation” in some translations of Marx’s texts, is the idea that at the beginning of capitalist accumulation activity, the moneymaking class has to seize some other people’s means of production or wealth, to get the first pot of gold, so to speak. Enclosure is the example that Marx cites: basically, capitalists used state power to appropriate peasant lands and create their first fortunes.

After they have these first fortunes, according to Marx’s original formulation, they invest in technology, machines, and other things; then, they have a capitalist enterprise that can continue to accumulate wealth through the expropriation of wage-labor surplus and technological innovation, without any more raw appropriation of people’s properties and means of production. So primitive accumulation is the origin of domination.

But, of course, later studies show that primitive accumulation is not so primitive, in the sense that it is ongoing even in the twenty-first century. It’s not like capitalism became nicer after its first phase.

One more recent example of this kind of a primitive accumulation — accumulation through dispossession or appropriation — is foreclosure after the subprime financial crisis in the US and many advanced countries. You are indebted to the bank for the mortgage, but when the valuation of your home plummets, you cannot pay; or you become unemployed, and you cannot pay. In either case, the bank comes in and expropriates your home, even though you have already paid a large part of your mortgage.

This kind of appropriation is very close to practices from the early modern period, such as enclosure. There are other examples, such as the world debt crisis and structural adjustment, that created a lot of trouble for developing countries in the 1980s and 1990s. We call this sort of accumulation “primitive,” just because that’s how Marx formulated it — but actually it is ongoing in the present.

Daniel Denvir

You write that for a long time, scholarship portrayed late Imperial China as inward-looking and insular. But in fact, beginning in the sixteenth century, demand for Chinese silk and ceramics on the world market exploded. And by the eighteenth century, China was absorbing the majority of silver that European colonialists were mining in the Americas, which was an astounding thing to learn. Chinese living standards at the time at least matched those of Western Europe.

How did that influx of silver transform the Chinese economy? How was that economy then positioned within the world system? And why, given this incredible wealth, wasn’t eighteenth century China able to undertake the primitive accumulation required for capitalist takeoff?

Ho-fung Hung

That is an interesting chapter of history. The common misperception is that from the sixteenth to the eighteenth century, China didn’t need anything from the world, but the world needed Chinese silver, Chinese tea, and Chinese cotton textiles. That is a misperception because actually China did need things from the world, especially silver. Our perception of early modern silver is that it was just a currency, a measure of value; it doesn’t have any use value. It’s utility in itself.

But is that true? China was in a monetary crisis in the fifteenth and sixteenth centuries. It was only resolved by the influx of American silver, which flowed into China via European merchants, who used the silver to purchase Chinese goods. It came through the Manilla trade and through the Portuguese colonial trade network, which connected all the way to Macau and Guangdong. And later on, of course, the Dutch and the British join in, buying Chinese goods with American silver.

This silver is very important because the Chinese currency system used to rely on paper money and copper coins. But the drawback of this paper money is that it is easy to fake, and it is very difficult to maintain its value; the state can print too much of it, and then its value plummets and people don’t trust it anymore. This paper money is not very reliable, and copper is quite abundant in terms of mining resources, so neither is a very convenient way to measure the worth of valuable or bulk goods in long distance trade routes. Silver is a better choice because it is precious enough to hold large amounts of value over long distances.

China used to rely on Japan for its supply of silver, because China did not have a lot of silver mined domestically. But Japan adopts its seclusion policy in the early seventeenth century. So it stops its silver offload to China, and China becomes reliant on American silver for the major currency of its economy. The state levies taxes in silver, meaning that people need to pay taxes in silver even if their income is in copper coin; these people need to trade copper for silver. All long-distance trade within China was also in silver, and this silver came from American mines.

So the Chinese economy is very plugged into the world economy in this sense, with this silver flow.

To answer your question about why China didn’t have a period of primitive accumulation if it had this market economy, this arc of transformation from a market economy into a capitalist economy is actually very common. Let’s say that it is the normal situation across the world because, as I said, when you have a vast market economy, there are always merchants who want to accumulate money for the sake of accumulating money; they become loan sharks and bankers and things like that.

If there’s a few of them and they are not too wealthy, then they can help facilitate the economy. But when they become too big, it will invoke resentment, and the state will start to see these wealthy merchants as power contenders, threatening the rule of the monarchs.

