2.1 Capitalism (versus Socialism)

Capitalism has preoccupied some of the world’s most influential philosophers, including Adam Smith, Max Weber, Joseph Schumpeter, and Karl Marx. Although each of these theorists offers a distinctive perspective on the concept of capitalism, including its origins, they share several defining features: capitalism is a modern system of economic organization that leverages transactions based on actors’ economic self-interest to increase the productive capacities and developmental outcomes of societies. Smith, Weber, and Schumpeter, again, with some differences, shared a normatively positive view of self-organized economic interests that own and direct capital and other resources without extensive oversight by the state. They emphasized the value of entrepreneurship and innovation as contributing to progress in society, even when it involves – in the words of Schumpeter – “creative destruction.”

Marx did not see capitalism as the aggregation of individual interests, but rather, as the expression of class interests. Capitalism’s unfolding as a necessary stage of history, to Marx, not only produced unparalleled advances in societies’ ability to meet their physical needs (through advancements in the “means of production”), but also sharpened class conflict. These structural contradictions would eventually spark revolution, resulting in a new “communist” society that would end alienation and exploitation. Following Lenin and the Russian revolution, China’s communist party revolutionaries hewed to the Marxist critique of exploitative capitalist societies and global imperialism, even though Marx himself emphasized developing the means of production to its “highest stage” prior to overthrowing capitalism. Mao Zedong’s revolution of 1949, like Lenin’s three decades earlier, emphasized the need for a period of socialism, marked by state ownership, to do the work of capitalism in developing the productive forces. In these classic Marxist conceptions, private versus state ownership is the hallmark institution that distinguishes capitalism from socialism.

How production actually happens in economies is the focus of a second conceptual dyad, anchored by market mechanisms at one end and government planning at the other. The concept of “markets” is distinct from capitalism, but bundles naturally with it. For neoclassical economists, markets are the selection mechanism that facilitate market entry and exit through competition (Reference SchumpeterSchumpeter 1911). Mediated by price signals, markets organize horizontal exchange transactions among economic actors – producers, workers, consumers, financiers, etc. At the other end of the spectrum is government planning, whereby political agents such as ministers decide who should produce what for whom and at what cost (Reference LindblomLindblom 1977). Goals of planners may or may not be consistent with productivity and growth, as they may privilege other values related to socioeconomic development or political control. An extreme expression of the state-as-planner model severely limits space for markets. Stalin in the USSR strove to perfect a central planning system, which Mao largely adopted in urban areas throughout the 1950s as a model of industrialization (Reference Brandt and RawskiBrandt and Rawski 2022).

The international economy also features in debates over the relative advantages of markets versus planning. In neoclassical economic visions, a country’s ability to leverage its comparative advantage in the international division of labor can be a potent catalyst for growth, beyond what is possible within a national economy. During the 1970s and 1980s, the premier postwar international economic institutions of the International Monetary Fund (IMF), World Bank, and General Agreement on Tariffs and Trade (GATT, the precursor to the World Trade Organization) envisioned that deeper integration into the international economy was part of the recipe for economic development. Still, in both critical and some neoclassical theories, exposure to international economic forces can be a damaging source of competition and even exploitation (Reference BhagwatiBhagwati 2004; Reference EvansEvans 1979; Reference FriedenFrieden 2006; Reference LeninLenin 1916). Mercantilist policies deployed by states to protect national economies from these harms include, for example, subsidizing exports and restricting imports, fostering domestic industries, and manipulating payment systems and currencies (e.g., Reference ListList 1841).

Political economy as an academic field considers not just how economic functions are carried out, but also the role of the state in these systems. While no national economy operates in a void without state influence, the role of the state varies considerably in scope and strength. The most stringent advocates of market capitalism posit the benefits of a severely restricted “night-watchman state,” whereby the state’s scope is limited “to protecting individual rights, persons and property, and enforcing voluntarily negotiated private contracts” (Reference Buchanan, Tollison and TullockBuchanan, Tollison, & Tullock 1980: 9) to avoid statist tendencies to crush entrepreneurship and seek rents. Such classic capitalism presumes that markets are largely self-regulating, and that sociopolitical crises arising from capitalism can be fixed primarily by market forces themselves, as well as by technology and productivity advances. Indeed, technological optimists view the continued evolution of technology as sufficient to resolve deep schisms and inequalities catalyzed by advanced capitalism. Disruptions in labor markets and wages would present short-term costs (Reference ChandlerChandler 1977).

A middle ground on the appropriate role of the state, albeit still covering a broad spectrum of functions, recognizes the necessity of arm’s length regulation by the state to address market failures such as monopoly and environmental degradation. Even the process of liberalization may entail regulation (Reference VogelVogel 2018). A more activist state may define areas in which market mechanisms dominate and areas in which it takes an assertive role in directing resources, such as in industrial policy. This middle ground is where we find the “varieties of capitalism” literature, which recognizes differences among political as well as market configurations in advanced capitalism (Reference Hall and SoskiceHall & Soskice 2001). This influential literature stresses a distinction between “liberal market economies” of the Anglo-Saxon capitalist tradition and “coordinated market economies” of the European tradition. While the state maintained a greater posture in the latter compared to the former, steerage by the state was never considered the main driver of growth and development (Reference ThelenThelen 2012), and is not central to these models.

Returning to the distinction between capitalist and socialist systems, János Reference KornaiKornai (2016) identified the distinguishing characteristics of each, listed in Table 1.

The preceding discussion lays out stylized, and sometimes idealized, notions of political economy based on classic scholarship. In reality, politico-economic systems are always mixed (Reference PolanyiPolanyi 1957). Such mixtures are readily identified in the major theoretical approaches that have dominated study of the political economy of development. While recognizing unique aspects of China’s developmental model, the most common frameworks invoked for understanding its reform-era experience are theories of modernization, the developmental state, transitions from socialism to capitalism, state capitalism, and to a lesser extent, fascism. We outline each of these theories in the following sections, highlighting their common attention to “getting institutions right” (Reference Rithmire and YihaoRodrik, Subramanian, & Trebbi 2004).

2.2 Modernization Theory

“Modernization theory” encompasses a broad set of ideas originating in the mid-twentieth century that economic and political development progress in tandem and that economic growth generally leads to democratization. Reasoning from a stylized narrative of the Western experience, modernization theorists identified a set of structural changes associated with economic development, including urbanization, education, industrialization, and secularization, which were expected to craft citizens who would progressively prefer property rights and civil rights (Reference DeutschDeutsch 1966; Reference InkelesInkeles 1966; Reference LipsetLipset 1959). Sustained growth and the emergence of a politically engaged middle class in particular were posited to generate demand for power sharing, protection of property rights – and, ultimately, multiparty democracy (Reference Almond and VerbaAlmond & Verba 1963; Reference Przeworski and LimongiPrzeworski & Limongi 1997). Notably, this process was imagined to be universal: any society that experienced economic growth with market mechanisms and private wealth accumulation would undergo social and political changes that lead to democracy.

Modernization theory met significant criticism. Samuel Huntington argued that economic development and social mobilization could destabilize polities and that stronger governments were better equipped than liberal ones to manage the process of modernization (Reference HuntingtonHuntington 1968). Taking a pan-national view, dependency theorists criticized modernization theory for failing to incorporate global or transnational forces; they viewed underdevelopment not as a function of “backwardness” but rather as exploitation or inhibition of the “periphery” by developed “core” countries (Gunder Reference FrankFrank 1966; cf. Reference Dos SantosDos Santos 1970).

Despite these critiques, earlier expectations that modernization theory could provide insight for China’s reform-era development were understandable: many held that as China industrialized through the introduction of markets and a middle class emerged from an urbanized, growing economy, China would embark on a path of political liberalization and, ultimately, democratize. While addressing the prospects for political or regime change in China is beyond the scope of this Element, we note that many Western observers (Reference GilleyGilley 2004; Reference GuthrieGuthrie 1999; Reference LardyLardy 1994) and even some in China (Reference WangWang 2009) hoped that modernization theory might correctly predict China’s developmental trajectory. Reformers in Beijing relaxed socialist-era restrictions on economic activity to allow private-sector development and open the door to international market forces. Decades of spectacular economic growth through industrialization and urbanization ensued.

Yet, clearly, the CCP did not open up to political competition. Instead, space for political contestation has narrowed considerably over time, contravening modernization theory’s expectations. A wide range of scholarship on China’s middle class and its entrepreneurial class offers explanations for why these groups have not been advocates for political change, including that they have been incorporated into the party-state and that the CCP enjoys broad legitimacy among the public for its achievements (Reference DicksonDickson 2008; Tang 2018; Reference TsaiTsai 2006, Reference Tsai2007; Reference ShiShi 1997).

