Published October 12, 2021
Written by Tony Saich, Director, Ash Center for Democratic Governance and Innovation; Daewoo Professor of International Affairs, Harvard Kennedy School
Should we be surprised by General Secretary Xi Jinping’s recent policy initiatives to re-exert control over the private sector? One prevailing view is that they mark a distinctive break with the past couple of decades, when China produced massive fortunes for a small elite in real estate and tech. Others argue that they’re necessary to clean up messy sectors that require more effective regulatory oversight. However, the truth is that the Chinese Communist Party (CCP) has always been, at best, suspicious of private entrepreneurs and activities outside of its direct control, and, at worst, downright hostile. External observers have often seen what they want to see, claiming that while the party has maintained its socialist rhetoric, in practice it was not serious and could be ignored. After all, the private sector contributes 60 percent of GDP and provides almost 90 percent of new jobs in urban China. Surely, the CCP could not be serious about reining it in — or could it? History might provide some answers.
In 1921, the CCP’s founding Congress expressed clear goals of overthrowing the capitalist economic structures, introducing the dictatorship of the proletariat, and nationalizing industry. Yet, since that time, policy has been marked by pragmatism in how the private sector would be used to serve policy ends. Whenever economic pressure has demanded it, the sector has been allowed more space to grow. In addition, when the state has lacked capacity, the work of development has been outsourced to the private sector, whether that be domestic enterprises or foreign-invested ones. During the early 1940s in Yan’an, where Mao Zedong and his leadership were based, the party itself even engaged in opium production to ease the financial stress caused by the blockades of the nationalist forces.
The initial promise after 1949 was that there would be a lengthy period during which the private sector (“patriotic capital”) would be tolerated as the party sought to revive the war-torn economy. However, it was not long before policy began to squeeze private entrepreneurs by tying up the supply and distribution chains in the hands of the state and forcing them to sell out to state organizations. By the Cultural Revolution of the 1960s, Mao was accusing his enemies within the party of being “capitalist roaders.” A “capitalist,” patriotic or not, was clearly not a good thing to be. The peasants who had received land as a part of land reform were quickly moved forward through collectivization into the communes.
The period since 1978 has proven more complex for the party, with both foreign and domestic challenges. During this period, China engaged with foreign investments for the first time since the 1950s, pursuing export-led growth and increasing the country’s presence on the world stage. Still, the CCP remained cautious and suspicious of foreign intent. Throughout the 1980s, the CCP slowly and grudgingly acknowledged a role for private enterprise. Private firms were allowed as long as the number of employees did not exceed eight, and concerns were such that many de facto private enterprises registered themselves as collectives, an approach that was termed “wearing a red hat.” Some private entrepreneurs were even blamed for providing support to the student-led demonstrations of 1989.
The 1990s saw a growing partnership between party-state functionaries and business, leading to increased insider dealing and continued official corruption; at this time, business licenses and access to land required political connections. By the end of the century, the party had accepted a limited space for private business and its role in the economy and even permitted entrepreneurs to become party members. Of course, a number of existing party members were already profiting from the private sector.
The subsequent economic boom, accompanied by China’s entry into the World Trade Organization, created massive wealth for some and increased corruption and inequality. The new economic model also spawned high levels of debt and increased the influence that powerful tech companies exerted in key areas of communications and information control. Facing this landscape, General Secretary Xi launched a popular campaign against corruption and, most recently, implemented a series of actions to reassert tighter party control over the private sector. The process began with the state taking an ownership stake in major corporations and strengthening the role of party committees in these companies. This approach received public attention when Jack Ma and his Alibaba and Ant Group financial empire found their wings clipped in late-2020. Subsequently, the party has called on private companies to help state enterprises, demanded the rich give back to society through philanthropic giving, and passed a raft of legislative oversight. These new regulations have gone far beyond seeking to control and regulate the real estate and tech sectors. For example, they’ve led to disbanding the for-profit education sector and dictating how many hours children can play games online.
The current policies emanating from Beijing are not a new reality but rather another turn in the cycle of how the party views and uses the private sector. There are many echoes from the past. From Xi Jinping’s perspective, he has a party-/state-led model that works and will be more effective than Western profit-driven capitalism. He needs the private sector, but the sector needs to more clearly serve the party’s interests (“patriotic capitalists”). Thus, where possible, policy has provided preferential treatment for the state-owned sector to drive domestic policy and China’s global approach. By contrast, the private sector has been disfavored in terms of access to capital and investment; the party has reined it in when it becomes too influential or when business seems to be evading party oversight. Xi Jinping should be believed when he says that he intends to build China into a “modern socialist power.” Will the approach work? That is a topic for a different piece.