Because it causes political and social disruption, this capitalist activity leads the state to periodically confiscate their wealth and persecute them for corruption charges: it happened in China, the Islamic world, South Asia, and medieval, Catholic Europe. What happened in early modern Europe, due to chronic warfare, was a special case.

Meanwhile, in China, you just have the normal situation in which the state finds the merchants useful, but also persecutes them if they become too numerous or wealthy. And interestingly, when there’s a conflict between the merchants and the farmers, handicraft workers, or ordinary citizens who complain about food prices and rice merchants’ hoarding activities, the state will come to the rescue.

The state will tend to side with the workers, farmers, and poor people and force merchants to give away their food or lower the prices. Basically, there was price control in the seventeenth and eighteenth centuries. As a result, if you are a merchant family, it is a very typical pattern that when you get wealthy enough, you will start to invest your resources into the education of your offspring in order to prepare them for imperial examination.

Under the Chinese imperial examination system, if you do very well on the examination, then you can become an official and start a bureaucratic career. Because successful merchant and banking groups were often persecuted in seventeenth- and eighteenth-century China, it was preemptively wise to invest your fortune into the education of the younger generation, so that they can have bureaucratic careers and you can become a political family. It was very common for wealthy merchant families to turn into political families, becoming a part of the state.

This was unlike in Europe, where you see multigenerational, family-owned, finance-owned companies, such as the Rothschilds. For Chinese merchant and banker families, the better way to reproduce elite status was to prevent the state from confiscating their wealth by becoming a political family.

Daniel Denvir

So the key difference is that the Qing Dynasty–era Chinese state, pursuing stability and social harmony, took the demands of workers into account. By contrast, European states became eager to ally with merchants to crush popular unrest whenever it emerged. And, as a result, commerce in Europe is not totally stigmatized and repressed.

In China, rural gentry and state elites are investing a lot of money into commerce, but entrepreneurs, instead of building these powerful multigenerational families like the Rothschilds, invest their wealth into becoming the real elites: the gentry and state officials.

Ho-fung Hung

In European contexts, we also see paternalistic rulers who try to be sympathetic to the masses against the merchants, but comparatively speaking less so, because they need the financing and the monetary resources of the merchants so as to finance their wars. In China, they are more worried about social unrest because, in their eighteenth-century heyday, the Qing Dynasty was perceived as a foreign occupying dynasty.

The Manchus originated as a kind of seminomadic people; they don’t even speak and write Chinese at first, because they have their own language. In terms of blood ties and cultural affinity, they are closer to Mongols and other central-Asian peoples. The Manchus invaded in the seventeenth century. They crushed and then finished off the Ming Dynasty, which is seen as the last Han Chinese dynasty.

In the seventeenth century, a lot of the Han Chinese gentry are resisting the rule of the Manchus, just as they resisted Mongol rule in the thirteenth century. Throughout the Qing Dynasty, the Manchus worry about themselves being seen as a foreign invading dynasty. And for much of the seventeenth century, Han Chinese were not allowed to participate in the elite military establishment of the managers, the banner army; it was exclusively for the Manchus, the Mongols, and other seminomadic peoples.

So, in some sense, it is true that they are a kind of foreign occupying dynasty. Because the Qing are so worried about the legitimacy, they are more eager to side with the underdogs when class conflicts arise, portraying themselves as paternalistic protectors of the common people. At the same time, they are more suspicious of the merchants and financing classes, because most of them are Han Chinese. So there was an ethnic dimension to this dynamic as well.

Daniel Denvir

You also argue that the so-called agrarian origins explanations for capitalist take off in England — which point to the way that England’s early modern agricultural revolution freed up essential capital and labor — fails to explain why China did not take off. China, in fact, had also undergone an agricultural revolution, so there was a rural surplus in late-imperial China. It just wasn’t coordinated toward urban industrialization.

Ho-fung Hung

In the literature of social and economic history in England and Europe in general, the assumption is that there was an agricultural revolution. Agricultural productivity grows exponentially, so there was generally enough surplus in the countryside to pave the way for the rise of industrial capitalism.

What I’m arguing is that this is a necessary but not sufficient condition for the rise of industrial capitalism or capitalism in general: you can have an agricultural revolution, you can generate enough surplus, but you still need actors, agents, and institutions to concentrate the surplus into a capitalist enterprise. This urban elite is very important, and it is another necessary condition.

