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Lectures institutionnalistes de la Chine

Ownership Transformation and System Change in China

Transformation de la propriété et changement de système économique en Chine
Bernard Chavance


Compared to other post-socialist economies, the evolution of ownership forms during system change appears quite original in China. A first diversification occurred during the 1980s, with the enlargement of « non-state » (private, foreign) ownership forms ; concurrently usus and fructus rights were redistributed within unchanged legal forms of collective and state ownership. During the 1990s a wide-scale privatization process was launched both in the collective industrial sector and in the state sector. Since the 2000s, a mixed system stabilized where non-state forms predominate from a quantitative point of view, while the state sector takes the form of large business groups in the strategic sectors. The entangled character of both private and state ownership, and the connexion of these two sectors with the Party, make up the base of an original type of party-state (mixed) capitalism.

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1The experience of institutional change in former socialist countries after 1989 and 1991, and China’s evolution since 1978, share a common characteristic, a wholesale transformation of the economic system, that amounts to a shift from the socialist system family to the capitalist system family. However differences and even divergences observed in the process of change are numerous and significant. The place of ownership is one of the most important; there is a striking contrast between the trajectories of most of the post-socialist countries of Central Europe and the former Soviet Union, and that witnessed in China. In their policies of a fast « transition to market economy », the former all gave priority to privatization of their economies, strongly encouraged by international organizations like the World Bank, the International Monetary Fund, the EBRD, and by western governments. Within approximately a decade, the shift to preeminence of private ownership had been accomplished, through various deliberate privatization programs and techniques, and also spontaneous processes (Vincensini, 2011). In following a strategy of « modernization », realized through a number of wide-scale reforms, China did not consider ownership transformation in its agenda in the first 15 years of change. The state and collective ownership sectors were still dominant or very influential at the beginning of the 1990s (Chavance, 2000).

2Strong tensions and tendencies in the process of change, and modified policies and reforms caused a reorientation during this crucial decade, where dramatic changes occurred, including a wide-scale movement of privatization in the state sector – even though it was not realized under this name. Concurrently, a significant fraction of downsized but concentrated state-ownership economy underwent a process of reorganization, that would continue throughout the 2000s and 2010s.

3This article attemps to reflect on this specificity of Chinese experience of system change. While privatization has been considered as a prime concern in post-socialist economies, the reasons of the ideologically sensitive character of ownership changes in China, and the difficulty to assess real transformations in this essential sphere of the economy will be discussed.

4The first section considers the initial period, a decade and a half when transformation was essentially focused on changes in coordination, while mutations in ownership were confined to gradual extension of small private ownership, and redistribution of rights within inherited collective and state ownership. The second section discusses the great privatization movement that extended from 1994 to 2003, under the maxim of « Retain the large (state owned-enterprises), let the small go », a period where important changes in legislation and corporate governance were promoted. The third section deals with the new forms of mixed statist capitalism that evolved and stabilized since the first half of the 2000s. The paper concludes with remarks on the specificity of chinese capitalism.

1. The shift to market socialism with Chinese characteristics (1978-1993)

  • 1 At the 14th Congress of the Communist Party (1992), China was proclaimed to be a « socialist market (...)

5A few months before the end of communist regimes in Central Europe, Wlodzimierz Brus, a great figure of reformist thought, of Polish origin, published with Kazimierz Laski a book under the title From Marx to the market: socialism in search of an economic system. Reflecting critically on his earlier influential views about a « decentralized model » of socialism, he now advocated a model of « market socialism proper », with markets for products, labor, and capital. In such a model the question of ownership, according to the authors, would become « open-ended », the future of state ownership being left undecided, without any a priori doctrinaire position. Traditional socialist values as equality of chances, full employment, social protection etc., would be maintained (Brus, Laski, 1989). While this kind of testament of reformist thought had no influence on the post-socialist economies of Europe and the former Soviet Union, that all followed the path of a conventional « transition to the market economy », nor impact in China itself, – the formula of « market socialism proper » is a somewhat relevant description of the type of economic system that actually evolved in China in the first half of the 1990s, through about 15 years of protracted institutional changes1. State and collective ownership were still paramount, while central planning and vertical coordination had been drastically reduced, markets for products were becoming dominant, a flexibilization of labor contracts was in process, capital markets had been created. In the movement of growth of rural and urban incomes, of minimal unemployment, « reforms without losers » (Lau et al., 2000) had until then prevailed.

1.1 Redistribution of property rights within collective land ownership

6Chinese reforms are generally and accurately characterized by their gradualism and pragmatism. However the decisive change that triggered the whole cumulative process of transformation – the decollectivization of agriculture – was nothing less than radical. People’s communes in the countryside had been an institutional cornerstone of the economic system for twenty years. Their replacement by the household responsibility system, a dramatic shift from collective to family farming, was the combined result of peasant pressure and political strife at various levels of the party apparatus, until the leadership approved the extension of successful local experiences. Initially a regional experiment, its viral extension after authorization by the party eventually led to the abolition of the people’s communes in 1984. Concurrent price increase for deliveries above procurement quotas was also a decisive change for modifying peasant’s incentives. The dramatic agricultural growth of production and incomes that ensued gave the initial impulse and legitimation to the whole reform process.

7Contracts were established between local authorities and peasant families, attributing the right to use of a given allotment, resulting from division of the commune’s agricultural land, in proportion to the number of family members, and specifying the quota to be paid to the state; any surplus could be freely sold on expanding markets. Initial contracts were for one year, soon extended at 3 years, later at 5, 15, and even 50 years. But it has to be underscored that ownership of land remained « collective » and was not granted to families, who actually benefited of a transfer of usus and fructus rights while abusus and the formal title of ownership remained with local authorities. The latter periodically redistribute land, to take into account population changes. « Quasi-state » ownership of land (Kornai, 1992) was consequently maintained, but actual use and income rights had been redistributed to peasant families. The disposal right of local authorities (abusus) would become critical in the second stage of system change.