2.3 Developmental State

Modernization theory assumes industrialization under relatively laissez-faire conditions rather than specifying the appropriate scope for states in the development process. Its advocacy, generally, of democratic institutions and enabling of society implies that the main drivers for economic development should best come from outside the state, i.e., from relatively autonomous economic actors. It is against this privileging of a more restrained state, as well as alertness to countries’ concerns about exploitation through unfettered globalization, that the “developmental state” literature emerged (Reference Woo-CumingsWoo-Cumings 1999). Successful strategies of developmental states include drawing on their status as “late industrializers” to leapfrog stages of development, especially in the acquisition of critical technologies, and harnessing statist tools to guide the development process (Reference GerschenkronGerschenkron 1962). Reference HaggardHaggard (2018: 10) notes the influence that Gerschenkron had on the developmental state school:

The developmental state literature originated out of efforts to explain the unexpectedly rapid industrialization of several East Asian economies. Japan, Taiwan, Korea, and Singapore all managed export-oriented industrialization in the post–World War II period with a set of institutions that did not conform with neoclassical economic norms (World Bank 1993). Technocratic state agents, typically concentrated in specific economic ministries, “picked winners” by identifying and nurturing sectors and firms through industrial policies, including tax breaks and preferential access to credit (Reference WadeWade 1990). Such targeted state intervention in the economy promoted rather than prevented growth.

The nature of the state – what provides its capacity – in successful developmental models is the hallmark of the theory. The ideal state in important respects approximates a Weberian-style bureaucracy, characterized by meritocratic recruitment and technocratic expertise, corporate coherence, and sufficient autonomy from societal interests to avoid rent-seeking and capture (e.g., Reference AmsdenAmsden 2001; Reference JohnsonJohnson 1982, Reference Johnson1995). Countering the implication of earlier works on East Asia that suggested states were depoliticized because they were insulated from society and politics, Reference EvansEvans (1995) emphasizes the relationship between state and society, in particular the degree to which state actors and structures are “embedded” in society. When network ties, especially with the private sector, are dense enough to provide information useful to policy making, the developmental state is more effective. As Reference Doner, Ritchie and SlaterDoner, Ritchie, and Slater (2005) succinctly put it, developmental states are “organizational complexes in which expert and coherent bureaucratic agencies collaborate with organized private sectors to spur national economic transformation.”

China’s reform-era experience shares some commonalities with the developmental state, including a late industrializer’s sense of urgency to catch up and concomitant prioritization of economic growth through industrial policy. But on balance, China departs from several key features of the developmental state – to the point that we do not find it appropriate to classify it in the same category.

First, compared with the East Asian developmental states, China’s economy was relatively decentralized and lacked a “pilot” ministry, like Japan’s MITI or Singapore’s Economic Planning Board, that directed development in a strategic and holistic manner. Instead, especially in the early decades of reform, China’s development was driven by local governments with strong incentives to pursue investment and growth (Reference Breznitz and MurphreeBreznitz & Murphree 2011; Reference OiOi 1999). Scholarship on China’s bureaucracy has emphasized the role of meritocracy and promotion incentives (Reference AngAng 2016; Reference Lü and LandryLü & Landry 2014; Reference Shih, Adolph and LiuShih, Adolph, & Liu 2012; Reference YangYang 2004), but few, if any, would describe the Chinese bureaucracy as “embedded” or “autonomous.” On the contrary, scholarship has emphasized the prevalence of corruption, though scholars differ on whether corruption has been primarily “growth-enhancing” or distorting (Reference AngAng 2020; Reference LüLü 2000; Reference Rithmire and ChenRithmire & Chen 2021; Reference WedemanWedeman 2003, Reference Wedeman2012).

Second, China retained state ownership, especially over large firms at the “commanding heights” of the economy. Developmental states generated large, vertically integrated conglomerates (the Japanese keiretsu or Korean chaebol), but state ownership of firms was not significant. Relatedly, while the East Asian developmental states directed credit toward the most productive enterprises, China’s state-owned enterprises have had privileged access to subsidized loans from state-owned commercial banks, while the more profitable private sector has faced ongoing barriers in accessing credit.

Third, most developmental states had limited domestic markets and restricted exposure to foreign direct investment (FDI), while China clearly has a large domestic market and FDI featured prominently in its period of high growth. This combination of FDI and a vast domestic market created a highly competitive ecosystem as domestic players upgraded and foreign firms pursued greater efficiency to compete in China’s vast middle market (Reference Brandt and ThunBrandt & Thun 2010).

Fourth, the developmental states were built on anticommunist efforts, lending ruling parties both a mobilizing existential threat (Reference Doner, Ritchie and SlaterDoner, Ritchie, & Slater 2005) and access to the markets of Western allies. China’s economy also eventually grew with access to overseas markets, but, as we go on to discuss, the Chinese bureaucracy was and is that of a Leninist system and organized to facilitate collective production and consumption.

2.4 Post-Socialist Transitions

While the concept of the developmental state refers primarily to late industrializers in the postwar period, collapse of the Soviet Union and communist regimes in Eastern and Central Europe led to studies on the political economy of post-socialist transitions. It would not be possible to explain China’s evolution without understanding its socialist past, but the gradualism and sequencing of introducing markets and dismantling many aspects of state socialism distinguishes China from post-socialist states in Europe.

Adopting the neoliberal principles of the World Bank and IMF, many post-communist governments implemented radical market reforms (“shock therapy”) by privatizing state assets and lifting state controls over prices virtually overnight (Reference ÅslundÅslund 1995; Reference WeberWeber 2021). The policy logic, as articulated by Jeffrey Sachs, was starkly laissez-faire: “Economic problems solve themselves: markets spring up as soon as central planning bureaucrats leave the field” (Reference SachsSachs 1993, xiii, cited in Reference Hall and ElliottHall & Elliott 1999: 306). However, this was not borne out by Russia and Poland’s experiences with the “big bang” approach to reforming socialism. In the immediate aftermath, both suffered extreme inflation, currency devaluation, unemployment, and declines in industrial production – and the intended objective of disempowering existing political and social interests was not achieved, especially in Russia (Reference MurrellMurrell 1993).

Furthermore, it became increasingly evident that institutional legacies from the socialist era mediated the reform process, leading to diverse privatization paths and outcomes. Rather than wholesale replacement of planned economy institutions with market forces, East Central European economies exhibited distinct forms of privatization that reflected their particular paths of extrication from state socialism (Reference StarkStark 1992). By acknowledging sources of continuity and path dependence, this strand of the transition literature provides a more nuanced, nonbinary lens for understanding post-socialist forms of political economy, an insight that resonates with our observations about China’s hybrid model.

Comparative studies of post-communist systems generally contrasted the Soviet Union’s painful exit from socialism from China’s more experimental and gradualist reform approach (Szelenyi & Mihályi 2020). Yet economists also engaged in internal debate over explanations for China’s rapid growth. Was it due to unscripted experimentation with incremental reforms or due to liberalization, internationalization, and privatization (Reference McMillan and NaughtonMcMillan & Naughton 1992; Reference Sachs and WooSachs & Woo 1994; Reference WooWoo 1999)? As discussed in Section 3, these mechanisms are not mutually exclusive in practice, but accounts that discount the role of the central and local states in China’s reform process are incomplete.

Over time, others observed constraints to deeper reform following state capture by early beneficiaries of reform in transitional economies (Reference FryeFrye 2010; Hellman, Jones, & Kaufman 2003). This is a somewhat counterintuitive finding given that conventional interest-based analyses would expect the short-term losers of reform (e.g., laid-off workers, former managers, pensioners, etc.) to present a greater obstacle to further marketization. Instead, many post-communist transitions have been suspended in a “partial reform trap” due to opposition from newly enriched owners of privatized assets (Reference HellmanHellman 1998). Political dominance of early reform winners thus obstructs full transition to a market economy. China has similarly faced challenges in liberalizing some economic sectors due to resistance from vested interests and associated venality (Reference PeiPei 2006). A key difference from the European post-socialist cases, however, is that China’s reform-era leadership has never embraced the teleological agenda of transition from state socialism to market capitalism. Unlike the post-socialist transition economies that liberalized following the collapse of their ruling communist parties, the CCP continues to monopolize political power in China and, as discussed next, state ownership or control of strategic economic sectors persists.

2.5 State Capitalism

The frameworks discussed thus far derived from particular historical and regional experiences with development – modernization theory described the path of advanced industrialized democracies; the developmental state explained rapid growth in East Asia’s newly industrialized countries; and the post-socialist transitions literature focused on the former Soviet Union, Eastern and Central Europe. By contrast, the concept of “state capitalism” has been used to describe a wider swath of political economies, both geographically and historically. State capitalism spans contexts as diverse as wartime Germany, the Soviet Union under Lenin and Stalin, Nasser’s Egypt, and contemporary large emerging market economies such as Brazil, India, and Indonesia. Writers at both ends of the left-right ideological spectrum have used the term pejoratively. “State capitalism” was first articulated in 1896 by Wilhelm Liebknecht, a founder of the Social Democratic Party of Germany (SPD), at the Second International Congress (Reference SperberSperber 2019, 104). In response to misperceptions that the SPD advocated state socialism, Liebknecht retorted, “Nobody has combatted State Socialism more than we German Socialists, nobody has shown more distinctively than I, that State Socialism is really State Capitalism!” (Reference LiebknechtLiebknecht 1896, 4). This antistatist sentiment was echoed during the 1950s when Marxists in the US critiqued Stalinism as “state capitalist” for extracting surplus value from labor in an exploitative manner akin to private capitalism (Reference James, Dunayevskaya and BoggsJames, Dunayevskaya, & Boggs 1950).

