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State and private in China’s economy

By Tim Wright

The central story of China’s economic reforms and the resulting economic miracle has been the move from a centrally planned to a largely market economy, and the emergence of a market-based and mainly private sector alongside the old state-owned sector. Most quantitative trends are still in that direction, and legal and institutional reforms, notably stronger property rights within a situation of limited rule of law, have provided some support. Nevertheless, China has maintained its distinctiveness from other varieties of capitalism, both in rhetoric (“socialist market economy”) and in reality. The Communist Party state retains a more powerful role in the economy than is the case with most capitalist countries, and the trend has by no means been unidirectional from state to private or from planning to market.

Indeed, over the past several years there has been a lot of discussion in China over a counter trend, that is “the advance of the state and the retreat of the private” (guo jin min tui). On the one hand this reflects the on-going perception in the Chinese leadership that only the “national champions”—the massive state-owned companies—are likely to be able to compete on the international stage. Moreover, the nature of the 2008 stimulus package—heavily weighted to large-scale infrastructure—meant that many of the resources went to state-owned companies. At the same time, the trend also involves struggles for power and wealth between different groups in society. Thus as the Economist reported, state interests were successful in the mid-2000s in seizing some 4,000 privately run oil wells in north-west China.

Chinese President Hu Jintao (L) talks with Vice President Xi Jinping as they leave after the closing session of the National People’s Congress on March 13, 2009 in Beijing, China. (Photo by Guang Niu)

One of the main arenas of contention between state and private interests has been the coal industry. Of course this is an arena where genuine claims of public interest can be made. China is critically dependent on coal as a source for its energy (coal provides around 70% of China’s total energy needs), a dependence that causes major environmental problems, and in that situation the state could be expected to pay close attention to the industry in any society. Moreover safety, or rather the lack of it, has provided a major reason and pretext for state intervention. Up to the early 2000s China’s coal safety record was an international embarrassment, with far higher levels of fatalities and fatality rates per million tons of coal produced even than other developing countries. This became a matter of concern both for the leadership and for the educated public in general. Wen Jiabao’s history as a geologist contributed to making this issue a major focus of the more “populist” agenda of the Hu Jintao-Wen Jiabao leadership. The worst safety record was found among the smaller rural and private mines, and therefore provided the pretext for a series of attempts to curtail or control such mines. It also allowed the state and the press to paint the small mine owners as “black-hearted coal owners,” and they received public sympathy.

The two trends—a general extension of state power in the economy and concern for coal safety—came together in the attempt to consolidate and rationalize the coal industry in the late 2000s. This happened most famously in Shanxi province, until 2008 China’s largest coal producer, and similar policies were then extended to other provinces, though with some variations. In Shanxi, the policy took the form of empowering State-owned mining enterprises to take over the resources of small mines within an area allocated to each of the large mines, thus ruling out any competition over resources. This was widely perceived, though not official described, as the (re-)nationalization of coal resources.

Private enterprises and owners not surprisingly felt bitter at the implementation of this policy, and argued strongly that any compensation that was paid was entirely inadequate. Owners among the local rural population were angry at being forced to sell below value, with dark rumours about bribes paid to local officials. But many of the targets of the policy were extra-provincial investors, and thus people for whom the provincial government would feel no particular responsibility. The largest group was from Wenzhouin Zhejiang, whose investors had sunk tens of billions of yuan into the Shanxi coal industry in the 1990s and 2000s. The overall trend towards the strengthening of property rights was shown by the fact that the Wenzhou owners felt able to fight the takeover, using media campaigns to denounce the nationalization and the state’s encroachment on private rights. They also attempted to call on the rule of law, hiring lawyers, who held workshops and conferences in Hangzhou to protest the policy, arguing that it contradicted the principles of the socialist market economy. Nevertheless the trends towards stronger property rights and the rule of law were only incipient, and it would appear that the mine owners’ protests had limited effect, and the nationalization went ahead.

Private owners were not the only interests adversely affected. By concentrating ownership in the hands of state owned enterprises at the provincial level, the policy also deprived local governments of the major part of their revenue streams and local populations (and migrant workers) of many employment opportunities. Thus there was much less enthusiasm for the policy at the county level and below than at the level of the province, though outright opposition was limited by the heavy weight the central state was giving to the improvement of work safety in assessing officials for transfer and promotion: the policy does appear to have very substantially reduced the accident rate, and resistance could be made to seem irresponsible. In addition to generating tax revenues, local governments had previously been able to pressure private mine owners into contributing to a wide range of social expenditures. As one local official complained, although they could get the private owners to build roads or schools almost at will, they couldn’t even get the new province-level owners to construct a public toilet.

One must be careful in extrapolating the experience of the Shanxi coal industry to the national economy, but at the minimum this episode shows that the state retains levers and the willingness to use them to impose its will on the enterprise sector to a far greater extent than in most other capitalist countries. While private owners appear to have a greater ability now to articulate their interests in public, they are still not able to roll back the advance of the state at the expense of the private where the state—or key elements of the state—sees its core interests involved.

Tim Wright, Editor-in-Chief of Oxford Bibliographies in Chinese Studies, is Emeritus Professor of Chinese Studies at the University of Sheffield, UK.  His research focuses on modern Chinese economic history, in particular natural and economic shocks to the economy, and on the political economy of contemporary China. His publications include Coal Mining in China’s Economy and Society, 1895–1937, The Chinese Economy in the Early Twentieth Century: Recent Chinese Studies, and The Political Economy of the Chinese Coal Industry: Black Gold and Blood-stained Coal.

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Image credit: National People’s Congress 2009 via iStockphoto.

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