8Productivity rise in agriculture in the first half of the 1980s liberated a huge « latent surplus population » in the reserve army of labor – to quote Marx. It was the origin of two decisive components of the emerging new modes of development: the fast expansion of « township and village enterprises », and a growing pool of migrant workers, moving to cities for industrial employment – while keeping their rural compulsory registration by hukou. The latter prolongs the bond of rural citizens to the land, but also maintains an ultimate protection when they are faced to fluctuations of the urban economy.

9Decollectivization amounted to a kind of revolution from below, authorized by the center, a type of egalitarian land reform. In the new institutional organization of agriculture, the rural population – that still represented about 80% of the total – while remaining attached to the land, gained independent farming, an increase in the average income and access to consumption, the possibility for a part to enter wage-labor, in rural enterprises or in urban industry as migrant workers. The local party apparatus, initially reluctant in front of the great change (Dumont, 1983; Chavance, 1988), soon accepted the new powers and possible benefits that resulted from the novel property rights distribution. This amounted to a new grand compromise between the central and local authorities, and between the power apparatus and the peasantry, inscribed in the adjusted ownership arrangement in rural areas.

1.2 Township and Village Enterprises: extension of collective ownership

  • 2 The very category of « non-state » enterprises, is revealing of ideological euphemization, or of ci (...)
  • 3 « In the rural reform our greatest success – and it is one we had by no means anticipated – has bee (...)

10A most important change, as far as ownership is concerned, was the development of township and villages enterprises (TVEs), that initially extended from the basis of former people’s communes small industries. Accompanying the transformation of rural land organization, TVEs were in « collective » ownership, as land, signifying they depended of local (village and township) authorities. With the extending private and foreign-owned enterprises (joint ventures), they formed the « non-state sector »2. Taking a variety of forms in different regions, they seemed to be a kind of (local) public enterprises, strongly distinct of urban state-owned enterprises in terms of ownership and governance. They became an unexpected but decisive agent of systemic change in the decade of mid-1980s to mid-1990s3, through very fast growth of production, the promotion of competition with the state sector, also subcontracting with it, and allowing a part of rural labor force to shift to the wage-labor system. In a period of fiscal decentralization (Shirk, 1993), they gave rise to a conjunction of interests, called by Jean Oi « local state corporatism » (Oi, 1992, 1995), where local government (and party) found strong interest in the development and prosperity of TVEs.

11The nature of TVEs was controversial for many observers, specially mainstream advocates of the theory of property rights. How could such poorly defined property rights, which lacked any exchangeability, and in a certain measure security (Ho, 2013), result in a success in terms of « performance » (i.e., in this perspective, growth)? Weitzman and Xu (1994), for instance, suggested that TVEs were « poorly defined cooperatives » and that the paradox or challenge raised for the property rights theory could be solved by extending the latter in taking into account the « ability of a society to collaborate ». TVEs were sometimes alternatively defined as quasi-state, or quasi-private enterprises. Fuzzy property rights accompanying for a decade beneficial growth consequences remained a puzzle for advocates of the property rights doctrine. In the 1990s the policies of privatization inspired by this approach were launched in central and eastern Europe in a period of post-socialist depression, contrasting with the Chinese continued and fast expansion (Chavance, 2011).

1.3 Dualistic policies: a grand contextual innovation

  • 4 Kornai (2001) gives a critical assessment of the initial obsession with speed for privatization in (...)
  • 5 A confirmation is negatively given by the 1987 dualistic reform of the state sector in the Soviet U (...)
  • 6 A paradigmatic case was given by arguments put forward at the beginning of transition in Poland by (...)

12Gradualism and pragmatism have been symbolized by the dualistic strategy followed by the party-state in different fields. Such strategy has been – along with experimentations – the most original innovation in the process of system change, when we compare it to conventional teleological policies followed in post-socialist societies. The time factor is central here; a great contrast with the latter countries where the speed of change was deemed essential4, is that a genuine perspective of transition that would take time was generally present. Dual-track reforms, comprising a gradual extension of new institutions, new regulations, new authorized practices (second track), while concurrently maintaining the initial system (first track), have different rationales. The first one is their compromise dimension, in a context where changes are generally controversial, uncertainty prevails on consequences, and where maintaining the party’s position is a shared objective among different factions of the leadership. The second is that a dual-track reform ensures a degree of permanence, through initial continuation of the first track as an expected guarantee of social and economic stability; conversely it is in principle reversible if consequent destabilization appears threatening – this rejoins the compromise dimension. Dualist processes are a source of tensions and conflicts, possibly of corruption, they may allow resistance to change to build up; but they are facilitated in a high growth context, that may even be necessary to their extension and possible resolution5. A successful dualist policy, resembling the process of institutional « layering » in Streeck and Thelen’s (2005) typology, is bound to end in the gradual generalization of the second track and contraction and removal of the first track; in any case it takes time. We are far from teleological transition strategies that call for speed, want to take advantage of political « windows of opportunity » and disregard possible social costs of transition6.

13The original dual-track experience was in agriculture: in the household responsibility system, contracts included a compulsory quota of deliveries, beyond which the peasants were free to extend production and sales at market prices. The urban (industrial) reform of 1984 has been a kind of transposition of the agricultural experience: state enterprises received a planned production quota, at administrative prices, and were authorized to increase production and marketization at deregulated prices. As a result, in less than a (turbulent and conflictual) decade, the industrial state sector gradually « grew out of the plan » (Naughton, 1995).

  • 7 Another analogous case of dual-track reform was the sale of apartments to former occupants by state (...)

14The twofold, gradual policies of institutional change have taken place in many different, but connected domains. External opening was a case, with the Special Economic Zones, initially authorized in Guangdong and Fujian, later progressively expanded to the coasts and borders; eventually the whole economy was « opened ». Another instance was the extension of a contract system for new state sector employees in the 1980s, while the old life employment system was put into extinction. In the 1990s, all employees were shifted to new types contracts7.