Half a century later, the term “state capitalism” experienced a revival. After the 2008 global financial crisis, neoliberal critics of state interventionism in the economy repopularized the term to describe countries with state-owned enterprises (SOEs), national oil companies, and sovereign wealth funds (Reference BremmerBremmer 2010). In this encompassing definition, democratic countries such as Brazil, India, Indonesia, and Norway are also regarded as state capitalist. State capitalism conveys a more derogatory connotation, however, when referring to autocracies such as China, Russia, Iran, and Saudi Arabia, with some preferring the term “authoritarian capitalism” (Reference BloomBloom 2016; Carney 2018; Chen 2022; Reference Huang and TsaiHuang & Tsai 2022; Reference Witt and ReddingWitt & Redding 2014) or “autocratic capitalism” (Reference KornaiKornai 2016) to underscore regime type.

Bracketing its normative connotations and diverse historical pedigree, political economists have analyzed state capitalism as a categorical alternative to the varieties of capitalism literature that focused on Western market economies (Reference Hall and SoskiceHall and Soskice 2001). In the study of comparative capitalism, state capitalism broadly denotes mixed economies in which the state retains a dominant role amidst the presence of markets and privately owned firms. Contemporary scholars have converged on a general definition that highlights the centrality of a capacious and autonomous state in steering economic development through not only targeted ownership stakes but also a suite of other institutional and financial interventions (e.g., Reference KurlantzickKurlantzick 2016; Musacchio & Lazzarini 2014; Reference McNallyMcNally 2012; Reference Naughton, Tsai, Naughton and TsaiNaughton & Tsai 2015). Tools – again, not wholly unique to state capitalism – include preferential access to credit, subsidies, industrial policy guidance, and control over managerial personnel. State influence in the economy is exercised selectively, and typically concentrated in strategic sectors, such as defense, energy, communications, and finance.

Because state economic intervention occurs in both the developmental state and state capitalism, it is worth distinguishing between them to clarify their definitional boundaries. A general similarity is that both types of political economy entail indicative planning and policies to support select sectors. A second observation is that both concepts are agnostic about regime type even if they are more often associated with authoritarian variants. Some, but not all, developmental states in Asia transitioned from autocratic to democratic rule over time; and as indicated previously, state capitalist economies span all regime types. Yet the two models differ in important aspects, starting with the centrality of state ownership and management of strategic sectors typical to state capitalism. Based on this key distinction, we would not regard postwar Japan and Korea as state capitalist due to private-sector dominance of their leading industries, while Singapore can be regarded as both a developmental state and state capitalist due to the prominence of its government-linked corporations and sovereign wealth funds.Footnote ¹ State capitalism also envisions a wider range of tools for direct and indirect state control of firms through appointment of SOE executives, state-owned asset management companies, and equity stakes in private businesses.

Section 4 elaborates on how China has evolved from a more familiar form of state capitalism to “party-state capitalism,” such that earlier developmental goals have been overshadowed by an abiding focus on political power and risk management.

2.6 Fascism

In Section 4, we describe the evolution of China’s state capitalism into its more politically focused, party-state directed version, which we call party-state capitalism. This evolution recalls earlier theoretical debates about shifts in models. During World War II, German social scientist Friedrich Reference PollockPollock’s (1941) essay, “State Capitalism: Its Possibilities and Limitations,” inspired a strand of debate that seeded the Frankfurt School of critical theory (Reference GanglGangl 2016). Identifying “state capitalism” as the historical successor to “private capitalism,” Reference PollockPollock (1941: 96) differentiated between democratic and totalitarian variants, and described the latter as follows:

Deliberating in the context of trends in continental Europe’s political economy, founding members of the Institute for Social Research associated the erosion of “monopoly capitalism” with the politicization of economic relations (Reference SperberSperber 2019). Herbert Marcuse (1942) contended that the modern state was conceived to be separate from society, “non-political and subjected to its own laws and standards” (p. 70). Under National Socialism in Germany, however, Marcuse observed elimination of the “rational division of functions between the state and society” (p. 71), such that “economic expansion must not only be supplemented, but superseded by political expansion and domination” (p. 74). The result was fascism.

Fascist regimes are characterized by the centrality, even totality, of the state as a political solution to perceived economic and political crises. Citing Japan and Germany’s early-twentieth-century experience with “revolution from above,” Barrington Reference MooreMoore (1966) identified a fascist (capitalist reactionary) path to modernity in contrast to bourgeois revolutions that led to democracy and peasant revolutions that led to communism. As a reactionary, ultranationalistic mode of development, fascism is most commonly associated with the Italian and German movements that seized power amidst dual crises of capitalism and liberal democracy (Reference BermanBerman 2019). Popular dissatisfaction with national disunity, stagnation in economic and technological modernization, and a desire to elevate the nation’s international status produced “almighty states” seeking to dominate “every sphere of life,” assuming “responsibility for the collective life of the population and the economy, which in turn had to serve national goals” (Reference BerendBerend 2006: 99). Given the complexity of defining fascism (Reference GriffinGriffin 1991; Reference PaxtonPaxton 2004), here we engage fascism as an “historical event,” rather than as a designation of regimes, and focus on the fascist treatment of the economy (Reference BerezinBerezin 2019: 356).

Operationally, fascism’s economic dirigisme privileged the political goals of states above individual or group interests, including those of private capitalists. However, fascist regimes never sought to eliminate private property rights, but rather, to direct the efforts of capitalists:

The “primacy of politics” in the fascist stance toward capitalists was exemplified in interwar Germany and Italy. Both states not only vowed to protect private property and promote economic growth, but also sought to create “a system in which the state’s ‘needs’ and ‘goals’ were not threatened by unregulated markets and ‘selfish’ capitalists” (Reference BermanBerman 2009: 571).

Logistically, fascist economic dirigisme involved corporatist relationships, a drive for national self-sufficiency justified by the perceived threat of foreign control over critical inputs, and “growing confusion between the roles of private enterprise and the state” (Reference LytteltonLyttelton 1973 141). State ownership existed alongside private ownership, even oligarchy, because the state could exert control through its political prerogative. Control, rather than ownership, was paramount. Therefore, capitalism and private property were formally embraced, but “willingness to assert the power of the state vis-à-vis the market … represented a real solution to the problems of the modern liberal capitalist order” (Reference BermanBerman 2009: 571).

China’s transition from state socialism to party-state capitalism differs markedly from the European and Japanese paths to fascism. Fascist movements explicitly opposed socialism, while the contemporary CCP remains a Leninist political party that embraces socialist values in official discourse, while maintaining a mixed economy with extensive private ownership. Another key difference, as we will show, is that party-state capitalism in China emerged in the process of reforming market socialism rather than as a movement built on the ruins of failed political and economic models. Unlike interwar fascism, party-state capitalism does not entail ideological or institutional rejection of what came before. We return to this comparative theme at the end of the Element after delineating the core features of China’s political economy as they have evolved over time.

3.1 The Era of Reform: Experimentation and Gradualism

The dual cataclysms of the Great Leap and Cultural Revolution (1966–76) offered an aperture for substantial political and economic changes upon Mao’s death in 1976. Deng Xiaoping’s assumption of power in 1978 marked the beginning of the “reform and opening” (gaige kaifang 改革开放) era, during which the CCP introduced markets in rural and urban China in a manner that was gradual and experimental; did not dismantle the core institutions of state socialism; and retained a commitment to the CCP’s own monopoly on political power. These reforms prompted a fundamental reorganization of the factors of production, in particular unleashing labor productivity as many rural dwellers were allowed to migrate to cities for new opportunities.

In the rural sector, reforms began in Anhui and Sichuan, the inland provinces most affected by the Great Leap famine (Reference KelliherKelliher 1992; Reference YangYang 1996). The Household Responsibility System, which became national policy in the late 1970s and early 1980s, permitted plots of collectively-owned land to be leased to households. Markets were layered on top of state procurement quotas; whatever households produced in excess of quotas could be sold on markets. By all accounts, agricultural productivity accelerated, accumulating rural savings that in turn financed industrialization. Land in rural China would remain owned by collectives, and the household registration (hukou 户口) system, which assigned each Chinese citizen a place of residence and designated them “agricultural” or “nonagricultural” (urban), linked rural citizens to collectives and prevented them from formally migrating to cities as it had done since the early PRC period.