What we see in China is a consensus in the seventeenth and eighteenth centuries that China’s agricultural productivity has seen impressive growth, comparable to England or Western Europe. There’s enough agricultural surplus. But because of the state’s tense relationship to merchants and the emerging cost of entrepreneurialism, there’s a lack of urban elite capable and willing to coordinate the concentration of this rural surplus into a capitalist enterprise.

Again, I’m not saying that there were no such elites. There were some, but they were never as resilient and powerful as their counterparts in Europe, because of the particular political situation in China in the eighteenth century. In short, this agricultural revolution and abundant agricultural surplus is only a necessary but not sufficient condition for the emergence of capitalism in China.

Daniel Denvir

Your next question, moving forward through Chinese history, is, “how and why state builders in the nineteenth and early twentieth centuries failed to foster state-directed capitalism, as Japan did.” Every late industrializer, after England, “faced an increasingly competitive world economy” and “required an even higher level of state intervention to direct and concentrate essential financial resources for a quicker start in capital accumulation.”

How did successful late-industrializers, like Germany, Russia, and particularly Japan, foster state-directed capitalism in a period when Western imperialism was on the rise? And how did that new world system remake the conditions that each new developmental state, including China, was forced to navigate?

Ho-fung Hung

Moving into the nineteenth century, it will be interesting to compare Japan and China. Japan is a successful late-industrializer; China is less successful. China underwent some progress in the nineteenth century, but it is not as successful as in Japan. The key to understanding this difference is the state.

Japan and China were very similar up to the eighteenth century. There’s abundant agricultural surplus, there’s a lack of urban entrepreneurs. And then Japan takes a shortcut to capitalism by using state power to do the primitive accumulation, if you will.

One form of this is, of course, that the state used taxation to squeeze the peasants and concentrate rural surplus in the hands of the state. Then the state used these resources to establish a bank that offered cheap loans to industrialists, providing capital for the industrialization of the country. So in the Japanese, and also German, route to late industrialization, the precondition is a unified state that is strong enough to pursue this sometimes very brutal expropriation of resources from the countryside.

In China, they actually tried to do the same thing, but their effort failed in the nineteenth century. There are tax reforms in the Chinese state; they want to increase taxation, and then use the tax money to create a government supported corporation to import foreign technology, to build steel, railroads, and all kinds of things. So it was the same strategy, but China didn’t manage to execute it and Japan did, due to both contingent factors and less contingent factors.

One is that Japan is a much smaller place. Geographically, China is much, much bigger; Japan is about the size of a Chinese province. The Chinese state needed to coordinate concentration of resources and industrialization over the whole vast base of the empire, which is much more difficult just because of its geographical vastness.

As a result of its continental scale, the state delegated a lot of tasks to the provincial or local elites. Thus, in nineteenth-century China, there is a breakup of the state, in which these local elites start to have their own private armies, putting down rebellions and things like that. This disintegration of the state did not take place in Japan, where a much smaller geographical space made it relatively easy for the state to centralize power and do everything through the central government.

Another factor is the insularity of Japan as an island state. In nineteenth-century China, Western imperialist forces were very interested in dividing the resources of China among themselves — the British, the French, the Germans, the Russians, and everybody else. These powers are busy trying to craft their own spheres of influence in China during the nineteenth century, so they don’t devote much energy and attention to Japan. Japan only had a commercial relationship with the US in the nineteenth century.

But at that time, the US’s population and economic center of gravity was still very much on its east coast; its interests were starting to move west, but the US was still a young Pacific power. It didn’t have the kind of power or desire to colonize Japan, so to speak, so it established trade relations instead.

As a result, Japan has this breathing space, while other European powers are busy dividing up China. Thus, it was both geographical factors and contingent geopolitical factors in the nineteenth century that led to the failure of the Chinese state in pursuing the kind of late-industrialization strategy that Japan and Germany employed around the same time.

Daniel Denvir

That disorder, of course, continued for decades, through the wars of the Republican period up until 1949, when Mao declared the People’s Republic of China. And the reason it was impossible to achieve capitalist takeoff during the civil wars, foreign wars with Japan, and world wars of the Republican period is not a mystery.

Ho-fung Hung

Yeah, exactly. After Japan took off, Japan itself became an imperial power and jumped into the competition for Chinese resources. So China is busy fending off this kind of encroachment for a whole century, until the Communist Party of China (CPC) came to power and managed, for the first time in centuries, to create a unified and strong central state. That is when the industrial takeoff can really happen.

Daniel Denvir

Mao and the rise of the CPC change everything. You write that “the rural-agrarian and urban-industrial developments in the Mao period laid the foundation for the capitalist boom in the 1980s.”