15Ownership change was dual-track in a sequential sense. In the first period dominated the extension of « non-state » sectors (TVEs, small private sector, joint-ventures with foreign firms). The state sector was not considered for significant formal ownership changes – even though partial redistribution of de facto property rights in the state sector took place with the various contractual management reforms, dual-track changes in prices and production, and incremental phasing out of compulsory planned objectives. But ownership transformation was principally sequential. In the second phase, beginning in the mid-1990s, while the development of new private enterprises and groups reached a new level, the policy of « retain the large, release the small » launched a wide-scale privatization of small and medium collective and state firms, the remaining concentrated state sector of big firms being later continuously reorganized.

1.4. Reform cycle

16The first period went through a reform cycle. Economic and social tensions resulting from inflation, corruption linked to the dual-track system, favoritism, inequalities, initiation of reforms touching the « iron rice bowl » were the background of the Tiananmen crisis in 1989. Political demands for democratic rights, expressed by the student movement emerged forcefully in Beijing and other cities, before being violently suppressed. In the conservative backlash that followed, many changes were suspended. One example is the shareholding system, which had been first experimented in Shenzhen, whereby firms could issue shares, essentially to raise funds; it was further introduced by some small or larger state-owned enterprises (SOEs), joint ventures or even private companies. This shareholding system was being considered for extension but the 1989 events completely transformed it. The shareholding experiments were limited to SOEs, and the active exchanges that had emerged before (in Shenyang, Chengdu, Wuhan, Beijing and Tianjin) were closed; Shanghai and Shenzhen were then selected as the only « over the counter » official markets (Walter, 2010). When the Stock exchanges were opened in the two cities in 1990 and 1991, initially only a small number of firms that had publicly sold shares were listed. After the new start of reforms following Deng Xiaoping’s southern tour in early 1992, Chinese capital markets will be essentially developed to help and finance the state industrial sector.

17Restarting and relegitimizing the reform process was Deng’s decisive but last endeavor. An important figure in the new period of reform was to be Zhu Rongji, who became first vice premier in 1993, and was appointed premier at the Party congress of 1997. In this new upswing of the reform cycle, a combination of financialization and changes in the ownership system was eventually contemplated – and carried out.

18Ownership reforms of the 1990s were not motivated by a doctrinal or principle orientation, that would relate private ownership and market coordination. They came from pragmatic needs to face the tensions inherited from the previous period of change. In the state sector, the decline of profitability and accumulated debts of SOEs, the burden of their social expenditure in a context of enhanced competition and of accelerated inflow of foreign investment, the growing non performing loans of banks, called for new policies.

Box 1. The long march of private property in official doctrine

Box 1. The long march of private property in official doctrine

In italics: constitutional articles or amendments

Credits: autor

2. The great privatization: gaizhi 1994-2003

2.1 Tensions and further reforms

19From 1993 to 1997, an impressive range of interdependent policies was introduced, responding to inherited tensions. They also corresponded to changing social compromises. Social groups were leaving the group of (joint) winners of the 1980s, to enter a category of relative losers: rural dwellers, the industrial working class. A shift from rural to urban China was taking place. Income inequalities soared.

20In the macro sphere, a stabilization program including inflation control and devaluation was realized by Zhu Rongji; in 1994 occurred the decisive change in the fiscal system. The main aspects were unification of taxes for firms, ownership types and local governments, that implied a recentralization of the tax system and the assignment of fiscal responsibilities and revenues at the different levels of government in the country. The previous SOE profit contracting system, developed in the 1980s, whereby SOE managers had to meet performance targets and could in return retain a share of the firm’s profit (Garnaut et al., 2005), was abolished, contributing to the end of the dual-track system. The main taxes were now value-added tax and profit tax. A change for « parametric guidance », i.e. macro-policy, contemplated in the past by East European reformists, but never really implemented there, was advancing. The continuous decline in central budgetary revenues, that had characterized the 1980s, was subsequently reversed; on the expenditure side, subsidies receded and the civilian outlays for administration, education, pensions and social security expanded (Naughton, 2007).

21A different compromise between central and local authorities followed; actually the previous decentralization of the tax system, that had stimulated the local developmental state (or local corporatism) had allowed to « buy » the local authorities for change and expansion (Shirk, 1993). The new fiscal system reinforced the central hand, leaving local authorities with more stable rules for their own development, but constraining them to a permanent search for revenue. At the same time, the expenditures shifted from the central to the local level were increasing, notably with the transformation of the social protection system, in a process of externalization out of SOEs. Local governments and cadres, being increasingly assessed by higher levels on the basis of local expansion (and social stability), were entering a more intense hunt for finance.

2.2 Ownership reforms: gaizhi or restructuration

  • 8 Let us note that Chinese actual privatization wave occurred at the end of the 1990s, a decade which (...)

22A whole strand of reforms was now reaching the ownership system. They gradually covered a moving continuum extending from reorganization of the state ownership to plain privatization8. The sequence may be seen as a process of radicalization of the leadership, but it is also explained by bottom-up pressures or experimentations, and by financial tensions in the budget, in the banking system and in SOEs’ finance.

23In 1992, a central Regulation granted SOEs extended rights to set their own prices and wages, to hire and fire workers and to engage in foreign trade. The turn to a « modern enterprise system » for SOEs was proclaimed in a Party Decision of 1993, with « clarified property rights » and « separation of enterprises from government »; it allowed for the privatization of small and medium SOEs, under various forms (Song, 2015). In 1994 the Company Law upheld the « corporatization » of SOEs, i.e. their transformation into joint stock companies (or limited liability companies for the smaller ones), with a board of directors, opening the possibility of diversifying their ownership structure by endowing diverse public organizations with shares or even selling minority parts of the latter to the public. It also set new, less restrictive rules for foreign investment – that soared in the decade. This Law was a clear intent to force the change of state enterprises towards a western type model of the firm, that would give a greater flexibility of management, governance, ownership and access to financial markets for the public sector. Its implementation will actually appear protracted.