Rural industrialization through “township and village enterprises” (TVEs) was a primary engine of economic growth in the 1980s and early 1990s. Legally owned by local governments, TVEs surprised policymakers and observers alike in their astonishing rates of growth and productivity; their output grew at an average annual rate of 30 percent during the 1980s. While a significant number of TVEs were actually privately owned firms masquerading as a more politically acceptable corporate form – a phenomenon known as “wearing the red hat” (dai hong maozi 戴红帽子) – most were owned by local governments. The unexpected productivity of these public enterprises has been attributed to tax-sharing arrangements between levels of the state in China during the reform period. Early-1980s fiscal reforms allowed local levels of government to control revenues generated in their jurisdictions, creating incentives for local governments to run “their firms as diversified corporations, redistributing profits and risks, and thereby allowing the rapid growth of rural industry with limited resources” (Reference OiOi 1999:12; Reference SolingerSolinger 1984; Reference WhitingWhiting 2001).

In urban areas, experimental and gradual reforms to state-owned enterprises met with less success than rural reforms (Naughton 2006). Despite introducing dual-track pricing and incentive pay for well-performing managers, SOEs continued to lag in productivity, resulting in significant nonperforming loan problems for state banks (Reference LardyLardy 1998). It was not until the late 1990s that significant numbers of SOEs underwent corporate restructuring and privatization (Reference LinLin 2017). Most of the economic growth in urban areas during the first two decades of reform came from the private sector and foreign investment, sometimes in combination.

Unlike the developmental states in East Asia, where private industry benefited from various preferential policies, in the first few decades of China’s reform era, the private sector had a liminal status. Lacking in formal political protections, petty capitalists were subject to lingering ideological suspicion and episodes of political crackdown (Reference KrausKraus 1991). Nonetheless, local governments depended on their economic contributions and were incentivized to support local entrepreneurs by both fiscal systems (retaining tax revenue) and the party-state’s organizational management system (cadre responsibility contracts that conditioned bonuses and promotion on meeting critical state goals, economic growth chief among them) (Reference AngAng 2016; Reference EdinEdin 2003; Reference OiOi 1999; Reference WhitingWhiting 2001). In this context, capitalists relied on adaptive informal institutions, widely practicing “informal coping strategies devised … to evade the restrictions of formal institutions” (Reference TsaiTsai 2006: 117).

Private entrepreneurs, for example, were essentially excluded from the state-run banking system, and therefore developed a creative range of informal financing mechanisms to support their businesses (Reference TsaiTsai 2002). Other strategies, such as disguising private ownership through different corporate forms, facilitated private-sector growth in the gaps between formal institutions and informal encouragement to pursue economic development. Partially because the overall approach to reform in China was experimental and gradual, over time widespread adoption of these informal practices produced endogenous change in formal political institutions, including the legalization of private enterprises (with more than eight employees) in 1988 and the 2001 decision to allow private entrepreneurs to join the CCP itself.

The opening to global capital was similarly experimental and gradual, allowing the CCP to assess and contain its effects while managing internal dissent over opening to the world (Reference PearsonPearson 1992). Four coastal Special Economic Zones were designated in 1979, and fourteen coastal cities were opened by the mid-1980s. The piecemeal introduction of foreign capital and competition enabled the CCP to assess the economic and political effects of global capital. Politically, the sequencing of reform and opening contributed to the regime’s ability to reframe its embrace of global capital and market reforms by creating initial “winners” of reform (Reference ShirkShirk 1993). The regime benefited from the growth effects of foreign capital before it initiated more politically and socially costly economic reforms, reframing a narrative of class struggle into one of national competition in an age of globalized markets (Reference GallagherGallagher 2005).

China’s accession to the World Trade Organization (WTO) in 2001 catalyzed a phase of deepening global integration by which the country became the “world’s factory.” Between 2001 and the onset of the global financial crisis in 2008–09, China became the world’s leading exporter, comprising 10 percent of world exports by 2011 (WTO 2002). China’s current account surplus surged from a little over 1 percent of GDP in 2001 to 10.1 percent at its peak in 2008 (IMF 2012). Over the same period, FDI grew from around $40 billion to $186 billion, and the People’s Bank of China (PBOC) accumulated vast foreign exchange reserves, exceeding $2 trillion by 2010, which it invested largely in US treasury bonds.

Economically, foreign investment brought new technology and management knowhow into China, nurturing an emergent class of domestic business elites and firms that would grow into competitors (Reference PearsonPearson 1992). China combined large volumes of FDI with an enormous domestic market, and Chinese firms upgraded as foreign competitors localized production to reduce costs. At the same time, Chinese firms improved quality to compete for the vast middle market (Reference Brandt and ThunBrandt & Thun 2010). China’s labor supply and the promise of its market size attracted FDI, but Chinese firms also proved innovative in manufacturing and technology commercialization (Reference Nahm and SteinfeldNahm & Steinfeld 2014). Undoubtedly, government policies at multiple levels facilitated these benefits of globalization, including joint venture requirements, investments in research and development, and controversially, requirements for technology transfer as well as mimicry and outright intellectual property theft (L. Reference ChenChen 2018; Reference Breznitz and MurphreeBresnitz & Murphee 2011). Many local and sectoral protectionist efforts were the product of decentralized and fragmented politics (Reference TanTan 2021) as well as the preferences of many within the CCP to retain state control over strategic sectors (Reference HsuehHsueh 2011).

Significant restructuring of state-owned enterprises, entailing laying off millions of workers and dismantling the “iron rice bowl” of cradle-to-grave social welfare enjoyed by urban state sector workers, occurred during the late 1990s. Around 85 percent of local government-owned industrial firms underwent corporate restructuring between 1997 and 2003 in a strategy called “grasping the big, releasing the small” (zhuada fangxiao 抓大放小) enterprises (Reference Zeng, Tsai and OiZeng & Tsai 2011: 40). The process was politically thorny, involving ideological contestation over ownership. Plagued by behaviors such as asset stripping, de facto privatization of state-owned enterprises led to widespread discontent and stagnation in less dynamic regions that were the heart of Mao-era industrialization (Reference HurstHurst 2009; Reference LinLin 2017; Reference ShueShue 1988).

3.2 “State Capitalism” and the Limits to Market Liberalization

Embracing the private sector, restructuring state-owned firms, and opening to the global economy diminished and reshaped the role of the state in China’s political economy, but major forms of state intervention and state ownership were retained. Most fundamentally, state-owned firms persisted into the twenty-first century and, especially for those owned by the central government in Beijing, many expanded and became vastly more powerful in the 2000s. As central SOEs underwent restructuring, their ownership was transferred from various ministries and concentrated in the State-owned Asset Supervision and Administration Commission (SASAC) by 2003. Over the next several years, many behemoth SOEs would undergo initial public offerings (IPOs) on stock exchanges in China and abroad, a policy intended to introduce discipline and modernize corporate governance while retaining state financial control. For its part, SASAC was designed to “financialize” the state’s role in governing SOEs to enhance their competitiveness (Reference WangWang 2015; Reference Naughton, Tsai, Naughton and TsaiNaughton & Tsai 2015).

Preserved state ownership at the commanding heights of the economy and in globalized or strategic sectors, such as shipping, telecom, natural resources, and aviation, broadly conformed with the main features of “state capitalism,” and China’s political economy was described as such (Reference BremmerBremmer 2010; Reference Lin and MilhauptLin & Milhaupt 2013; Reference Naughton, Tsai, Naughton and TsaiNaughton & Tsai 2015). But the state’s economic role was not limited to ownership of firms. The basic institutions governing inputs to production – land, labor, and capital – coalesced around state control, even as the regime experimented with market mechanisms and undertook reform (Reference Looney and RithmireLooney & Rithmire 2017). In land, decades of reforms nonetheless left local governments as owners of “state-owned” land and the only actors who could convert rural, collectively owned land into urban land for construction. Local governments increasingly relied on land-lease revenues to meet budgetary expenditures, and contrary to the expectations of modernization theory, urbanization was described as “state-led” rather than driven primarily by markets and migration (Reference HsingHsing 2010; Reference OngOng 2014).

In the financial system, state-owned banks continued to dominate, offering low deposit rates for China’s vast household savers, and capital controls kept savings domestic. This combination of institutions, a version of what economists call “financial repression,” gave policymakers access to a large pool of capital (Reference LardyLardy 2008). Bank credit continued to be subsidized and readily available to SOEs and, increasingly, local government borrowers (Reference Liu, Oi and ZhangLiu, Oi, & Zhang 2022), but also found its way to the private sector in greater volumes. On the labor front, the household registration system underwent piecemeal reforms while the state retained basic control over population movements, and therefore the labor supply and demands for social and political inclusion in China’s cities (Reference WallaceWallace 2014; Reference SolingerSolinger 1999).

