30 years of »socialist market economy«: market economy made in China

Measured in terms of purchasing power parity, China has been the most important economy in the world for several years. »The dominance of the Chinese economy appears to be the industrial
and trade policy of the classic industrialized countries with challenges«, says the latest issue of the magazine for economic policy »Wirtschaftsdienst«, which takes on the search for a new China strategy in the West. Despite the large number of people, the country’s rise to a “geo-strategic challenge” was not a sure-fire success.

Deng Xiaoping (1904-1997) is considered the inventor of modern China. In the 1960s, the General Secretary of the Communist Party played a key role in the failed »Great Leap Forward«. Farmers were forced to leave their fields, the country was supposed to be industrialized. That failed miserably: the entire economy was shattered and many people went hungry. From then on, China remained socialist in its self-image, but it was open to new ideas from outside, including capitalist ones. Farmers were allowed to cultivate private land again. The party and government now tolerated private enterprise and allowed foreign investment. The question of the right economic course has remained controversial to this day.

Deng, who had studied in France in the 1920s and later in Moscow, had been considered the strongman in the party and government since the late 1970s. A trip by Deng to southern China in 1992, where he had begun small-scale economic reforms, was groundbreaking. »Don’t think that planned economy is socialist and market economy is capitalist. Both are just measures. The market can also serve socialism.«

According to this reading, which is also widespread among European leftists, the market economy is not an exclusive product of capitalism, but can be a means to a good end. At the XIV Party Congress that same year, the Communist Party approved Deng’s plan to build a market economy by the end of the century. Not only private companies were strengthened, but also state-owned companies were given more leeway. The corresponding constitutional amendment took place 30 years ago, on March 29, 1993. On that day, MPs replaced the term planned economy with “socialist market economy” and changed the phrase “state-run enterprises” to “state-owned enterprises”.

The resolutions triggered a growth spurt with double-digit growth rates. Further reforms followed, also in science and research. In 1997/98 many state-owned companies were privatised, trade barriers were removed, the banking system was redesigned and in November 2002 China joined the World Trade Organization WTO after 15 years of negotiations.

China had thus arrived in capitalist globalization, from which the People’s Republic as the “workshop of the world” became the greatest beneficiary. China soon surpassed Japan as Asia’s largest economic power. Since Deng’s constitutional reform in 1993, the country’s economic output has increased fiftyfold.

Accession to the WTO has fundamentally changed the conditions. Today, China builds most ships, computers and knick-knacks of all kinds and exports these products. There is hardly a country for which China is not one of the most important trading partners. Companies like Bytedance (Tiktok), Huawei or the oil company Sinopec are active worldwide. The country also plays a central role in important raw materials and their refining. 90 percent of the world‘s processing of cobalt for batteries takes place in China. As an investment location, China has gained paramount importance, especially for German corporations and for “dirty” industries from the Global North. In addition, the 1.4 billion people in China have become the most important sales market for many Western corporations.

But like other fast-growing emerging economies that are catching up, China is burdened by “structural barriers to income dynamics,” according to the World Bank. A broad middle class with high incomes and Western consumer demands faces an even larger lower class, which remains largely excluded from the rapidly growing national income. The Gini index, which measures income inequality, improved until 2015, but then rose and at 46.6 points is now well above the warning threshold set by the World Bank at 40 points. The aging of society is also problematic. In 2022, the population has shrunk for the first time. For the “socialist market economy” this can mean: China is getting older before it is rich. The People’s Republic itself lives from the international division of labour. There are dependencies in key elements of the value chain, such as semiconductors, raw materials and food.