15.4 Deng’s 1978 Turn

At the CC meeting of December 1978, Deng presented his version of the New Economic Policy. Central planning would remain dominant, but it was proposed to introduce elements of decentralisation and encourage private initiatives. The concept was that market forces would be introduced at the periphery to ensure the targets of the planned economy were met.

The Beijing leadership began warily, communal ownership of agricultural land would remain, but private use of that land would be permitted. Simultaneously, it launched a small number of special economic zones (SEZs) subject to severe controls.

The basic points of the 1978 reforms were:

• Peasants were offered the opportunity to lease the land they farmed. To ensure profitability the government would allow the prices of agricultural produce to rise by more than 20% in 1979.
• Local rural organisations would be permitted to launch collective and/or private business enterprises: these would be known as Town and Village Enterprises (TVEs).
• Foreign investors were invited to invest in China, subject to strict conditions.
• Market forces would play a much bigger role in determining prices. More investment was to be channelled from capital investment to consumer goods.

The country began the process of lurching towards the world market.

15.4.1 Agriculture, Land and the TVEs

The disaster that was the Communes has been described in Chapter 13, following the deaths of as many as 20 million through starvation there had been a de facto restoration of personal responsibility for land and livestock. This was achieved by allocating land to individual households on the promise they delivered a certain quota of their harvest to the state. There was a tolerance of a free market in farm produce, peasants were free to sell their surplus produce as they wished. Individual enterprise in the form of the revival of handicrafts was encouraged, after having virtually disappeared during the GPCR: cobblers, tailors, tinkers and vendors became common sights in the cities.

Constitutionally in China urban land was owned by the state and in rural areas by collectives, but these new measures allowed land to be treated as private property. Chinese agriculture was returning to traditional patterns under the slogan of “collective land ownership but individual land use”. There was a massive growth in a free market in agricultural produce. This was accompanied by the removal of state control of prices to help ensure the profitability of the more efficient farms.

In terms of increased production of agricultural produce, Deng’s moves were eminently successful. By the end of the 1980s those who leased land were permitted to sell the lease or even leave it as an inheritance. Just as with the NEP in Russia this led to a differentiation within the peasantry with some peasants growing rich and expanding their holdings at the expense of others. Layers of Chinese peasants lost their lands, were impoverished and were forced to migrate to the cities, providing an inflow of cheap labour for the development of the SEZs. But in China the scale of what happened was unprecedented both in terms of the scope and the speed of the process.

During the period 1978-84 the reforms were predominantly rural with great emphasis on decentralisation and with greater autonomy given to provincial governments.[5] Private enterprise in the countryside was encouraged in the form of the Town and Village Enterprises (TVEs). These usually originated from commune workshops so there were hundreds of thousands of them. With the demise of the communes, the workshops extended their repair of agricultural implements to include manufacturing light machinery for farm use. These TVEs were notionally under the control of local municipalities, but with the effective privatisation of agriculture were in an anomalous position being notionally communal enterprises run for the benefit of the local peasants while becoming increasingly self-funding and self-sufficient.[6]

Because the TVEs were largely independent they were very flexible in terms of organization and ownership, and significantly enhanced economic and infrastructure growth in rural areas. TVEs would all commence as communal ventures but would pass through every shape and form, some retaining their communal nature, some adopting mixed communal and private ownership, and some rapidly became private property. They were a glimpse of what might have been achieved if the creative powers of the peasants and villagers had been unleashed within a planned economy.

However, the TVEs were launched by a Stalinist bureaucracy to better preserve themselves and their privileges. Within this framework the TVEs served the valuable purpose of employing and training many middle and lower level CCP cadres in the smaller towns and villages who were in danger of being left behind by the moves to a market economy, and who could have become a focus for opposition to regime policies. In 1994 the government produced an “honour list” of successful TVE “Peasant Entrepreneurs”; it was noticeable that being a Party member gave one a head start in being successful.[7]

TVEs were market-oriented from the outset and so became a pressure for institutional change at a time when the place of privately-owned companies in the economy and society had not been established; they were a mechanism whereby the managers and local CCP tops accumulated the necessary experience and knowledge to run private enterprises and the capital to eventually acquire them.[8] Initially, only TVEs with fewer than ten workers could become a private firm (within the European Union enterprises with fewer than ten employees were classified as ‘micro’), but in 1987 this limit was abolished which opened the door to the privatisation of all TVEs. In practice, even the supposedly collective TVEs responsible to the local authority were soon operating as private enterprises.

