Mussolini in Beijing

The Chinese model of state-directed capitalism is coming apart — and it’s unleashing a new authoritarianism.

President Xi Jinping attends a business forum with Italian and Chinese businessmen at the Quirinale Palace in Rome, Italy, March 22, 2019. (Alessandra Benedetti-Corbis / Getty Images)

In 2008, before his first serious bid for the US presidency, Donald Trump expressed unreserved admiration for China’s economic model. Back then, China was seen as a place where capitalists like him could freely pursue profits without any regulatory restraints:

In China, they fill up hundreds of acres of land, constantly dumping and dumping dirt in the ocean. I asked the builder, did you get an environmental impact study? He goes, “What?” I asked, “Did you need approval?” No, the Chinese said. And yet if I am the last guy to drop one pebble in the ocean here in this city, I will be given the electric chair.

In the same spirit, British billionaire Alan Sugar, host of the UK version of The Apprentice, was horrified by the prospect of Jeremy Corbyn’s Labour Party coming to power, suggesting in 2015 that “if they ever got anywhere near electing him [Corbyn] and him being the prime minister then I think we should all move to China.”

To these business tycoons, China represented a paradise of limitless capital accumulation, a welcome rising superpower they could seek refuge in after socialist excesses and political correctness brought down Western civilization.

But those days are long gone. China’s state media now promotes a new direction for economic growth that they call “common prosperity.” Under the new doctrine, President Xi Jinping has explicitly called for strengthening state guidance and regulatory measures against “disorderly expansion of capital.” Some commentators on the Left have celebrated Xi’s move as a revival of genuine socialism, while Western politicians and financiers lament it as an alarming regression to statism and even orthodox Marxism-Leninism. Yet we still don’t know exactly what “common prosperity” means.

No Socialism in Sight

Though hastily abandoned under the pressure of widespread protest, Beijing’s insistence on the draconian zero-COVID policy until late 2022, with its blatant disregard for economic damage, demonstrates the Communist Party of China’s (CPC) priority of state control over economic growth. The verdict that the common prosperity program indicates China’s further departure from neoliberal capitalism is not far-fetched.

On the other hand, Xi has been anxious to dispel any speculation that his common prosperity program is intended to restore the kind of egalitarianism prevalent in the Mao period. In December 2021, Xi made a speech at the Central Economic Work Conference attacking welfarism and pledging China would not opt for a model that would “uplift a group of lazy people who gain without working,” with explicit derogatory references to Latin American “populism.” This hostility toward welfare could be found in any speech from any free-market fundamentalist in any capitalist country — lip service to Karl Marx and Mao Zedong aside.

As far as the official ideology goes, on the eve of Mao’s 125th birthday in 2018, the party disbanded Marxist study groups and labor activist organizations on university campuses across the country, even rounding up their leaders.

In the last two years, the concrete measures associated with the common prosperity program include fining and even partially taking control of the country’s most successful tech firms and their subsidiaries. They also include starving some of the biggest real estate developers of financing. In a series of speeches on the proper place of private entrepreneurship under the new program, Xi reiterated that the party-state should maintain a paternalistic role over capital to ensure the larger purpose of the nation. He highlighted that “entrepreneurs must have a lofty sense of mission and a strong sense of responsibility for the country and the nation; closely integrate the development of the enterprise with the prosperity of the country, the prosperity of the nation, and the happiness of the people; and take the initiative to bear and share the worries of the country.” He then cited a number of model capitalists from the nineteenth century to the 1950s who regularly donated their wealth to support the political and military causes of nationalist state-builders, only to eventually surrender their enterprises to the state.

This economic model, based on the state’s paternalistic guidance of private firms and a work ethic unfettered by socialist welfare, resembles state capitalism under fascist regimes in interwar Europe and Asia. But the likeness does not stop there. Many have already pointed out the party-state’s ever more militant nationalist rhetoric, persecution of minorities, rise of the cult of the great leader, and obsession with total surveillance and control of the population. Prominent official scholars’ open and fervent embrace of Nazi theorists like Carl Schmitt in recent years says it all.

Aggressive Statism and Nationalism after the China Boom

This statist and fascist turn in China’s political economy does not stem from the personal preference of Xi Jinping but is rather a result of the country’s long economic crisis. China’s export sector, dominated by private and foreign enterprises, has been the primary source of profitability since China moved toward export-oriented growth in the mid-1990s, with the sector absorbing massive foreign exchange reserves. These reserves have been the foundation of the expansion of state bank credit, which mostly flowed to state-owned or well-connected enterprises to support many of their fixed-asset investments, such as infrastructure, real estate projects, and new steel mills and coal plants. As long as the foreign exchange reserves were growing, the CPC-controlled financial system could increase local currency liquidity in the form of generous bank loans without increasing the risk of devaluation and capital flight.