In addition to state ownership and control over major factors, policymakers pursued broad guidance over the country’s developmental direction. The National Development and Reform Commission (NDRC), built amid the reform of the State Planning Commission, did not plan production and consumption as a conventional state planner would, but did mobilize resources and direct policy toward both national developmental goals and regional efforts in the 2000s. Regionally, campaigns directed investment to specific parts of China left behind by globalized coastal areas, such as “Opening the West” (xibu da kaifa 西部大开发, 2000), “Revive the Northeast” (zhenxing dongbei 振兴东北, 2003), and “The Rise of the Center” (zhongbu jueqi 中部崛起, 2004). Substantive concerns about the country’s specialization in low value-added industries and dependence on foreign technology began to coalesce in 2006. A new drive for “indigenous innovation,” manifest in the Medium- and Long-Term Plan (MLP) 2006–20, targeted increased spending on research and development, reduced dependence on foreign technology, and increased productivity-driven growth. Barry Naughton suggested that the MLP heralded the revival of industrial policy in China (2021: 49), but nonetheless notes that firms remained the primary actors until the global financial crisis provided a turning point for economic policy and political contestation over China’s future.

4.1 Party-state Encroachment

The first site at which we can distinguish China’s party-state capitalism is institutional expansion of the state’s role in the economy beyond public ownership of large enterprises in strategic industries. Standard definitions of state capitalism referenced previously do not capture the range of tools deployed by the Chinese state. Especially notable is the emergence of institutional and financial modes of party-state encroachment into the private sector.

4.2 Blending Functions and Interests of the State and Private Sectors

China’s private sector has been a major source of the country’s economic “miracle” and outpaced the contributions of the state-owned sector by most measures (Reference LardyLardy 2019). A common description of the private sector’s economic value is “60/70/80/90,” meaning that private firms contribute to 60 percent of China’s GDP and generate 70 percent of innovation, 80 percent of urban employment, and 90 percent of new employment (Reference ZitelmannZitelmann 2019). Meanwhile, SOEs continue to accrue losses and suffer declines in productivity. To some degree these problems are endemic to the sectors in which state enterprises have been concentrated historically – strategic and declining industries – but that explanation is secondary to insufficient profit-maximizing behavior and misallocation of capital by financial institutions (Reference LardyLardy 2019). Despite the importance of the private sector to China’s economy, the common connotation of the term “private” – that it is relatively hived off from the state – is belied by features of ownership and function. We explore here the intensifying blending of not just ownership but also function and interests, in a manner that compromises the familiar public/private conceptual binary and illustrates the distinctive political logic of party-state capitalism.

4.3 Expecting Extraterritorial Political Adherence

A third site at which to observe party-state capitalism in contemporary China, one that has not yet received scholarly attention, is the expectation of party-defined political correctness not just by domestic economic actors, but also foreign corporations that do business in China and in territories over which it claims sovereignty. Some firms were proactive in demonstrating political compliance by establishing party cells in their China offices. Since 2017, however, a growing number of major foreign brands and organizations have been pressured to express contrition for various political faux pas, primarily relating to how Hong Kong, Taiwan, and Tibet are portrayed in their advertisements, websites, or social media (Reference NiewenhuisNiewenhuis 2019). Table 2 provides a nonexhaustive list of such apologies by prominent multinationals.

This heightened political sensitivity marks a distinct change from the 1990s and 2000s when Chinese localities competed with one another to attract foreign direct investment (FDI) by offering a host of concessionary policies, such as tax breaks, preferential access to land and credit, and lax oversight of labor and environmental practices (Reference ZweigZweig 2002). China’s openness to FDI differentiates it from the East Asian developmental states at comparable phases of industrialization (Reference KroeberKroeber 2016; Reference Liu and TsaiLiu & Tsai 2021). Although foreign investors have faced their share of challenges in China, these frustrations were more regulatory, cultural, and operational than political in nature. As a result, China has been the developing world’s leading recipient of FDI since 1991 and attracted the most FDI globally between 2002 and 2006 (UNCTAD, various years).

Intensified political monitoring and censuring of foreign capital is a more recent expression of party-state capitalism. For several decades, Beijing’s objections to comments and events perceived to challenge its sovereignty/territorial claims were largely directed at national governments and institutions that hosted controversial figures such as the Dalai Lama or leaders from Taiwan. Since the mid-2010s, however, the party-state has progressively extended its political radar to multinational corporations (MNCs). In addition to publicized solicitation of formal apologies by foreign capital, businesses with significant stakes in the China market have adjusted their discourse and behavior, whether due to direct pressure or self-censorship. When a general manager of a US National Basketball Association (NBA) team tweeted support for Hong Kong protesters in 2019, the league was extensively criticized by China’s state-owned China Central TV, which suspended its NBA broadcasts and stated, “[W]e think any remarks that challenge national sovereignty and social stability are outside the category of freedom of speech” (Reference ShihShih 2019).Footnote ¹⁰ When protests erupted in Hong Kong against a proposed extradition bill with China in 2019, Cathay Pacific Airlines suspended staff who participated in or expressed social media support for the demonstrations, followed by the resignation of its CEO (Reference FreedFreed 2019). When China introduced a National Security Law for Hong Kong the following year, nearly all of the territory’s tycoons and international business leaders signed a statement organized by the party’s United Front Work Department in support of the law before its text was even released (Reference PrassoPrasso 2020). News outlets refusing to retract their choice of words or coverage of sensitive topics (e.g., New York Times, Wall Street Journal, and Washington Post) have seen their reporters expelled from China on short notice (Reference StevensonStevenson 2020; Reference Tracy, Wong and JakesTracy, Wong, & Jakes 2020). Political correctness on the part of foreign capital figures in state capitalism, but it is expected under party-state capitalism.

4.4 From State Capitalism to Party-State Capitalism

Table 3 summarizes the main differences between state capitalism, as it emerged in the post-Mao era, and party-state capitalism as it has taken form since the late 2000s. As indicated in the “State Capitalism” column of Table 3, Chinese state capitalism from early on already contained features – notably party cells and party-controlled appointment of SOE managers – not widely found in other state capitalist systems.

The novel manifestations of party-state capitalism outlined previously – enhanced party monitoring and industrial policy, deepening ambiguity between the state and private sectors, and growing political assertiveness with foreign capital – suggest considerable infrastructural power on the part of the party-state (Reference MannMann 1984). Indeed, most accounts of state capitalism in China emphasize attempts to preserve control over economic actors, as does our analysis of party-state capitalism. Yet it is important to recognize, and pursue research about, how the state is constrained in executing its strategic intentions, including by negative externalities of party-state capitalism itself. Principally, the earlier era of state capitalism in China was characterized by a rough alignment of interests among the state, local officials, and firms who all pursued economic growth and, frequently, personal prosperity (Reference AngAng 2020, Reference DicksonDickson 2008; Reference WedemanWedeman 2012). In the context of China’s growing global economic footprint and emphasis on regime security, party-state capitalism may threaten this alignment of interests, complicating implementation of economic policy and producing conflict between private firms and the state. In what follows, we identify two sources of constraints on state power – domestic state-business relations (Section 4.5) and China’s global engagements (Section 6.1).

4.5 Influence of Big Business under Party-State Capitalism

Charles Reference LindblomLindblom (1977) observed that all governments depend on economic actors to provide jobs, growth, innovation, and other things that states value. While Lindblom focused on the power of firms in democratic market systems, this insight also applies to state capitalist systems, even in the context of a Leninist regime focused on the party-state’s centrality. “Reciprocal dependence” (Reference CulpepperCulpepper 2015) underlies state-business relations in contemporary China: the state still relies heavily on nonstate investment and economic activity by firms and business elites who wield significant power. We noted one such example of the state’s dependence on business in our discussion of Alibaba and Taobao. This reciprocal dependence, which from the point of view of political control by Beijing is a longstanding principal-agent problem, has been well documented in the study of Chinese politics (e.g., Reference CaiCai 2014, Reference LiLi & O’Brien 1999; Reference LinLin 2017; Reference TanTan 2020). Under party-state capitalism new agents, created especially through financialization mechanisms, reside outside of that system and dissipate the party-state’s personnel control. The majority of capital in the new industrial guidance funds is sourced and managed at the provincial and municipal levels, or by nonstate actors (Reference Naughton, Yongnian and TongNaughton 2019a). China Minsheng Investment Group is a prime example. Founded in 2014 by over 50 private companies that invested $75 billion (China Minsheng Investment Group n.d.), Prime Minister Li Keqiang gave it the imprimatur to be “the Morgan Stanley of China” and invest in strategic sectors. Bad management and outright corruption ensued. Within five years, China Minsheng accrued over $45 billion of debt and had to be rescued by the PRC State Council (Reference Chen and RithmireChen & Rithmire 2020).