  • 9 The « non-state » sector, a typical Chinese postsocialist category, is defined by all enterprises t (...)

24The most significant change for SOEs came from the policy called « retain the large and let the small go », a decisive strategic turn of the leadership. The very phrase illustrates the somewhat reluctant and unacknowledged approach to privatization, and points to the financing constraints of the time. It was a radical decision to limit the state sector to a number of key national industries and sectors, with the consequence that its relative weight would be reduced in the overall economy, and « non-state »9 forms would expand considerably. In industry, they had actually become dominant since 1992.

25« Retain the large and let the small go » was launched by the government in 1995, and the Party congress of 1997 gave the authorization for local governments to privatize on a wide-scale. The fact of privatization of state or collective firms was not new, it had taken place already in the 1980s and first half of the 1990s, under different forms, at the local level. The new policy was in a sense, this time also, a central sanction to, and extension of bottom-up initiatives. With the campaign launched by the government it became a wide-scale phenomenon. The party referred, as an ideological legitimation, to the notion of the « three favorables » that Deng Xiaoping had established: in the assessment of any change or reform, one should refer to the criteria of its contribution 1) to growth (productive forces), 2) to the strength of the socialist state, 3) to the increase of living standards (Wu & Fan, 2015).

2.3 Background changes

26Let us consider some institutional changes that formed the background of the ownership transformation.

27A classical heritage of the socialist institutions was the ministerial system of organization for the whole economy, and the state sector in particular, based on a sectoral principle. It was gradually discontinued by reforms of the state administration, in 1993 and specially 1998. SOEs consequently lost their traditional branch « mother-in-laws », and authority was shifted to diverse weaker structures, as general ministries (Finance, Labor) or commissions (Guthrie et al. 2015). This amounted for great SOEs to a further shift to what Kornai (1992) had called for Hungary « indirect bureaucratic coordination », as a kind of fragmented vertical dependence on a variety of higher government bodies. But SOEs managers actually gained autonomy from these changes in their relation to administration (Walter, 2010).

28The inherited state banking system was incrementally reshuffled. With the phasing out of the traditional redistribution system in the state sector, whereby SOEs profits were centralized in the budget and redistributed in the economy, financing shifted from the mid-1980s to self-financing by retained profits and to bank credit. The source of SOE’s « soft budget constraint » was often displaced from state budget to state banks, where central or local authorities could exert their influence to support and finance projects and growth. A cumulative backlog of nonperforming loans accumulated in the banking system, continuing in the 1990s. After the Asian crisis of 1997, a strong policy of consolidation of state banks was launched: bad loans were transferred to state Asset Management Companies (the equivalent of « bad banks ») and the banks were massively recapitalized. WTO accession in 2001 would soon imply opening the Chinese economy to foreign banks – even though this process will be actually protracted.

  • 10 Actually, if many characteristics of the wage-labor nexus had been analogous to socialist countries (...)

29From the 1980s to the mid-1990s, changes in the wage-labor nexus had mainly resulted from the growing diversification of the economy. Employment conditions, wages, work organization had greatly differentiated between the traditional SOEs, and the new sectors of TVEs, small private enterprises, special economic zones with their joint-ventures, urban construction sites or industries where migrants were hired. Renewable labor contracts had been introduced in SOEs for new workers in 1986, while the people already employed remained under the previous system of life employment – another example of dualist reforms. The profound transformation of the industrial workers’ position came with the reorientation of policy, aimed at reduction of overmanning in the state sector, in a context of continuously enhanced competition and low profitability. The Labor Law of 1995 extended the labor contract system. And layoffs, that had begun in the first half of the decade, exploded in the second half (Naughton, 2007). The traditional « iron rice bowl » with long-term stability of employment and access to social protection through the work unit (danwei), that was somewhat similar to other socialist countries10, was broken. In a few years, the whole labor configuration went through a kind of big bang – with millions of people laid off, a significant part of urban workers of the state and collective firms (Lüthje, 2013). Unemployment soared, mobility intensified, the « flexibility » of labor markets extended.

2.4 Social protection externalized

30Concurrently with the state employment shock, social protection previously under the responsibility of the state firms was externalized, i.e. it was entrusted to new public institutions or to the local governments. Such transformation had been realized early in European post-socialist economies, now China was entering a similar process.

  • 11 Considering both privatized housing of SOEs and new private housing, by 2005, urban housing units o (...)

31Privatization of the housing park under actual control of SOEs was an important change in the ownership structure, in the movement of Polanyian commodification of the economy. In the second part of the 1990s, about half of urban households were allowed to purchase their apartments from their enterprise at favorable terms11. It relieved SOEs of the management of housing for their employees, it also cushioned somewhat the redundancies shock. Access to private ownership of housing contributed to a sociological reorientation for urban society. A massive transfer of state to private property had taken place. A housing market developed in the 2000s, also fueled by new booming construction.

32State firms were relieved in the same period of the responsibility to pay for the pensions and medical care of their employees, shifted to public funds financed by contributions of employers and employees. « The goal was to develop portable national pension, health, and unemployment insurance programs comparable to social security systems in most other countries » (Freeman, 2015). The process was under way when the big layoffs occurred. A unified National Security Fund was created in 2000, linked to Asset Management Companies that were allowed to invest part of its funds on the stock markets, where SOEs were searching for funding (Solinger, 2016).

33In the crucial period of the second half of 1990, the heritage of the socialist wage-labor nexus was terminated in the state sector. The iron rice bowl was over. But if the break was radical for millions of workers who lost their jobs or experienced reduced entitlements for social security, mitigating factors and active cushioning policies were at work. Continued high growth was a decisive factor for absorbing the social blow – in contrast with former socialist countries where, at the beginning of the same 1990s decade, unemployment and impoverishment had soared in the midst of depression (Chavance, 1994, Porras, 2013).