In many townships and villages local officials began a rapid sell off of TVEs (to themselves) for a small fraction of what they were worth. By the time of these sell-offs the Party tops managing the TVEs had a decade of experience of running what were in practice private enterprises, and were well versed in capitalist management techniques. By the year 2000 all TVEs were openly functioning as capitalist firms. Helped by generous state loans and economic decentralisation, the TVEs grew rapidly and in 1996, at their peak, accounted for 30% of GDP and employed 135 million people.[9] However, after 1996 the number of TVEs decreased sharply as the state privatised small SOEs many of which were light engineering companies, which then began to compete with the TVEs.

The TVEs are a good example of how an economic form generated with one goal in mind, to assist economic regeneration in the countryside within a deformed workers’ state, became an important transitional element in the development of capitalism. In supporting the TVEs the state sector nurtured and supported nascent bourgeois elements until they assumed ownership directly.

15.4.2 Foreign Investment, Trade and Market Forces

In 1979 Deng announced the creation of the first four Special Economic Zones (SEZs) open to foreign investment, these being on the borders of Hong Kong and Macao, and in the Guangdong and Fujian provinces on the southern coast. These were to be a means of modernising the productive forces within a centrally-planned and state-controlled economy, and at this stage the bureaucracy was very cautious and made only limited concessions.

In preparation for attracting foreign investment, the Chinese regime introduced a series of reforms which allowed managers of selected SOEs (those designated to be part of joint-enterprises in the SEZs) to end “lifetime” jobs for workers. This was a break with previous policy in which a worker was a state employee and had a job for life (the so-called “iron rice bowl”). For workers in these enterprises job security was replaced by fixed-term contracts. At the time these measures did not affect the great majority of Chinese workers who were employed in heavy industry in the inland, giant SOEs. Nevertheless, to spike workers’ opposition, the right to strike was dropped from the 1982 Constitution; instead a worker had to observe labour discipline and public order. In effect strikes were outlawed.

However, the SEZs were not as successful as expected. For capitalists to invest the bureaucracy had to create more favourable conditions, requiring a compromise with market forces. In 1983 certain of the restrictions were lifted: the necessity for investment to be in a joint enterprise with a Chinese company was removed and wholly foreign-owned companies were allowed to operate; the area covered by the SEZs was expanded to open up almost all of China’s long coastline to foreign investment. The bureaucracy may have been proceeding empirically, but how many compromises and of what kind would be made?

Soon the government was actively encouraging foreign-owned and operated enterprises to establish factories in China as a means of absorbing unemployed young people, especially peasants migrating to the towns, and at the same time helping to increase supplies of consumer goods. On 20 October 1984, the CC adopted a series of measures which marked the beginning of the end for the state monopoly of foreign trade. An important initial difference between Lenin and Trotsky as against Stalin and Bukharin was that they considered a workers’ state in a capitalist world must have a state monopoly of foreign trade. First loosening and then abandoning this control was a key move towards developing capitalism in China.

Controls on foreign trade were greatly eased, allowing individual enterprises to engage in direct trading with foreign firms outside the control of the Ministry of Foreign Trade (which was re-named the Ministry of Foreign Economic Relations and Trade). Subsequently, the government introduced another tranche of legislation in 1986 to further facilitate Chinese businesses entering the mainstream of international trade: in particular access to foreign exchange and credit, and reform of the wages system to allow much greater bonuses to be paid to managers.[10]

Beginning in 1979 and throughout the 1980s, the Chinese government was preoccupied with incentivising state enterprises most of which were characterised by gross inefficiency. The Party appreciated the benefits being realised from TVEs and expected that extending the same reforms to the urban industrial sector would have the same effect. It was agreed to introduce market mechanisms such as allowing greater autonomy for management, and permitting horizontal relations between enterprises (previously characterised by a rigorously enforced top-down structure).