Why did primitive accumulation succeed under Mao? What does it mean that it was carried out in the name of socialism? How is it related to Immanuel Wallerstein’s argument that actually existing socialism never operated outside of the capitalist world system?

Ho-fung Hung

In a kind of Wallersteinian formulation, I agree that the socialist state should be governing with equality as its first priority. But in many actually existing socialist states, from the Soviet Union to Eastern Europe, to communist China after 1949, equality is part of it, definitely — they try to promote equality either as part of propaganda or actual policy — but the first priority is accumulation and growth. Actually, that sort of rapid industrialization is really their first priority.

In the Soviet Union and communist China during the ’50s and ’60s, this imperative of rapid industrialization and growth trumps every other consideration. What I argue, along with many other Chinese scholars, is that Mao pursued a very extreme form of state-led industrialization, using state power to extract agricultural surplus resources from the countryside and concentrate it into state-owned urban enterprises, with the goal of rapidly expanding the industrial urban sectors, from steel mills to infrastructure.

In the process, this policy enlarged the inequality between the rural and urban, because it is a very typical model of exploiting the countryside to promote the growth of urban industrial sectors.

Of course, part of the deal is that they also try to create equality and equalize incomes and status within the countryside, and within the city. But the inequality between urban and rural sectors keeps enlarging because of this heavy, rapid industrialization model.

In this sense, the state-socialist model is not exactly a pure socialism. This form of industrialization involves an imperative toward the rapid accumulation of capital, not by private capital, but by state capital. It is an extreme form of state-led industrialization, like what Germany and Japan did successfully in the nineteenth century, but in a much tougher mid-twentieth-century international environment. In this environment, state industrialization took on a much more extreme and rapid form: a direct extraction of rural surplus to concentrate the urban industrial sector.

Daniel Denvir

A key Maoist policy that laid the groundwork for the later capitalist boom was not just this state squeezing of the countryside, but also compensation of the peasants by providing substantial health care and other welfare policies. How was that labor pool created? And then how, in the ’90s, was that surplus released into the booming coastal industrial export economy?

Ho-fung Hung

The key distinction between the Soviet Union’s model of rapid state-led industrialization and the Chinese one is that Stalin basically destroyed the peasantry and promoted the urbanization of the population. In China, they captured the rural population in the countryside. The peasant economy was destroyed and replaced by the people’s commune system, which resembles Soviet collective farms. But China kept the rural population there at the same time, for many, many reasons: they worried that a rural-to-urban migration would create unemployment and hence instability in the cities, so they wanted the peasants to stay as farmers in the countryside.

At the same time — in exchange for this very draconian squeeze of the countryside, for the state’s procurement of agricultural products and taxation — they also invest a lot in basic education, eradication of illiteracy, and socialized medicine: the famous barefoot doctors, and also the mass vaccination program that eradicates a lot of contagious disease in the countryside. The literacy rate of the Chinese countryside is among the highest in the developing world during the Mao period.

Because they provide basic services and education to the countryside, they create a large pool of rural surplus labor that is literate and healthy. This laid the groundwork for the private capitalist takeoff in the ’80s.

What is interesting about China’s shift to export-oriented industry in the 1980s and ’90s is that originally people didn’t expect that much. The fact that China is a huge exporter now seems obvious: you offshore American or European or Japanese companies’ factories to China, and you find cheap labor and can manufacture things. But back in the ’80s and ’90s, people didn’t have much confidence about whether that would work in China, because a lot of companies had done offshoring in South Asia, Southeast Asia, and many other places; what they encountered was a lot of cheap labor from the countryside, but it was not necessarily disciplined, healthy, literate, and efficient labor.

It would take a lot of time to train these workers in how the factory works and how to read instructions, all without them getting sick. In many developing countries, if you establish a factory using a lot of rural workers, there will be periodic outbreaks of tuberculosis and other diseases.

But when China shifts to a model of export-oriented growth — allowing or inviting foreign industrial capital to establish factories in the coastal areas and absorb rural surplus labor — the companies soon find out Chinese labor is not only plentiful and cheap, but also healthier and more literate than rural migrant labor in many other developing countries.

After Mao’s period of rural development, however, the one-child policy begins to reduce the supply of rural surplus labor. The young population in the countryside is declining, and after the market reform in the 1980s, government investment in education and health care in the countryside stopped growing; all these advancements achieved in the Mao period seemed to reverse. This was another phase of development, but the Mao period’s creation of healthy, literate, rural surplus labor laid the groundwork for later export-oriented industrialization based on low-cost labor.