Yet many of the debt-driven fixed-asset investments are redundant — Chinese leaders have warned about the indebtedness and overcapacity of the economy since the late 1990s. They proposed reforms such as depriving inefficient enterprises of state banks’ cheap loans. But as the recklessly expanding sectors became cash cows and quasi-fiefdoms controlled by different factions of the party-state elite, those reforms gained little traction.

When the long boom of China’s export-led growth faltered in the 2008 global financial crisis, the Chinese government unleashed an aggressive monetary stimulus program that led to a strong rebound driven by debt-financed fixed-asset investment. The weakening of the export engine and the redoubled investment expansion financed by state banks in 2009–2010 created a debt bubble no longer matched by the expansion of the foreign exchange rserves. Between 2008 and late 2017, outstanding debt in China soared from 148 percent of GDP to over 250 percent. The surge of loans amid the 2020 pandemic further pushed the share to more than 330 percent, according to one estimation.

The apartments, coal plants, steel mills, and infrastructure financed by this massive debt became nothing more than excess capacity, never to be profitable. After the 2009–2010 rebound, the profitability of enterprises kept falling across the board in both private and state sectors.

Falling profits make loan repayment challenging, creating a debt time bomb. As such, China ran out of room for growth through debt-financed fixed-asset investment while the growth of the export sector failed to rebound to its pre-2008 level.

Excess capacity, falling profit, and increasing indebtedness across the economy underlay the stock market meltdown and capital flight that drove the Chinese currency’s sharp devaluation in 2015–16. The economy stabilized in 2016 only with the renewed tightening of capital control. The banking system also injected rounds of new loans into the economy to prevent it from slowing too much. Yet much of these loans were used for the rollover of existing loans. These recurrent loan surges brought further buildup of indebtedness into the economy without adding new dynamism. Many enterprises became loan-addicted zombies. With the cessation of the robust growth of the economic pie, the state sector has increased its squeeze of the private sector and foreign companies. The “advance of the state sector and retreat of the private sector” (guojin mintui) amid the general economic slowdown is partly an effort to aid the growth of state firms at the expense of private and foreign firms. The policy aggravated inter-capitalist competition between the United States and China, leading to a US-China interimperial rivalry reminiscent of the UK-German rivalry a century earlier.

When Xi first came to power, he was expected to pursue an agenda of economic liberalization. Official media in the early days of Xi’s reign discussed financial liberalization reform to starve unprofitable but privileged enterprises of credit. State newspapers published articles, believed to be endorsed by Xi, to call for “supply-side structural reform,” which “sounds less like Marx and Mao than Reagan and Thatcher.” Very soon, though, any expectations for the return of a Deng Xiaoping–style set of market reforms fell flat. The vested interests in the state were so strong that Xi had little choice but to double down on the policy of supporting the continuous expansion of state-owned or state-connected companies at the expense of private and foreign ones. Today there’s a broad consensus that the statist turn of the Chinese economy, though predating Xi, accelerated significantly under him.

The Spiral of Statism and Economic Crisis

In the name of the common prosperity program, Beijing cracked down hard on giant private enterprises like Alibaba and Tencent, founded by private entrepreneurs and incorporated in the Cayman Islands. The crackdown included barring Ant Group, Alibaba’s fintech arm, from launching an overseas IPO at the last minute; imposing a hefty anti-monopoly fine on Alibaba itself; adding severe restrictions on technology firms in collecting data and providing services; and banning for-profit school tutoring firms.

Under this initiative to restrain the growth of private capital, Beijing reined in the financing of privately owned property developers in 2020. Cut off from new financing sources to roll over mounting debts, many real estate developers suddenly fell into solvency crises, with that of Evergrande, the leading company in the sector, being the most widely watched. As a solution, the Chinese government reportedly considered breaking down and restructuring Evergrande into state-owned enterprises, nationalizing the largest developer in the economy. This is consistent with the state’s recent attack on other giant private companies, with the possibility bringing them, or at least parts of them, under state ownership or control.

Yet, while leftists might applaud some of these interventions in the abstract, judging from the profit-oriented operation of other state-owned or state-connected enterprises such as Sinopec or Huawei, it would be naive to expect any newly nationalized enterprises to revive socialist mandates like full employment and workers’ welfare as they were forced to under Mao.

Robust economic performance, expanding employment, and rising income have been the Communist Party’s primary claims to legitimacy since the 1990s. Without them, the CPC has to find an alternative way to secure its regime’s survival. In this context, redoubling the party-state’s efforts to take direct control of the economy while resorting to aggressive nationalism, even at the cost of aggravating the economic crisis, becomes a rational approach. As such, China has likely now entered a long period of economic slowdown, tightening statist control, and belligerent nationalism.

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Ho-fung Hung is Henry M. and Elizabeth P. Wiesenfeld Professor in Political Economy and chair of the department of sociology at Johns Hopkins University. He is the author of Clash of Empires: From “Chimerica” to the “New Cold War” (2022) and City on the Edge: Hong Kong under Chinese Rule (2022).

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