Another situation in which we observe this structural power of firms is when their activities seem to conflict with the party-state’s prioritization of stability and focus on risk mitigation, frequently ensnaring the state in the financial problems of even nonstate firms. Overly indebted, large private companies have been described as “grey rhinos” that pose systemic risk to the country’s banking system (Almanac of China’s Banking and Finance 2017; Reference Gao, Arner, Wan, Godwin, Shen and GibsonGao 2020). By virtue of their size, complexity, and potential disruptive power, these firms constrain the state’s autonomy and exist in what Lowi called “a state of permanent receivership” (Reference LowiLowi 1979). Anbang Insurance Group, for example, was nationalized in 2018 following trophy acquisitions that included the Waldorf Astoria Hotel (Reference HancockHancock 2018). Other huge private firms, such as HNA Group (owner of Hainan Airlines), have similarly been censured for acting recklessly abroad. Concern about these threats to China’s financial health and international image have pressured Beijing to discipline such conglomerates and assume responsibility for their excesses.

Like other “state capitalist” and indeed capitalist political economies, China has its share of extraordinarily wealthy individuals and powerful firms, both of whom can threaten the state and limit its autonomy. Regardless of whether oligarchs accrue their wealth through party-state connections or not, they have strong incentives to defend that wealth (Reference WintersWinters 2011), a practice that frequently conflicts with the policy goals of the party-state itself. For example, several pilot programs to tax residential real estate have failed over the years despite potential benefits for state revenues. In addition to threatening the material interests of real estate developers and their local government allies, such a property tax would require officials to declare their assets (Reference Cho and ChoiCho & Choi 2014).

Lastly, we recognize that Chinese companies – whether state or private, at home or overseas – may successfully cultivate state actors to work on their behalf. Arthur Reference KroeberKroeber (2016: 104) cites a phrase popular among Chinese citizens and officials: “There are no state-owned enterprises, only an enterprise-owned state.” Although this depiction may be exaggerated, we concur with the underlying insight: just because the state has a large role in the economy does not eliminate the possibility that business interests may capture elements of the policy-making and implementation process. Indeed, the report that over 95 percent of “officially defined large private companies” have CCP connections indicates a measure of mutual dependence and vulnerability (Reference Yan and HuangYan & Huang 2017: 38, nt. 7). While this Element emphasizes the extension of state capitalism into party-state capitalism, various forms of “capital” retain the driving logic of capital – its accumulation.

5.1 Endogenous Sources of Change

In identifying endogenous sources of change, we find that China’s political-economic institutions and practices generated dynamics that the CCP viewed as posing potential threats to its monopoly on political power and, therefore, requiring resolution. Macroeconomically, as discussed in Section 3, the Chinese economy post-WTO accession relied excessively on external demand for growth, while Chinese exports were generally concentrated in lower value-added sections of industrial supply chains. Chinese policymakers had emphasized the importance of enhancing domestic demand since at least the Asian Financial Crisis in the late 1990s. The issue of macroeconomic imbalances took on greater urgency after the 2008 Global Financial Crisis, which exposed the fragility of global demand and was framed in party-state discourse as a “new normal” of less rapid but more internally driven growth (Reference HolbigHolbig 2018). Yet the response to the crisis itself created problematic economic dynamics. China’s large stimulus was conveyed only partially through fiscal spending and the rest in imperatives to state banks to lend. The vast majority of credit went to SOEs and to local governments and into real estate development and infrastructure construction. The ballooning debt of both the private and public sector eventually produced alarm about the systemic risks posed by large debt burdens (Reference Liu, Oi and ZhangLiu, Oi, & Zhang 2022; Reference RithmireRithmire 2022).

Corruption, and the associated fear of attenuated party discipline, was another endogenous source of threat. China’s reform era involved an embrace of capitalist development through what scholars have called “special deals” (Reference Bai, Hsieh and ZhengBai, Hsieh, & Song 2019) or “profit sharing” (Reference AngAng 2016) primarily between local officials and firms. These relationships were mutually beneficial and involved forms of corruption – namely, bribery, whether through basic kickbacks or the kind of socializing typified by discussions of “guanxi 关系” – that facilitated commerce and growth. By the late 2000s, however, corruption seemed to present a challenge to the CCP’s legitimacy and capacity to govern effectively (Reference PeiPei 2016; Reference WedemanWedeman 2012). That Xi’s first major political initiative was a historic anticorruption campaign indicates his concern about the issue.

Meanwhile, Xi’s early years in power were marred by financial instability, especially the stock market crisis that began in 2015. To bolster confidence in equity markets and allocate capital to nonstate actors, policymakers touted the Shenzhen and Shanghai exchanges starting in 2014, inspiring waves of IPOs and expanding investment, chiefly by retail investors (as opposed to institutional investors). The rapid expansion of equity capital ended in an even more rapid selloff that began in the summer of 2015, during which the Shanghai index fell about 18 percent from its peak and Shenzhen’s dropped by over 30 percent in a matter of weeks. The collapse accelerated in part because of widespread margin lending and online peer-to-peer (P2P) lending platforms, many of which were beyond the state’s regulatory reach and whose activities surprised authorities who did not anticipate or understand them (Reference He and XiaoyangHe and Li 2020). After briefly showing signs it would tolerate a “market correction,” the state quickly intervened to arrest the collapse in asset prices by deploying a National Team of funds to inject nearly 3 trillion RMB into the exchanges, holding shares of half of all listed firms at the peak (Li, Zheng, & Liu 2022). At the same time, regulatory authorities suspended IPOs and launched investigations into journalists and market participants for “spreading rumors” or facilitating excessive margin lending. The state’s response to the financial crisis – first embracing market forces and then stepping in to stymie their impacts – demonstrates the risk management logic of asserting party-state control.

5.2 Exogenous Sources of Change

A series of events occurring outside China’s borders constituted exogenous sources of perceived threat to the CCP and its economic model. More generally, the Color Revolutions in Eastern Europe and Central Asia and the mass movements associated with the Arab Spring were viewed as cautionary tales within the CCP. This perception was reinforced by civil unrest in Tibet (2008) and Xinjiang (2009), events that would eventually beget a massive expansion and deployment of the state’s coercive apparatus in those regions, including internment camps for Uyghurs in Xinjiang that have attracted the designation of “genocide” (Reference Greitens, Lee and YaciziGreitens, Lee, & Yazici 2020).

While these political events produced a general threat mentality, external events in the economic realm contributed more directly to shifts in the political economy. Whistleblower Edward Snowden revealed that the US had deployed a cyberweapon against Iran and that the National Security Agency (NSA) had breached the servers of Huawei by inserting a “back door” into hardware used by the telecommunications giant. These revelations amplified voices within China saying that reliance on foreign technology poses a threat to national economic advancement and security. Within a few years, new laws and policies, especially the massive industrial policy campaign Made in China 2025 (announced in 2015), would frame technological advancement in terms of national security and existential threat.

Clearly, based on this timeline, dating the shift to party-state capitalism is more complex than identifying a single shock or temporally compressed set of decisions. Such is the nature of change in economic models. Even when single exogenous shocks are hypothesized to spur significant transformation, for example the oil shocks of the early 1970s (Reference GourevitchGourevitch 1986), the rise of the knowledge economy in the 1990s (Reference HallHall 2020), or the Covid-19 pandemic (Reference McNamara and NewmanMcNamara & Newman 2020), they produce diverse aftershocks as they are refracted through various domestic institutions, histories, and sociopolitical processes. Moreover, the timeline shows that many of the more acute threats occurred after Xi’s term began, especially the Snowden revelations, the financial crisis in domestic equity markets, and the emergence of a global pandemic from within China’s borders. We emphasize the contingency inherent to the increasing reliance on the party-state itself to remediate problems in China’s political economy. Party-state capitalism, much like China’s earlier reforms, does not reflect the execution of a longterm masterplan, at least before Xi’s rise to power. Rather, the totality of perceived threats to the party-state and challenges of managing problems of economic reforms led policymakers to rely on instruments of party control and technologies of party governance (e.g., campaigns) that then reinforced the party-state’s power and centrality within the economy.

Figure 1.

Perceived internal and external threats since the mid-2000s

5.3 Legal and Developmental Securitization

The party-state’s anxiety over perceived internal and external threats has resulted in increasing securitization of China’s political economy (Reference Pearson, Rithmire and TsaiPearson, Rithmire, & Tsai 2022). Since the mid-2010s, a steady progression of laws relating to national security have been enacted that require compliance by Chinese firms, especially those in the technology sector (see Table 4). The encompassing 2015 National Security Law stipulates that economic security (Article 19) and financial stability (Article 20) constitute national security concerns that should be protected by the state (People’s Republic of China [PRC] 2015). TReference Hehe 2017 National Intelligence Law (People’s Republic of China [PRC] 2017) further requires “firms, individuals and other organizations” to “cooperate in national intelligence work and keep confidential the [information] that it or he knows” (Article 7). Other laws – concerning counterespionage, counterterrorism, cybersecurity, antiforeign sanctions, and data security – similarly compel firms to support the party-state’s security efforts and share relevant data and information.