Daniel Denvir

You write,

Because the Maoist state relied almost solely on surplus extracted from the countryside for the primitive accumulation process and refused to rely on external borrowing, as many other socialist and developing countries did in the 1970s, the Chinese state was much less burdened with external liabilities, while many other developing countries fell prey to dictation by their creditors when the international debt crisis hit in the 1980s.

As Isabella Weber shows in her recent book, China only narrowly dodged imposing a form of shock therapy that would have wrecked its economy in the way that post-Soviet Russia’s economy was wrecked. How important was Maoist China’s self-sufficiency as a necessary, if not sufficient, condition for capitalist takeoff?

Ho-fung Hung

It’s interesting that you mentioned Weber’s book. She did a great job showing that China narrowly dodged a kind of self-inflicted structural adjustment policy of free-market reform. Actually, across the developing world, many states, elites, and academics also want to dodge this sort of free-market reform structural adjustment policy.

But even though they dodge it in terms of their internal intellectual debate, they have to do it because of the debt crisis and the dictation of the IMF and the World Bank. Simply because their governments are so indebted, they can’t avoid borrowing from the IMF, and then the IMF forces them to adopt structural adjustment reforms. So one part of the puzzle that Weber showed brilliantly is that China could avoid a torturous self-inflicted structural adjustment reform.

The other part of the puzzle is why China escaped structural adjustment reform dictated by the IMF. And again, the answer begins in the Mao period. Mao refused to borrow from the international financial market to speed up growth; many developing countries, including socialist Eastern European countries, took these loans in the 1970s. Because of the petrodollar boom in the 1970s, the interest rate was very low. It looked silly not to borrow money from international financiers, which is what Brazil did, what a lot of African countries did, and what Southeast Asian did. Poland and Yugoslavia also borrowed a lot from the international markets, because borrowing at this low interest rate seemed like it would stimulate growth. If the growth rate is higher than the interest rate of the loan, then you can repay the loan without any problems and still pocket the gains of growth.

But for all kinds of reasons, Mao didn’t borrow.

One reason is the Maoist ideology of self-reliance: we need to self-exploit to come up with resources to grow, rather than borrowing from outside. Another reason is that, after [Richard] Nixon visited China in the 1970s, a lot of US allies in the region, mostly Japan, were very happy to provide economic assistance to China. So China didn’t need to borrow from the international financial market like Poland and Yugoslavia and many developing countries did.

Then, in the early 1980s under [Ronald] Reagan, Paul Volcker raised the interest rate of the US dollar to 20 percent. Many loans that were borrowed on moderate or even very low interest rates had adjustable, variable interest rates, so when their market interest rate of the US dollar increased, all these loans’ interest rates also increased.

As a result, many developing countries and Eastern European countries, such as Poland, find themselves in a very difficult situation when their interest rates suddenly skyrocket. That was the origin of the debt crisis. Many developing countries and socialist countries in Eastern Europe were nearly bankrupt, and then needed to default. They needed to enlist the help of the IMF, and the rest in history: the IMF helped bail them out with the condition that they adopt radical market reform.

China dodged that because of this 1970s stubbornness, Mao’s decision not to borrow from the international market. In the 1980s, China escaped this debt crisis and didn’t need to listen to the IMF, so it avoided an imposed structural adjustment program. Instead, China engineered market reform in a piecemeal, trial-and-error fashion, and the state maintained its dominance and the full autonomy of the financial sector in China.

This is another factor that explains the China boom: China’s rapid growth in the 1980s and ’90s, while Eastern European countries and other developing countries were troubled by the debt crisis.

Daniel Denvir

As we’ve discussed, Maoist China squeezed the countryside to industrialize, and the result was these massive state-owned enterprises. To what extent did state-owned enterprises help create and propel China’s boom? And by contrast, to what degree has their inefficiency, debt load, and role in creating a CPC-affiliated parasitic elite burdened that boom?

You write,

Some may argue that given the weight of fixed-asset investment in GDP, undertaken mostly by SOEs [state-owned enterprises] and local governments, the China boom is at least as much driven by the state sector as by the private export sector. But most of the fixed-asset investment in the Chinese economy has been financed by state bank lending, and a large portion of the liquidity in the banking system originates from a “sterilization” process in which private exporters surrender their foreign-exchange earnings to state banks in exchange for an equivalent amount of RMB issued by the People’s Bank of China, China’s central bank.