2.5 The big privatization: « Let the small go »

  • 12 A great number of TVEs were turned into shareholding companies, sometimes leaving an equity share t (...)

34« Let the small go » was translated in a wide-scale movement of partial or full privatization for small or medium-size SOEs (again, without using the expression, but rather the term gaizhi, or « transforming the system » (Garnaut et al., 2005)). Provincial and local governments struggled to find financial means, after the central government slashed subsidies to most SOEs, except the 500 largest, most centrally controlled (Walter, 2010). The main actors in the gaizhi process were these local authorities and the state enterprises managers. The profitability of most of these firms was low in the middle of the decade. A diversity of forms of divestment appeared, frequently Management Buy-Outs; some former SOEs or parts of them were bought by existing private firms. The change of ownership reached also the Township and Village Enterprises, which were under collective ownership; they had faced tougher competition pressures in the 1990s. Some were closed, and a majority privatized (for a fraction of latter, the « red hats » firms, it was an acknowledgement of a preexisting reality)12. The drastic decline of TVEs implied a reduction of the weight of collective ownership outside agriculture; it represented an important side of the big privatization push of the late 1990s. TVEs appear in retrospect as a decisive but transitory institutional innovation in the Chinese experience of system change. A similar divestment process took place in urban industrial firms that had been under collective ownership.

35Between 1995 and 2003, the number of state-owned enterprises fell from 118000 to 34000; total employment in the state sector was reduced by 44 million. The average size of privatized SOEs was 600 employees (Garnaut et al., 2005). The extent of this change is comparable to the privatization processes that took place, under various forms, in the former socialist economies of Eastern Europe and the ancient Soviet Union during the decade of the 1990s. In these countries, two ownership configurations emerged after privatization: in Central and Baltic Europe, foreign multinationals dominate and the state sector has been reduced to a few utilities (Bohle & Greskovits, 2012; Drahokoupil & Myant, 2010); in Russia private oligarchic and state ownership coexist. In China, while in the mid-1990s, the economy had become divided in three approximately equivalent parts for total output (state, collective and private) (Naughton, 2007), it evolved towards a complex mixed configuration. The non-state sector has become in principle largely dominant, but the complications of entangled post-socialist ownership lead some researchers to classify the economy in opposed ways, as an economy actually dominated (Lardy, 2014) or driven (Nee & Opper, 2012) by the private sector, or conversely as a state capitalism (Wu & Fan, 2015; Naughton & Tsai, 2015).

2.6 « Retain the large »

36« Retain the large »: the new policy meant focusing on centrally controlled SOEs, downsizing and concentrating state capital in larger business groups better equipped to face competition, or national champions, in basic or « vital » industries. A sectoral partition of ownership sectors was emerging, mitigated by interwoven property forms. Large SOEs were encouraged to form big business groups through different forms of consolidation and restructuring. The growing influential approach, promoted by the « Integrated Reform School » upheld the shareholding reform and asset management perspective, eager to avoid the Russian consequences towards privatization of the mass program of vouchers distribution (Wang, 2015).

2.7 Cushioning attempts

  • 13 Ching Kwan Lee (2007) compares rustbelt protests of desesperation, and sunbelt protests of discrimi (...)

37Social protests and resistance multiplied in front of gaizhi wide-scale consequences. Most of them were faced separately by local authorities that the central government pressured for avoiding extension, and limiting unemployment. A combination of repression of leaders and compensation concessions – a general method used by the party-state when confronted to protests – were used to defuse the movements and force the acceptance of the social effects of layoffs and ownership transformations. More generally, various factors and policies contributed to alleviate somewhat the social shocks of the big privatization, and restrain (official) unemployment – with great regional variations13. The extension of the new private sector and foreign-funded firms in that period absorbed part of SOEs laid off workers, and were a partial substitute to former collective ownership firms; the informal sector also played its role. The welfare benefits externalized from SOEs in recent years partially protected the previous pensions, and offered a limited shielding to retirees and unemployed. The governments established re-employment centers to cope with reallocation of labor. Early (but reduced) retirement, various compensations were used (Song, 2015). Gradual severance from firms was frequent – the xiagang statute, where the redundant worker keeps a nominal relation with the firm through work registration, with the formal (actually infrequent) possibility of subsequent reemployment, and access to limited benefits. Informal relations of this type had developed in Russia during the great depression of the 1990s. In general, the overall redeployment of the ownership system marked the shift from an implicit social compact inherited from socialism where the industrial working class benefited of stable employment and incomes, to a new configuration where wage-earners were faced to a competitive and fragmented labor market.

3. Mixed statist capitalism 2003-2016

3.1 Stock markets and shareholding structure

38The evolution of the state sector, starting in the 1990s, was related to the specific development of financial markets in China. In the 1994 Company Law, it was claimed that corporatization and shareholding reforms would be the future way for SOEs. Initially without other precise holder of formal ownership than the state as a general entity, state firms by becoming public joint-stock companies would have specific holders of shares, with a possibility of diversification and also of listing on the stock markets (in China, in Hong Kong or abroad).

  • 14 Formally, the Company Law was following the Anglo-US system of corporate governance, with complemen (...)

39A western normative model of joint-stock enterprise14 was thus grafted on the heritage of the socialist state firm. Similar tentative reforms had been introduced in the last years of socialist economies in the reforming countries of Central Europe, in the 1980s, Poland and Hungary, and had been accompanied by « spontaneous privatization » by managers, before all the countries of the post-socialist region would shift to organized privatization programs in the 1990s (Chavance, 1994).