These laws directly complement China’s “military-civil fusion” developmental strategy, jointly introduced in the 13th Five-Year Special Plan by the CCP, State Council, and Party’s Central Military Commission in 2015. The military-civil fusion initiative seeks to engage private businesses in achieving national defense objectives by encouraging cooperation between commercial and military technology efforts in research and development. Coupled with the Made in China 2025 industrial policy, and as echoed in the 14th Five-Year Plan (2021–25), Beijing’s prioritization of indigenous innovation to reduce dependence on foreign technology reveals not only a sense of insecurity about the country’s level of technology, but also proactive efforts to engage private firms in contributing to national priorities. The state recognizes that private tech firms are better poised than SOEs to develop frontier technology in artificial intelligence, 5G, biotech, aerospace, and electric vehicles. Multilayered laws and initiatives have developed under party-state capitalism to ensure that enterprises in these areas operate in the interest of national security even as they are driven by commercial motives. Combined with the rise of party-state capitalism, this securitization of China’s political economy has stoked counterreactions from OECD countries and contributed to changed dynamics in global capitalism. Section 6 elaborates on these recent trends.

5.4 Comparative Analytical Implications

Having delineated the evolution of China’s reform-era political economy, we revisit how it compares with the conventional models of political economy discussed in Section 2. Table 5 summarizes the core attributes of each of the theories and indicates the extent to which China’s developmental experience mirrors or departs from them during different periods.

During the first two decades of reform, high growth fueled by rural industrialization, urbanization, and private-sector development led observers to draw parallels with modernization theory. China “modernized” economically, but the process has been much more dirigiste than the Anglo-American paths to modernity. Furthermore, by the late 2000s, most political scientists had shifted away from deliberating about the prospects for democratization in China in favor of qualifying its form of authoritarianism with various adjectives (Reference Tsai, Hsu, Tsai and ChangTsai 2021). A large literature on “authoritarian resilience” pointed to the CCP’s adaptive capacity (Reference Heilmann and PerryHeilmann and Perry 2011), the PRC’s institutions (Reference TruexTruex 2016; Reference NathanNathan 2003), and public legitimacy (TReference Angang 2016). On the other hand, and particularly after the rise of Xi, scholars focused on the CCP’s repressive and coercive capacity (Reference GreitensGreitens 2016; Reference Deng and J. O’BrienDeng and O’Brien 2013; Reference OngOng 2022). In any case, the prospects for political liberalization, whether from the top or in response to demands from below, seem negligible.

Due to the prominent role of the state in China’s political economy and its prioritization of economic growth, comparisons with the East Asian developmental state became more popular during the 1990s. This is not surprising given partial similarities in features such as industrial policy, export orientation, and the outcome of rapid growth. China also shares with developmental states an approach to rural modernization that features campaigns and mobilization. This observation is a more recent addition to the developmental state literature given its traditional emphasis on technocratic management, but recent research has uncovered these commonalities and evidence of policy learning in the East Asian region (Reference LooneyLooney 2020). After the first two decades of reform, when the CCP’s growth priorities shifted from export-oriented, labor-intensive manufacturing to technology-driven growth and large-scale efforts to direct investment to underdeveloped parts of the country, the National Development and Reform Commission (NDRC) took on a significant role in directing development, perhaps more similar to the developmental state’s “pilot” ministries. But, as we have argued, these developmental goals are subservient to political ones in a way that distinguishes the Chinese economic model.

Overall, significant differences between China’s developmental trajectory and that of its postwar regional neighbors call into question the empirical fit of the developmental state. Even though China engaged in industrial policy, its state-controlled banking system has consistently prioritized lending to SOEs rather than the more productive private sector (Reference LardyLardy 2019; Reference TsaiTsai 2017). Another key contrast is that reform-era China has been far more open to FDI than other developmental states (Reference HuangHuang 2003; Reference KroeberKroeber 2016). The outcomes also differ in meaningful ways. Japan and the newly industrializing countries grew rapidly during the postwar decades while maintaining relatively equitable distribution of income (Reference HaggardHaggard 1989). By contrast, China’s Gini coefficient and regional inequality indicators have ballooned at an alarming pace in the course of marketization (Jones, Li, & Owen 2003; Reference WangWang 2008). Corruption and predatory behavior on the part of state agents has also been more pervasive in China than in the developmental states (Reference PeiPei 2016; Reference PempelPempel 2021).

The developmental state model described the experience of rapid industrializers in East Asia during their transformations, but those political economies evolved significantly in the process. Politically, authoritarian regimes in Korea and Taiwan opened to political competition and multiparty democracy. Slater and WReference Ongong (2022) argue that ruling parties democratized “from strength” rather than weakness, as ruling parties expected they could compete and win in elections based on their strong developmental records. Economically, the Korean and Japanese economies both experienced crises. Korea was hit badly by the Asian Financial Crisis in 1997–98, which dealt a fatal blow to many national champions and exposed the extent of resource misallocation and corruption there (Kang 2002; Pempel 1999). Japan experienced an asset bubble and subsequent burst leading to what is typically called the country’s “lost decades” of low or no growth, deflation, and ballooning national debt (Reference Funabashi and KushnerFunabashi & Kushner 2015). The scholars cited here have analyzed these political and economic outcomes as evolutions of a developmental state model, identifying how features of developmental statism explain the model’s demise or dismantlement.

China is also an outlier relative to other countries studied in the post-socialist transitions research agenda.Footnote ¹² Instead of radical marketization, its experimental and gradualist approach to reform delayed mass privatization of SOEs until the third decade of reform – and then the largest SOEs in strategic sectors were promoted by the state. Although China has confronted political barriers to deepening reform due to vested interests like its Russian and Eastern/Central European counterparts, the continued monopoly of political power by the Chinese Communist Party is a key overarching difference. In this respect, referring to contemporary China as “post-socialist” is somewhat misleading. It no longer has a command economy, but remains ruled by a party that identifies with socialist principles such as “common prosperity.” As Xi Jinping exhorted at the 20th Party Congress, “We must never waver in upholding the basic tenets of Marxism, the overall leadership of the Party, and socialism with Chinese characteristics” (Reference JinpingXi 2022). This is another example of how China’s mode of political economy is not well described by familiar terms such as “socialist” and “post-socialist” (Reference NaughtonNaughton 2017).

As discussed, state capitalism aligns the most closely with China’s political economy during the 2000s. Its mixed economy included a large private sector, alongside state ownership of strategic industries; industrial policy targeted at SOEs (including access to subsidized credit from the state banking system); and dominance of outward FDI by SOEs and sovereign wealth funds. These features persist, but since the late 2000s China’s political economy has evolved into a variant of state capitalism marked by party-state activism in reaction to various political, economic, and social risks produced by the domestic and global expansion of capitalism. While steeped in normative theory, earlier debates among continental theorists over the implications of state capitalism/fascism offer comparative historical insight into the dynamics underlying the transition from one type of capitalism to another. By considering fascism as a historically specific episode rather than a regime type or a coherent system of political economy, we call attention to its rise as a reaction to political-economic crisis and its emphasis on steering capital to serve national political goals. Pollock and his peers bore witness to profound empirical changes in state-society and political-economic relations, partially in reaction to “the general crisis of capitalism” (Reference BukharinBukharin 1934). By the same token, the emergence of party-state capitalism in contemporary China marks a tangible shift from its preceding and more familiar form of state capitalism.

Fascist governments approached political economy in a manner similar to party-state capitalism. Principally, the imperative of political control by the state (rather than focusing on the mode of ownership) and the prioritization of national political goals over all else are common features. Beyond this similarity of a state-securitized economy, China’s contemporary model of party-state capitalism differs from other core attributes of twentieth-century fascism. First, the political conditions are fundamentally different. While fascist movements were radically rightwing and anticommunist, socialist ideology remains salient in China, even as generations of party leadership have adapted its interpretation and policy objectives over time. The CCP emphasizes continuity with party-led reform rather than a radical break with the past. In terms of tactics, there has been reinvigoration of campaign-style governance that typified the Mao era (Reference Perry, Hsu, Tsai and 79ChangPerry 2021). But the scope of mass mobilization is much more circumscribed than under fascism, and while daily life in China became subject to greater surveillance after the outbreak of Covid-19, it is not militarized in a fascist manner.

Finally, China’s quest for economic self-sufficiency to reduce reliance on foreign goods and technology resonates in part with the appeal of autarky during the 1930s, but in practice, its economy remains deeply entwined with global supply chains. As the world’s largest exporter since 2009, China is not “decoupling” from global capitalism. However, under party-state capitalism the CCP’s fundamentally political mandate to promote its survival extends beyond the territorial borders of mainland China, commanding compliance with party-defined limits on politically acceptable discourse and economic behavior. Party-state capitalism has created its own effects in global capitalism, which we explore in the next section.