If the Chinese state’s capital has overwhelmingly come from exports, why are the SOEs important? Historically speaking, what role have they played? And how should we think about the relationship between the rise of the export economy and the SOEs created under Mao?

Ho-fung Hung

SOEs are important in the sense that a lot of infrastructure projects, as well as heavy industries like steel mills, coal plants, airports, and high-speed rail, were constructed and maintained by state enterprises; the telecommunications network was too. It is a famous India-China comparison that India has a lot of potential for growth, but Indian infrastructure is less developed than Chinese infrastructure.

This is because China has a centralized system and a state-owned enterprise system that they have relied upon for decades, from Mao into the post-Mao period. Both local governments and central government units, like the Ministry of Railways, helped construct crucial infrastructure — enough power plants to generate enough electricity, enough steel mills to fill the economy. State-owned enterprises are very important in terms of providing infrastructure and investment in these heavy industries.

On the other hand, of course, they have led to divides among the party elites. In the Central Committee or Politburo of the Communist Party, you can identify individual members of the top echelons of the elites by which sectors they have seized as their turf; they staff whole sectors, like, for example, the energy sector, the oil sectors, the minerals sector, or the electricity sector, with a fiefdom of their relatives and underlings.

This division of state sectors among the elites has become a corrupt, oligarchic structure. These state-owned enterprises are not financed directly by the fiscal resources of the state; largely, they are financed by loans from the state banks. And China has market ties in a lot of sectors, but the CPC has zealously guarded the financial sector so that the state banks continue their dominance in the economy. This is because the CPC see this flow of credit as its most important lever for directing the economy and maintaining CPC control of economic development and the elite.

The export sector is connected to this state-owned enterprise sector, which is focused on heavy industries and infrastructure construction. China has a closed capital account policy and its currency is not freely convertible, so if you are a mostly private or foreign export enterprise and you earn foreign currency, you cannot keep the US dollar yourself or keep it in an offshore account; you need to surrender it to the Central Bank of China, which converts your US dollars to an equivalent amount of a local currency, the yuan or the renminbi. Then, you use the yuan to pay your employees and do investment.

This is a policy of renminbi- or yuan-creation, backed by the inflow of foreign exchange, mostly in the US dollar and via the export sector. Much of this created liquidity turns out to be bank loans, because if you are an enterprise, you surrender your US dollar, you get yuan in return, and you save it in your account. And then the bank, in turn, uses that money to create loans for other enterprises.

Because the state banks have been dominated by the CPC, it is very difficult for private enterprises to get financing from state banks. The state bank has a discriminatory policy to be more lenient in issuing loans to state-owned enterprises, local governments, or government units. One reason for this is that, because these enterprises have the backing of the government, the banks think they won’t default, while a private company can default — they think it is safer to lend to a government unit.

So what happened is that this huge expansion of foreign exchange reserves in China created a commensurate expansion of liquidity in local currency, and this expansion of liquidity became local currency loans. And then these loans turned out to be state bank loans to local government and state enterprise. After they get the loans, they mostly use them for construction: expanding the airports, and adding lines to the subway system, building new lines of the railroad system, and building more steel mills and coal plants. This resulted in an excessive expansion of infrastructure and heavy industries.

Beginning in the 1990s, the Chinese government started talking about this issue of excess capacity. In the private export sector, they don’t talk about excess capacity, because there’s huge demand in the world economy to absorb consumer goods created by the Chinese export sector. But in state-owned enterprises — local government-dominated heavy industries and infrastructures — there was a lot of excess capacity, meaning that you are building things that are not going to be profitable.

For example, after you have an airport, you build a second airport in a nearby city at about the same size, and then you continue expanding that airport. A lot of people have praised China’s high-speed rail system, and there are a lot of amazing things about it — but even there, the fact is that they borrowed too much money. They keep building new lines, some of which are profitable.

But a lot of lines are connecting cities that not many people ride between, and if you charge market price for the tickets nobody will pay. This excessive capacity creates the typical overaccumulation issues studied in Marxian literature. It becomes a problem because enterprises and government units borrowed to build this stuff, but the result is not profitable, so they have trouble repaying their loans.