40When the shareholding system had spontaneously emerged in the 1980s, a « split share structure » had been established, that may be seen as a specific case of dualist regime. After the opening of Shanghai and Shenzhen stock markets in 1991, the perspective remained to preserve the domination of state ownership. There were essentially four types of shares: state-owned shares and legal person shares, held by public agencies and SOEs, A-shares open to Chinese citizens, and B-shares held by foreign investors. State-owned and legal person shares, the great majority, were non tradable; only the minority of individual shares were tradable. Actually over the counter transactions for state-owned shares developed, at discounted prices; their official non-tradability was a strong limitation to the financialization of the economy (Ma, 2008). Corporatization was often accompanied by a kind of dispersion of state ownership among various public organizations or administrations, contributing to the tendency for a managerial control of SOEs; the expected clarification of property rights was hardly forthcoming.

  • 15 In 1999 the important sectors for the state were defined as « industries affecting national securit (...)

41In 1997 the 15th Party Congress strongly promoted the gaizhi process, and confirmed that in the future the state sector should be concentrated in basic and vital industries15. While the (actual) privatization movement was in process for the « small » SOEs, a wide-scale reorganization of « the big » continued, with the shareholding system as principal objective, where mergers, purchase of smaller private firms, spin-offs, initial public offerings (IPOs) took place. In 2001, the National Social Security Fund was established, to consolidate local schemes of social security; the government attempted to help funding it through accelerating the sale of state assets. As a result the financial market went through a severe downturn, and remained on a low level until its reform in 2005 with the share-conversion program, that put in principle an end to the division between non-tradable and tradable shares.

42A Decision of the 3rd Plenum of 2003 called for a «  modern system of property rights » and declared the « shareholding company » to be the main organization form for public ownership (Song, 2015). In the same year, the national State Asset Supervision and Administration Commission (SASAC) was established, an important change in the reorganization process of the enduring but concentrating state ownership sector; it was followed in 2004 by similar provincial Commissions. SASAC was to be the « sole representative of state ownership », in view to « perform the investor’s responsibility » for 196 central SOEs; a core mission of SASACs was to « establish and improve the index system for preservation and increment of the value of state-owned assets » (Wang, 2015).

43SASAC replaced in principle the former multiple dependence of large SOEs, that had been under the supervision of various ministries (Finance, Labor, Planning commission), by a single authority, declared sole representative of state ownership. It also represented a turning point in the protracted process of state ownership transformation, from the previous (direct or indirect) bureaucratic coordination, to a more financial and tentative perspective of « asset management » (Naughton, 2015).

3.2 Mixed ownership patterns

44The structure of capital is only partially understood by categories of ownership, specially the division between private and state property. This is observed both from an economic and social point of view.

  • 16 Considering enterprises above the size of 5 million Yuan of annual sales revenue, a threshold intro (...)

45Overall, the ownership pattern has clearly evolved from a domination of state ownership to the domination of private ownership16. But this gives a partial view of the essentially mixed character of the Chinese economy in the 2010s. A dualist system has apparently emerged, where the central state sector is made of giant business groups limited to a number of strategic sectors, or commanding heights, relatively focused on the domestic economy, whereas the non-state economy encompasses a great variety of enterprises of different sizes, with a large part opened on the international economy. But actually the composite or blended nature of the ownership system is paramount (Guo & Ma, 2015).

46Non-state enterprises – private shareholding firms, joint ventures, foreign-owned enterprises – often have minority stakes by state entities (SOEs, local authorities, state agencies or funds). State-owned enterprises frequently have minority shareholders that are private entities: citizens, foreign investors, predominantly private firms or funds. The « mixed ownership » of SOEs has been promoted by the state since the 2000s, and specially since 2013, manifestly with an objective of corporate governance improvement.

47The influence of the state on the management of Chinese enterprises is not only observed in the state sector, where it is the formal owner of capital, but also on the private sector. Such influence is not so much felt through representatives of the state in company boards, who are rather passive, but by the multifarious dependence of private enterprises on relations with state and party representatives of various administrative levels.

48An original feature of the Chinese economic system is the ambivalent relation of state enterprises managers to the state proper, at the levels of the government and of regulators. On the one hand, the entangled character of state ownership, the multiple dependence of managers on various state shareholders, agencies, SOEs, etc., more or less passive, gives them some relative autonomy for action and strategy. On the other hand, the dependence of the enterprise and of its public shareholders on the party, that supervises the careers, promotions, sanctions, rotation of executives, puts strong constraints to discretion in management. The result is an original combination or hybridization of managerial capitalism, where managers benefit of some independence relative to (state) shareholders, and may even influence (or capture) « shareholder » administration, or regulators, – and of political (or party) capitalism.

49The dominant social group in the Chinese economic system remains structured on the basis of the party apparatus, which has renovated its organic links with the state ownership sector. But the social relations of the non-state sector with the state, and consequently the party, at the various levels of a « regionally decentralized authoritarian regime » (Xu, 2011) are essential.

50About half of the private entrepreneurs are estimated to have worked before in the party-state; a significant number are party members, and the great majority are members of people’s congresses and people’s political consultative conferences (Goodman, 2014). They are frequently members of Chambers of commerce or business associations organized at the level of local governments. For many private sector capitalists, the relations with state and party constitute an important component of economic activity, as they condition access to credit, land, authorization for going public, protection… (McNally & Wright, 2010; Bergère, 2007, 2013).

3.3 Urban land: the rise of real estate

51For agricultural land, the initial reform had disconnected formal (collective) ownership and usus and fructus rights, contractually granted to peasant families, but defined as inalienable. For urban land, in great demand with the fast urbanization and industrialization process, a similar distinction between formal state ownership and « land use rights » (LUR) was introduced (in 1998), allowing local or municipal governments to sell LUR and to collect land rent, without surrendering de jure ownership. Having gained the capacity to lease or contract the usus right of the urban land for a given period, they are holders of the fructus right jointly with the central state. The abusus right however remains vested with the state in general – it is in some way suspended. We observe another example of deliberate partitioning of property rights, and preservation of ultimate state ownership – the state being itself segmented into different levels of administration, that may have dissimilar objectives.