6.1 Restricting Chinese FDI

Western countries have reconsidered the benefits of FDI flows from China, particularly in sectors considered sensitive and of potential dual use. FDI from China in the US began to take off in 2009, and skyrocketed upward from about $15 billion in 2015 to $16 billion in 2016, before plummeting to negligible levels by 2018 (Rhodium China Investment Monitor n.d.). (Levels of FDI from US firms in China remained relatively steady, at around $12 billion during that period.) A similar spike occurred in the EU and UK during those years (Rhodium China Investment Monitor n.d.). Although a pullback of FDI from China reflected in part calculations by Chinese firms about a broad range of risks, one such risk was clearly the increased government monitoring of such deals, whether mergers and acquisitions or greenfield investment.

In the US, the Committee on Foreign Investment in the US (CFIUS) was set up in 1975, and then strengthened to scrutinize investment from Japan – a military ally – in 1988 (Reference Graham and MarchickGraham & Marchick 2006). By 2015, concerns over Chinese industrial policies designed to guarantee supplies of critical goods were heightened enough for the Obama administration to invoke CFIUS tools to restrict acquisition of the US subsidiary of German chip machine supplier Aixtron by a Chinese firm (Reference HenningHenning 2016). In summer 2018, a bipartisan bill (the Foreign Investment Risk Review Modernization Act, FIRRMA) expanded CFIUS rules that previously required a review only when a foreign investor sought a controlling stake, to instead require a review of any stake sought in companies “with substantial business in the US” if they are involved in “emerging technologies” or “critical infrastructure” (US Department of Treasury 2018).

European and East Asian governments similarly raised alarms over Chinese acquisitions of critical infrastructure at this time (Reference Mozur and EwingMozur & Ewing 2016). In the sensitive semiconductor sector, Taiwan and South Korea initiated steps to prohibit or restrict Chinese acquisitions and prevent transfer of intellectual property and engineering talent to China (President’s Council 2017). Many OECD countries, starting as early as the late 2010s, passed legislation to establish or buttress investment reviews. Prior to 2020, France, Germany, and Italy raised the possibility of an EU-wide screening process, while the Australian Foreign Investment Review Board (FIRB) announced its intent to increase scrutiny of Chinese private companies looking to buy Australian assets (European Reference CommissionCommission 2017; Reference AngusGrigg 2019). Tellingly, in justifying a strengthened review process for proposed investments from China, advocates frequently invoked the perceived indistinctness between Chinese firms, including private firms, and the CCP. As a representative of the Australian FIRB bluntly stated, there “is no such thing as a private company in China” (Reference AngusGrigg 2019).

6.2 Targeting Chinese Firms

Concurrent with strengthening the institutional processes for review of Chinese investments, the US government went further to target specific firms for their presumed threat to national security. In a high-profile case, the US government targeted telecommunications giant Huawei – a firm with opaque ownership structures that while technically “private,” was widely viewed as closely tied to the Chinese military and the CCP. A 2012 report in the US Congress accused Huawei (and fellow telecommunications giant ZTE) of “economic and foreign espionage by a foreign nation-state already known to be a major perpetrator of cyber espionage” (US House Intelligence Committee 2012). Seven years later, the 2018 National Defense Authorization Act prohibited federal agencies from procuring products/services from Huawei or ZTE. Placement of Huawei on the US Department of Commerce’s “unreliable entity” list in 2019 deprived Huawei of semiconductor chips as punishment. US government nervousness over large Chinese firms has escalated, especially in technology sectors, as they expanded access to the US. Even ByteDance, the privately owned parent of social media platform TikTok, was targeted by the Trump and Biden administrations as a national security threat due to suspected ties with the Chinese government.

Similarly, while human rights violations have long been a source of tensions between China and Western countries, backlash in this arena also has been directed at Chinese firms. Governmental bans on use of surveillance equipment from Hikvision and Dahua, for example, have been framed in the context of their use in Xinjiang. Because their products are also being used by autocracies along the Digital Silk Road, human rights observers regard their exports as “exporting digital authoritarianism” on the part of the Chinese government (Reference Polyakova and MeserolePolyakova & Merole 2019). As such, security concerns are also infused with ethical critiques.

6.3 New Initiatives to Counter the “China Threat”

In response to perceptions of a “China threat,” a third cluster of actions entails novel institutions and rules for the state to protect private sector assets of OECD countries. The US government has been the most proactive in this regard, with legislative proposals to screen more closely outbound US investment to China. The proposal that has advanced farthest is a potential National Critical Capabilities Defense Act, which would establish an interagency group under the Office of the US Trade Representative to screen transactions by US businesses in “countries of concern” and where “national critical capabilities” are at stake. Advocates argue that without such a control tool, investments can lead to the transfer of sensitive (or potentially sensitive) technologies, outsourcing of critical production, and obscured supply chains (Reference Hanemann, Witzke, Vest, Dudley and FeatherstoneHanemann et al. 2022). While criticism of US investment into China is not new, in the past objections largely focused on the accompanying outsourcing of US jobs, or the export of technology itself, rather than on the need to screen outward foreign direct investment for national security reasons. We view such action as an unprecedented effort by the contemporary American state to constrain capital movements, transgressing the bounds of what was previously deemed acceptable statist control of private property.

Also in the US, the Department of Justice in 2018 introduced the “China Initiative,” another extreme measure aimed in part to respond to China’s model and the blurring of state and the economy, as well as society. The China Initiative was premised on the idea that economic espionage and theft of intellectual property, especially related to dual-use technologies, as well as CCP influence in universities, pose a national security threat to the US (Reference LewisLewis 2021). As FBI Director Christopher Wray put it, “China from a counterintelligence perspective represents the broadest, most challenging threat we face at this time … because with them it’s a whole of state effort” (quoted in Reference LutzLutz 2018).Footnote ¹³ Echoing this position, the US Attorney for the District of Massachusetts Andrew Lelling contended, “If you are collaborating with any Chinese entity, whether it’s a university or a business, you are giving that technology to the Chinese government” (cited in Reference LewisLewis 2021: 178). Prior to its end in 2022, the Initiative directed largely unfettered scrutiny at Chinese nationals and Chinese-Americans, resulting in investigative overreach and racial profiling.

A new transatlantic institution also has been established: the US-EU Trade and Technology Council. The Council’s aim is to coordinate among allies for standards on artificial intelligence, quantum computing, and biotechnology products. These areas are subjects of China’s industrial policies that, among other things, bundle state funds and private capital in an opaque manner – suggesting to Western governments similar sorts of threats from party-state capitalism driving the suite of policies discussed here. Such initiatives evoke the notion that OECD countries are responding to calls for a Western alliance that is “[l]ike NATO, but for economic threats” (Reference VinciVinci 2020).

6.4 Industrial Policy to Reduce Reliance on Chinese Technology

A fourth tranche of initiatives focuses on strengthening OECD countries’ own industries to better compete with the perceived threat from China, and Chinese industrial policies, at home and overseas. Industrial policy, and more broadly national innovation systems, are not unknown in the West, especially in Europe (Reference Asheim, Gertler, Fagerberg, Mowery and NelsonAsheim & Gertler 2005; Reference NelsonNelson 1993). Indeed, Made in China 2025 was fashioned in part after Germany’s “Industry 4.0” plan. The US government, with an eye to competition with China, engaged legislation that nodded to industrial policy to an unusual degree in the form of the US Innovation and Competition Act of 2021. The nearly 2,400-page, $250 billion bill is designed to foster US semiconductor production, scientific research, the development of artificial intelligence, and space exploration in the face of growing economic, technological, and military competition from China (US Reference CongressCongress 2021). It calls for “catalytic” investments in these sectors, and extensive government procurement efforts to create markets for these goods. Even Republicans, who might be expected to eschew “statist” economic moves, favored the bill.

Significant legislative spending bills, such as the CHIPS (creating helpful incentives to produce semiconductors) and Science Act of 2022, were designed to address fears that China’s overseas investments in the developing world through the BRI would be leveraged for Chinese influence. The Biden administration in 2021 proposed the Build Back Better World (B3W), adopted by the G7 to build infrastructure in developing countries. Later that year, the EU launched its own Global Gateway Initiative with largely the same purpose: competing with the BRI (European Commission 2021). In the last year of the Trump administration, the US State Department launched a “Clean Network” initiative to persuade US allies and telecommunications firms worldwide to exclude Chinese 5G providers from their networks. The effort was intended to preclude Chinese vendors for security reasons, and also to enable US entrants in the sector (Reference Rithmire and HanRithmire & Han 2021).

Taken together, these measures to counter the perceived China threat have deepened China’s preexisting sense of insecurity. While the security dilemma in international relations theory focuses on military competition, the emergence of party-state capitalism in response to perceived internal and external threats (Table 5) has elicited similar dynamics in the economic realm. As detailed elsewhere, the measures that China has taken to enhance its own sense of security have had the perverse effect of triggering counterreactions, especially from OECD countries, which fuel a downward spiral of increasingly hostile economic policy measures (Reference Pearson, Rithmire and TsaiPearson, Rithmire, & Tsai 2022).