The real estate sector has also been getting a lot of attention lately. The sector is private, but it is related to the state because real estate companies cannot get land without the active collaboration of the local government. Local governments generate revenue by selling land to these real estate enterprises, and as the valuation of the apartments produced keeps going up, local governments can keep increasing their revenue by selling more and more expensive land to real estate.

Because the real estate machine is actually connected to the local government revenue machine, the same dynamics appear: the state bank is very lenient in lending money to these units, and that results in the construction of too many apartments that they cannot sell, but they still need to repay the loan.

At some point, there will be a moment of reckoning that they either need to default the loan or find some other means to come up with the cash. So now China is in a ticking time bomb, because of this internal debt crisis.

Daniel Denvir

One of the arguments you make in your book is that it wasn’t just Mao-era primitive accumulation that laid the groundwork for the capitalist boom. It was also capital from Japan and the four tigers: South Korea, Taiwan, Hong Kong, and Singapore. These developmental states were successful precisely because they operated under the US Cold War–era security umbrella, and they went on to play a big role in financing China’s takeoff.

You write, “China’s capitalist boom is tantamount to an explosion ignited by the mixing of the Maoist legacies and East Asian capitalism, each developed separately on opposing sides of the Cold War in Asia.” This East Asian capital, in turn, had even deeper roots in coastal entrepreneurial families who had departed Qing-era China to make their fortunes in European colonial outposts.

How did this capital find its way from Qing-era coastal China to American Cold War allies in Asia, and then finally to China’s export boom?

Ho-fung Hung

Yeah, definitely — many historians have pointed out the importance of this Chinese diaspora. In the 1980s, when China opened up, it has good infrastructure and a healthy and literate workforce from the countryside. But without the entrepreneurs to absorb them and turn them into export industries, the advantages China had in the Mao period would not amount to much.

What happened is that, in the 1980s and 1990s, a lot of overseas Chinese from Hong Kong, Taiwan, South Korea, Japan, and elsewhere in Southeast Asia move to coastal areas of China to run successful export-oriented industries. These pioneers have generations of experience manufacturing for US and European markets. They know what kind of Christmas tree these markets like, and what electronics will sell, and what kind of garments will be regarded as fashionable.

So China skipped this learning process, because they have this Chinese diaspora and Japanese and Korean capital. And not only do they have this money and capital, but also they are well-connected to the consumption market. Because the Soviet Union and other Eastern European countries did not have the diaspora and capital needed to mobilize their resources when they opened up, oligarchs and corrupt officials commandeer the resources, and the rest is history.

But when China opened up, there was already a lot of Chinese diasporic capital and Japanese and Korean capital, which had accumulated because of the particular geopolitics of the Cold War. During the height of the Cold War, East Asia is regarded by the US as a very vulnerable place, which could fall into communism. South Korea is always under threat from North Korea; Taiwan is threatened by communist China, as are Hong Kong and even Singapore.

Singapore almost became a Cuba of Southeast Asia. If you look at the history of Singapore after independence, the People’s Action Party used to be a left-wing party, until Lee Kuan Yew collaborated with US and UK intelligence to engineer a coup and arrest all the left-wing activists in his own party and turn Singapore into a social democratic state without a democracy. Singapore then became a bastion of the Cold War.

But all these places are very vulnerable, from a US perspective. And, as a result, we get the Korean War and the Vietnam War — the hot wars at the height of the Cold War.

Daniel Denvir

Also, the coup in Indonesia.

Ho-fung Hung

Yeah. With the coup in Indonesia, and also Malaysia and Thailand and the Philippines, you see active communist guerrillas in the countryside. So US policy toward these capitalist islands — from Hong Kong to Singapore, Taiwan, South Korea, and Japan — is very generous, in terms of opening the US market to their consumer products. Manufacturers in Latin America, Africa, and other places never received this kind of generosity.

These geopolitical conditions create a very favorable environment for capitalists to grow in these capitalist islands during the Cold War period. When China opened up, these entrepreneurs are eager and ready to go into China to take advantage of Chinese labor and Chinese infrastructure.

Daniel Denvir

Prior to the China boom, East Asia’s export economy was structured in a “flying geese” formation. The four tigers produced components that were assembled in Japan, which then manufactured and exported the highest value-added goods. In this flying geese formation, picture Japan at the head of the formation and the four tigers behind.

What happened to the Asian and world economies when that flying geese formation transformed into a Sino-centric so-called “panda circle?”