52Such kind of partitioning of property rights, with ultimate state ownership preserved, is quite distant of any proposal coming from the property rights theory. It has been the origin of an important change in the orientation of accumulation in the Chinese economy, accompanied by recurrent bubbles, and subsequent regulation changes (Wu, 2015). Property development has gradually taken an important place in the system. Housing, in the context of high savings, became an investment item for households with high-middle income, even though private renting is restricted. Land use rights sales, or commodification, grew into an important source of revenue for municipal governments; Lin & Zhang (2015) estimate that they accounted in the mid-2000s for « over 30% of total municipal budgetary revenue and nearly 40% of the fund for urban maintenance and construction ». Real estate development corporations have soared (both private, with an important share of overseas Chinese, and state-owned), supported by bank credit (and mortgage development)

53The place that real estate has attained in the accumulation regime is the reflection of a specific and evolving land ownership setup. It connects with the conflict for central leadership between the concerns with growth on one hand, and financial stability on the other, while local governments remain strongly expansionist and in search of finance through land use rights sales. During the fiscal expansion after the 2008-2009 global crisis, local authorities were authorized to found local financing platforms, a kind of special purpose vehicles, allowing them to get credit from banks with future revenues or land as collateral (Yu, 2015).

54Emerging interdependence of the instability of financial markets, and construction and housing cycles, mediated by the credit system, both formal (essentially state) and informal (shadow banking), reflect the current relations of ownership changes in various segments of the economy.

3.4 Ownership, control, and social background in the corporate sector

55The complexity of the corporate sector of the mixed Chinese economy, is revealed in the diversity and somewhat blurred classical relations between « capital-ownership » and « capital-function » (Marx) or « ownership and control » (Berle and Means). Discussing the social origins of the new elites, Andrew Walder (2010) considers four sectors. In the large state-owned sector, equity stakes by managers are infrequent (ownership is held by SASAC and various state organizations), their compensation is limited in comparison to international standards, managerial autonomy is constrained. In the privatized state sector, government entities may have kept some minority shareholding involvement, but little control remains; managers are often former state executives, with ownership stakes, higher incomes, significant autonomy in management. The transactional sector consists of enterprises initially established as private by former government officials or SOE managers; relations with the state continue to be important for conducting business (e.g. real estate firms, construction enterprises, mining companies), reciprocal dependence is present. There is frequent mixed private (managers) and state ownership. Eventually, in the entrepreneurial sector are de novo private firms, created to exploit new products, technologies or business plans, that grew to a larger scale (e.g. in consumer retailing, electronic appliances, services, software, high technology sectors). Generally here, founders or executives have no background as government officials; while remaining vulnerable to pressure by the state, they do not predominantly depend on government connections to conduct business. The future configuration of the corporate capitalism, relations between power and wealth, will depend on the evolution and relative weight of the four sectors and on their interconnections (Walder, 2010).

  • 17 In his Southern tour, in 1992, Deng Xiaoping declared that planning is not the same as socialism an (...)

56The specific place that ownership has taken in the system change is explained by different factors. The first is structural: the domination of state ownership is strongly correlated with the political regime; and it took quite a long learning process to understand that they could be somewhat separated, or partially uncoupled. In connection, from a doctrinal point of view, if the opposition between plan and market as a crucial distinction between socialism and capitalism proved easier to be qualified or downgraded17, the notion of state ownership as the basic institutional pillar of the socialist system, contrasting to the dominance of private ownership in the capitalist system, turned out to be deeply entrenched.

57Another factor is that preeminence of state ownership seen as a guarantee of social stability and of economic control of the ruling party, was gradually replaced by the view of a significant (but no more dominant) place for the state sector as a « commanding heights » security, protection from foreign influence, and continuity of the political regime.

3.5 Accelerated endometabolism

58A characteristic of China’s process of system change, reflected in the evolution of ownership patterns, is a contrast between the succession of strong disproportions and imbalances, and even endogenous crises, and the preservation of cumulative growth on a period of more than three decades. High inflation in the 1980s, a great political crisis in 1989, fiscal troubles and a severe banking crisis in the 1990s, social protests after the wide-scale redundancies following gaizhi, or later for wages demands, or unrest in the countryside about land seizure and corruption, financial cycles, real estate bubbles – most tensions successively surged without radically curbing the overall expansion. Robert Boyer (2012) observed that « the Chinese growth regime is not the expression of a homogeneous macro-institutional configuration but the outcome of a continuous readjustment of a variety of local configurations (…), it imparts to the Chinese economy a great deal of flexibility and reactivity. » On the other hand, the sequences of institutional change, propelled from below or launched from above, both actually interacting, as observed for ownership, have in some way been an illustration of endometabolism, whereby « the very success of a development mode gives rise to structural transformations that eventually destabilize it » (Boyer, 2015). But while such conclusion was drawn for historical experiences that lasted for a number of years, sometimes a few decades, it appears to be verified for much shorter time-spans for China in its systemic transformation period. Such swift endometabolism was linked to the somewhat paradoxical competition-led accumulation regime that came to prevail, highly imbalanced with its resilient overinvestment tendency, but that sustained growth on a significant historical period.

Box 2. China and « comparative capitalisms » perspectives

Box 2. China and « comparative capitalisms » perspectives

Credits: autor

4. Concluding remarks

  • 18 Janos Kornai (1992) has distinguished bureaucratic (vertically mediated) coordination from market ( (...)

59With hindsight, we observe in China a protracted, but in some measure analogous sequence in the process of economic system change, that took place in eastern and central Europe. The shift in the coordination setup, where dominance of bureaucratic coordination (to borrow Kornai’s term18) is substituted by dominance of market coordination, represents a first phase; the second phase lies in the replacement of preeminence of state ownership by ascendency of private ownership. In post-socialist countries, the first phase was very short, one or two years, and the second phase took nearly a decade. In China, the first phase extended on ten years (1984-1994), and the second took another decade (1994-2003), so the sequence comes more clearly to the light.

