China in its institutional transition to capitalism


The China chapter complements that on Tanzania. It illustrates transition from planning to market under a highly interventionist central and local state apparatus, which resembles to an extent the state machinery in Tanzania. But in other respects there are contrasts, both in the decentralization of the state in China and its elaborate control by the centralized Communist Party, but also in the success that China has had in enterprise creation. The scale and level of development of the two countries are of course completely different from the perspective of 2016. However, in 1980 China’s GDP per capita was $1,061, compared with Tanzania’s $601. By 2010 the gap between them was immense: $8,032 for China in GDP per capita  compared with $804 in Tanzania, a ten-fold difference, (using Maddison’s World Bank data, 1990 G-K$ see Table 1 chapter 1)  In part this chapter is about understanding China’s success story compared with Tanzania’s relative failure.

This book is about institutions underpinning capitalism. So why is China included? How capitalist is China?  There is huge controversy over this, of course. Yasheng Huang (2008) argues strongly that the growth and success of capitalism in China is attributable to liberalization of rural institutions that prompted rural entrepreneurship in the 1980s and access to western legal and financial institutions in Hong Kong, especially when it came to scaling up more capital-intensive enterprise. He also argues that the rural private sector was the motor behind growth in the 1980s and that there was more liberalization in the 1980s and less gradualism than others have argued. The contrary view is that Chinese institutions underpinning capitalism have been peculiarly ‘with Chinese characteristics’, which is to say that the Chinese state was and has been pervasive and that capitalism has been policy-driven and reflects not the strength of market institutions but the adeptness of policy choices in knowing which enterprises to support and which to allow to fail, which has been done via gradualism and experimentation. My argument straddles a middle-ground. I am interested in understanding the way in which markets have grown: not via straightforward underpinning by western-style rule of law and protective property rights, but by more roundabout routes of joint incentives to local officials and entrepreneurs; by the use of market-building incentives using the price mechanism and yardstick competition between regions; and in the role of the CCP as a sort of ‘meta-institution’ pulling the strings of economic liberalization when it suited its political aims, not uniformly or consistently but highlighting the mixed pattern across the regions and over time of legal and capitalist institution-building.

China is the one country in my sample that is a transition country, meaning that it has been shifting, since 1978, from institutions of communism and state control towards institutions of capitalism and markets (although post-colonial Tanzania was a socialist one-party state for 30 years, with strong central direction related to building up industry). How do I analyze the creation of capitalist market-building institutions coming from the direction of diminishing state planning, growing out of the plan (Naughton, 2007)?

In shifting from planning to market, from socialism to capitalism, China has been using the market and market incentives. For market incentives to work, markets have conventionally been thought to need such institutions as protection and security for private property rights and freedom from expropriation by the state. Chinese institutions do not follow western orthodox conventional wisdom of protecting private property rights, enforcing contracts, separating government from business, strong rule of law. China has none of these and yet has had fast and sustained economic growth based on quasi-private, or non-state, enterprise since the early 1980s. Formal constitutional protection of property rights did not come about until 2004; the government was and remains entwined with business; contract enforcement and the rule of law are very weak and not independent of the state (Xu, 2009); the judiciary is not independent of the executive.  Yet there has been private enterprise and investment – both domestic since the early 1980s, and foreign since the 1990s, delivering economic development and growth. How has this been done, that is the China puzzle.

The story is about market-building incentives given out by the Chinese Communist Party (CCP).  The politics of this has been more complex, with many CCP leaders in the 1980s being against economic reform and market incentives; Huang (2008) says that there was no agreement in favour of markets. Rather they were ‘context specific innovations, local knowledge and experimentation’ (Huang, 2008: 104; Naughton, 1996; Rodrik, 2007).

In building markets, there have been winners and losers in property rights with the rural sector advancing largely in the 1980s and then losing out in the 1990s to the urban and state-promoted development. There has been centralization of political control combined with decentralization of economic incentives, co-opting entrepreneurs and the middle classes into exchanging political rights for economic growth or siding with what Dickson (2003) calls the ‘non-critical realm’. The CCP has been a meta-institution (similar to Parliament’s role in England), adapting and shaping institutions including itself and its composition to achieve its aims of economic growth and to sustain itself in power. I support Huang’s (2008) argument that there was much greater institutional liberalization in the 1980s that favoured the rural enterprise sector, which was then retracted in the 1990s with greater urban development favouring the state sector and promoting foreign investment. Constraints on rural credit and greater insecurity for rural private enterprise pushed rural farmers into seeking jobs in the cities as migrants, the great migration of over 160 million migrant workers moving from rural to urban areas. My point is that, in terms of institution-building, these changes were both instrumented by the thrust of CCP policy, dependent on changes in leadership, from the leadership of Zhao Ziyang and Wan Li in the 1980s favouring rural reforms to the urban state-favouring Jiang Zemin and Zhu Rhongji era of 1989-2001, which took in the events of Tiananmen, after which policy was recalibrated against liberal and rural reforms. The post 2002 era of Hu Jintao saw more reform but the 2012 era of Xi Jinping appears to signal a resumption of the government reasserting its grip on economic levers (The Economist, January 16 2016)

As in the other case studies in this book, I am influenced by Milhaupt and Pistor (2013; 2008) in their approach to the relationship between the legal system and economic development. They argue that looking simply at the formal legal origins or formal legislation does not tell us enough about the importance of the rule of law and legal system in a country. The function of the legal system in relation to economic development and capitalist development in particular is not only to protect property rights but to perform various other functions such as coordination, signalling and credibility enhancement; different countries give more weight to some functions than others (Milhaupt and Pistor, 2013: 330 and see Chapter 2 of this volume). To recap, the coordination functions of the legal system, which are stronger also in the Continental European countries than in the liberal economies, is to give parties with a possible claim to property rights a seat at the bargaining table. As Milhaupt and Pistor argue, ‘it [the legal system] is not unprotective but places greater emphasis on participatory over individually enforceable rights and interests’ (Milhaupt and Pistor, 2013: 330). The signalling function of the legal system, which is highly significant in China, is to send out a message of policy intentions and principles that are going to be followed. By credibility enhancement, Milhaupt and Pistor mean the use of the legal system to strengthen belief in policies that are signalled by legal measures, also highly significant in China.