At the 12th Congress of the CCP in September 1982, Deng Xiaoping announced the building of socialism with Chinese characteristics; of a so-called “planned commodity economy” which, in effect, was a significant move away from a planned economy. The managers of small (and medium) SOEs were given much greater autonomy, encouraged to produce goods outside the state plan for sale on the market, and permitted to introduce individual bonuses. From this time on the planning element of the economy was applied only to major projects. However, the official position of the Party was that the state sector of the economy was, and would remain, dominant.[11] In the mid-1980s, in total, the state sector employed about 70% of the urban workforce and throughout that period the giant SOEs dominated the overall economic processes in China.

The government also tested a change in financial procedures for selected small and medium SOEs (SMSOEs)[12]: rather than remitting all of their profits to the state, as previously, they were allowed to pay a tax on their profits and retain the balance for reinvestment and distribution as bonuses. Here we have the bureaucracy of a deformed workers’ state, using capitalistic methods to revitalise part of the state sector.[13] However, these measures on their own proved insufficient to change the basic economics of SMSOEs, many of which continued to lose money. Nonetheless, a significant step had been taken in downgrading the importance of the national economic plan.

Determined to reduce the financial burden imposed by the SMSOEs, and to simultaneously increase the number of private companies in China, the government encouraged management buy-outs. These were to be sold off as going concerns or broken up into separate companies, with the more profitable sectors being privatised and the less efficient being closed or remaining under state control. Managers were encouraged to rationalise their companies to make them profitable. Millions of workers faced dismissal. However, SOEs in China were not simply for generating government revenues, they also served many other purposes, including the provision of social welfare.[14] The measures imposed left many of those who managed to keep their jobs with no health care, no sickness payments, and even no pension scheme. Those sacked were left with nothing.

One group of managers of SOEs (those more familiar with Western practices) were busy asset-stripping. The most modern machines in the factory were sold to friends in the private sector at knock-down prices. When the time came to privatise these companies their managers bought them cheaply because they had few worthwhile assets, and then in partnership with their friends re-stocked them with the machines previously removed. Another group of managers, especially senior CCP members with links to the local Party organisation which controlled the local town councils, entered into partnerships whereby the councils designated companies as collective ventures but then ran them for private profit which went to the local Party tops. This latter strategy was Beijing’s preferred option since it gave jobs to Party officials who would otherwise have been unemployed. The number of private companies rose from 1.83 million in 1981, to 11.71 million in 1985.

In 1987 there was a classic “scissors crisis”, too few industrial products to satisfy the demands of the newly-enriched peasants. The peasants responded characteristically and, despite an excellent harvest, there was a shortfall in basic food products (rice, corn) in the shops. In consequence, inflationary pressures exploded. The two years 1988 and 1989 saw the annual inflation rate hit 18%, the real purchasing power of working class families was hard hit, and social unrest ensued. The rationalisation and privatisation of state-controlled companies had led to a marked rise in unemployment, pushing the official unemployment rate above 5% (a real unemployment rate of more than 10%). Workers took strike action and laid-off workers rioted.

In response, in 1988, the regime put a brake on the so-called “reforms” and in an attempt to control inflation tightened the money supply. This provoked a new phenomenon for the Chinese economy, the recession of 1989. This economic crisis was transformed into a political crisis inside the CCP and the General Secretary, Hu Yaobang, was forced to resign for failing to take action against students protesting against the government measures. All this led to growing social unrest and a wave of strikes. This was the context of the protest movement in and around Tien An Men Square in Beijing.

1. Suliman, O. China’s Transition to a Socialist Market Economy, Quorum Books, 1998.

   ↩

2. Fan, Y. et al., Chinese Village Entrepreneurs, Durham University Business School, 1996.

   ↩

3. Ibid.

   ↩

4. Ibid.

   ↩

5. Hart-Landsberg, M., and Burkett, P. China and Socialism, Monthly Review Press, 2010.

   ↩

6. Wu Jinglian, 30 Years of Reform and Prospects for the Future, Development Research Centre of the State Council of PRC. 2008.

   ↩

7. Suliman, Op. cit.

   ↩

8. At this time the European Union was coming to the end of a similar process of modernising small and medium enterprises to make them more efficient and profitable. It appears that the Chinese had studied the European initiative and were following a similar path.

   ↩

9. OECD, State Owned Enterprises in China, 2009.

   ↩

10. Jie Dong, Mergers and Acquisitions, PhD Thesis, Manchester University, 2006.

    ↩