Ho-fung Hung

Throughout the ’60s, the ’70s, and the ’80s, there was an image of flying geese, in which the whole formation flies forward, but they maintain a stable hierarchy between the leading goose and its followers. Japan is the leading goose at the time: it always manufactured the highest value-added products, the most sophisticated, profitable products.

Once Japan moved up to even higher value-added products, the less fashionable, less profitable products were outsourced to the other geese: Taiwan, South Korea, and so on. The whole formation moves forward, but the hierarchy of Japan, and then the four tigers, and then Southeast Asia is maintained — that is, until the 1980s and 1990s, when China enters the picture.

Because China is so big and resourceful and has a huge internal market, it attracts not only the low value-added industries, but also high value-added industries. In the end, China absorbs everything from electronics to computers to, very famously, the iPhone; it also absorbs low-cost products, like garments, Christmas trees, and Halloween costumes.

In the 1990s, there’s an Economist article called “A Panda Breaks the Formation.” It comes with a cartoon, in which a panda breaks the flying geese formation. Because China is so big, it absorbs everything, and then the production networks become Sino-centric. Japan, Korea, Taiwan, and Southeast Asia all outsource their capital and manufacturing activities to China, and the capitalists in those places focus on finance and real estate speculation. Some super high value-added manufacturing remains in those places: one industry that gets a lot of attention is the manufacturing of high-speed microchips, especially in Taiwan.

When it comes to these high-tech industries, there is a kind of export-control regime, inherited from the Cold War, that China finds very difficult to bypass. So high-tech component manufacturing stays in these more developed economies. But other high-tech products, from drones to iPhones to electric cars, are already outsourced to China, so the bulk of the production network is Sino-centric.

The satellite economies surrounding China provide China with components, natural resources, and financing. Sometimes Chinese enterprises get financing through the banks in Hong Kong, for example. Of course, the recent trade war is trying to transform this Sino-centric network, but we still don’t know what it is transforming into.

Daniel Denvir

A key premise of your book is that,

Capitalism in any particular country is not fundamentally different from capitalism elsewhere. The underlying principle and basic dynamics of capitalism as an economic system are universal, though capitalism is always enmeshed in historically and nationally specific sociopolitical structures that enable the release of its productive forces at some times and fetter its reproduction at other times.

Why doesn’t China represent a unique party-state capitalism, as some argue? And what are the stakes of your argument that there is no Chinese capitalism per se, only a history of capitalism in China?

Ho-fung Hung

There are both similarities and differences between capitalism in China and capitalism elsewhere. The major similarity is that profit motivation and the imperative of accumulation drives the system in today’s China, as it does in the United States, Japan, and many other places.

The dominant imperative of economic activity is definitely to accumulate capital, to reinvest, and to make profits. Capitalism in China is also very similar to the systems in other places around the world, in the sense that the commodification of the means of livelihood is very complete. If you are living in China, the US, Germany, or Japan, you need to purchase most of your daily necessities from the market.

Daniel Denvir

And you need to sell your labor to get the money to buy that stuff.

Ho-fung Hung

And interestingly, in China the marketization of some daily necessities is even higher than in most European countries. If you look at private spending on total national health care costs in Europe, Japan, and South Korea, you’ll see that it is very socialized. A lot of health care expenses are covered by government spending, typically more than 60 percent; even up to 70 or 80 percent of total national health care spending is covered by government spending in some of these countries, and the rest is covered by private spending.

But two big economies have a very low percentage of public spending on health care: the United States and China both have health care systems that rely on private out-of-pocket spending more than government spending. So in that regard, China is as marketized as the US. It’s very capitalistic, and there’s a lot of profit-making going on among hospitals and health care providers; this system is more comparable to the US health care system than to those of the UK, Europe, or Japan.

In one sense, the capitalist system is very universal: it’s the same in China as in other places. But at the same time, this capitalist system needs to negotiate with the different political system it is embedded in. In the case of China, this is of course the party-state.

The communist party-state’s imperative is to stay in power, and to maintain and expand its power. China’s communist party goes about this in a very specialized way, with the infiltration and sale of economic units. So the capitalist system in China exists not in a vacuum, but in this particular party-state political context.

This doesn’t make China noncapitalist. It is still a capitalist system, but it is a capitalist system in quite a unique environment: that is, the dominance of the party in China. However, this environment is not entirely unique. Similar formations are already emerging in places like Vietnam, but the story is somewhat different there. Overall, the capitalist system itself has universality, but it exists in unique political environments with which it must negotiate all the time.