60The notion that private ownership is a prerequisite of market coordination, that goes back to von Mises, and is actually based on a model of a simple commodity economy, constituted a basic tenet of the transition doctrine. But it has not been unambiguously confirmed by system change, while the centrality of competition on the contrary stood out; in any case the question seems still open from a theoretical point of view.

61The different length and forms of the two phases are linked to the distinction in political and ideological conditions of system change. In East central Europe, the break in the political system was followed by a search for a fast « transition to market economy », a euphemism for (or a simplistic representation of) capitalism. In China, the changed strategy of the preserved political regime, inspired by the successes of Asian economies, and later striving to avoid the dismal experience of the ex-Soviet union, followed a more pragmatic and gradual line of reform of the socialist economy, proclaiming a « socialist market economy » at the end of the first phase (beginning of the 1990s), and subsequently engaging profound changes of the ownership system, but without acknowledging the depth of actual privatization.

62The Chinese trajectory of system change, until now, appears as a success in many (but not all) dimensions. It may also be seen, from the regime’s side, as a reserved move away from traditional socialist institutions, and a reluctant shift to a specific form of post-socialist capitalism, a hesitant and conflictual process conditioned by emerging contradictions and demands throughout three decades of transformation, helped by the high growth that eased and legitimized economic change – but also continuously called for further changes.

63Many specific forms of the Chinese economic system in the 2010s result from this tentative strategy of controlled change, centered on the consolidation of a national capitalist economy, on preserving the political regime, securing social stability, avoiding foreign domination, keeping control of the strategic sectors of an opened economy, regulating finance, etc. A number of important characteristics of the evolving Chinese economic system are thus politically determined.

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1 At the 14th Congress of the Communist Party (1992), China was proclaimed to be a « socialist market economy » by Jiang Zemin. This has remained the official doctrine to this day.

2 The very category of « non-state » enterprises, is revealing of ideological euphemization, or of circumlocutions introduced to leave sensitive questions of ownership in an imprecise status.

3 « In the rural reform our greatest success – and it is one we had by no means anticipated – has been the emergence of a large number of enterprises run by villages and townships. They were like a new force that just came into being spontaneously. » (Deng, 1987)

4 Kornai (2001) gives a critical assessment of the initial obsession with speed for privatization in post-socialist countries.

5 A confirmation is negatively given by the 1987 dualistic reform of the state sector in the Soviet Union, under Gorbachev, partially and tacitly inspired by the Chinese experience of the time. The stagnation, and soon depression context were an important cause of the failure of the reform (Chavance, 1994).

6 A paradigmatic case was given by arguments put forward at the beginning of transition in Poland by Jeffrey Sachs (1993), and Lezsek Balcerowicz (1995).

7 Another analogous case of dual-track reform was the sale of apartments to former occupants by state firms in the 1990s; when no housing was provided by the enterprise, workers who retired or started working before 1997 received a subsidy, while newer cohorts did not. The policy was coined « New people new rules, old people old rules » (Freeman, 2015, p. 106).

8 Let us note that Chinese actual privatization wave occurred at the end of the 1990s, a decade which was at the global level « the golden age of privatization » (Pargendler, 2012), both in the West and in the postsocialist world.

9 The « non-state » sector, a typical Chinese postsocialist category, is defined by all enterprises that are not only or principally owned by a state agency. It refers to the private, collective and other ownership forms (foreign, including joint-ventures, shareholding companies where the state is a minority owner).

10 Actually, if many characteristics of the wage-labor nexus had been analogous to socialist countries, the strict administrative allocation of workers to the production units, and the lack of labor mobility (by contrast, for instance, with the Soviet Union) were specifically Chinese.

11 Considering both privatized housing of SOEs and new private housing, by 2005, urban housing units owned by occupants was over 80%, a very high figure in international perspective (Naughton, 2007).

12 A great number of TVEs were turned into shareholding companies, sometimes leaving an equity share to the local government (Goodman, 2014). On regional differences, see Chen (2004).

13 Ching Kwan Lee (2007) compares rustbelt protests of desesperation, and sunbelt protests of discrimination.

14 Formally, the Company Law was following the Anglo-US system of corporate governance, with complements borrowed from the German two-tiered board system and elements of the Japanese main-bank system (Opper & Schwaag-Serger, 2008).

15 In 1999 the important sectors for the state were defined as « industries affecting national security, industries engaged in natural monopolies, industries that provide important public goods and services, and important key enterprises in pillar and high-tech industries » (Wu & Fan, 2015).

16 Considering enterprises above the size of 5 million Yuan of annual sales revenue, a threshold introduced in national statistics at the time, in 1998 the share of gross industrial output was of 50% for the state (including state shareholding firms) sector and 50% for the non-state sector. The state sector has declined under 30% since 2007, and in 2011 the non-state sector accounted for 74%. Between 1998 and 2010, employment in the state sector (including state shareholding firms) decreased from 60% to 20%, consequently the non-state sector grew from 40% to 80% (Song, 2015).

17 In his Southern tour, in 1992, Deng Xiaoping declared that planning is not the same as socialism and markets are not the same as capitalism; there is planning under capitalism and markets under socialism (Vogel, 2011).

18 Janos Kornai (1992) has distinguished bureaucratic (vertically mediated) coordination from market (horizontally mediated) coordination. Bureaucratic coordination may be direct, in the classical socialist system, or indirect, in a reformed socialist system.

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List of illustrations

Title Box 1. The long march of private property in official doctrine
Caption In italics: constitutional articles or amendments
Credits Credits: autor
File image/jpeg, 96k
Title Box 2. China and « comparative capitalisms » perspectives
Credits Credits: autor
File image/jpeg, 155k
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Electronic reference

Bernard Chavance, « Ownership Transformation and System Change in China », Revue de la régulation [Online], 21 | 1er semestre / Spring 2017, Online since 01 June 2017, connection on 24 July 2017. URL :

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About the author

Bernard Chavance

LADYSS, Université Paris Diderot,

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