In tracing the ways in which property rights and relatedly the legal system or rule of law has evolved in China, I argue that property rights in China since the 1978 opening up have not conformed to individual ‘western’ common-law-based protectionist rights; but nor have they been non-existent, and the legal system has evolved in an iterative fashion under the state apparatus. Rather property rights and the legal system and rule by law, have been used by those in charge of the state – the Chinese Communist Party (CCP) and state bureaucrats at various levels, central, provincial, local – to protect certain property rights to assist economic development. The groups that have been protected have varied over time and between regions.

The settlement of property rights is always a distributional issue: Kennedy (2013) argues that where one group’s property rights are strengthened, another group’s are weakened.  In China (as with our other case studies), there are different types of property rights and different groups of people with claims to those rights: rural land rights vs enterprise property rights; rural property rights vs urban developmental rights; official-backed and run state-owned enterprise ownership rights vs private-enterprise rights. These types of rights have shifted over time: different groups have come into favour and then fallen out of favour in how far the regime has backed their rights. Below I mesh the progress of different kinds of property rights onto the evolution of the variety of capitalism that China has been building since the late 1970s.

The second but related theme of the chapter is to understand the nature of this state.  I am using North, Weingast and Wallis’ (2009) Limited Access Order (LAO) framework to think about the issues of elites, and the nature of the state in the context of an elite Communist Party.  What is the relationship between the Chinese Communist Party (CCP) and state cadres and how has the composition of the CCP changed over time? What are the incentive structures used to control local officials’ behaviour and tie them in to market expansion? It explores how the CCP has maintained control using a combination of decentralization over economic incentives for local officials and centralization of control over political careers, dependent on yardstick competition in economic results. CCP and local official backing for local non-state enterprises have been the source of economic growth, first in the 1980s through the Household Responsibility System (HRS) and rural non-state (largely private) Township and Village Enterprises (TVEs), as well as through the accommodation of official-backed private enterprises, both domestic and foreign.

The development of the market means non-state activity, private sector, so including TVEs and the HRS. But it means more than the enterprise forms: it includes the use of the price mechanism, competition and economic incentives which includes career incentives, such as promotions and pay within the state career ladder. Use of these ‘price mechanisms’ are market-supporting in the sense that they harness the use of individual knowledge of capabilities, demands, energies which are or were only available at the local level to individuals knowing the context of their own capacities (Hayek, 1945). The paradox has been that these types of incentives have been heavily used within the CCP and state apparatus to give ‘high-powered incentives’ to cadres to use initiatives in the promotion of economic development, set as a local target post 1978.

State policy towards enterprises has provided relational ‘good enough’ property rights (Coase and Wang, 2013), security of the proprietor (Huang, 2008) rather than secure individual private property rights per se, to foster spectacular growth of those enterprises, initially coming out of poorer inland provinces. The CCP has adapted and shifted through ‘gradualism and experimentation’, like the meta-institution that the seventeenth century English Parliament was, both in its policies towards fostering markets and in its own composition, replacing ideologically Communist Party members with more technical expertise, ensuring that the ‘non-critical’ realm of new property owners, managers, growing numbers of middle classes would stay supportive of the regime, in their own interests. It has eschewed the ‘double balance’ espoused by North, Weingast and Wallis (2009) that argues that markets and capitalism in the economic sphere need to be accompanied by a move towards representative democratic politics.

The third set of themes that is explored in this chapter relates to corporate governance, China’s Variety of Capitalism. It examines the corporatization of both State-Owned Enterprises (SOE) in the interests of raising equity and access to broader sources of finance coming through listing on the newly created stock markets of Shanghai and Shenzhen. Relatively strong state control of management of these listed firms has been maintained by the state, continuing to hold block ownership of the bulk of shares in those companies and controlling who the top management of these firms were. There has been an absence of independent legal enforcement of discipline on managerial behaviour – very poor financial disclosure, few market-driven takeovers and little legal punishment against misappropriation. To counter this lack of institutions, and to provide some information flows, the quota system of local officials choosing which companies can be listed, with ranking of companies for listing based on their performance, has mitigated to some extent the lack of an effective legal framework, argue Pistor and Xu (2005). Although it is argued that more viable companies become listed, there is then an incentive not to reveal their weaknesses, resulting in misappropriation, tunnelling, and asset stripping by managers with relatively little in the way of state will to detect and punish these crimes. Workers’ rights in this erstwhile socialist regime have been disregarded, as capitalist market growth has let rip, with labour surpluses kept in check only mildly by the hukou registration system, which in turn has served to create a dualization in the labour market around more privileged urban workers on the one hand and rural migrants on the other, lacking official status and welfare support. The combination of lack of either market or state discipline over management combined with lack of worker rights has promoted a political capitalism, without the market checks and legal protections afforded by decentralized individualised property rights backed by the legal system of the Liberal Market Economy, and without the labour protections and coordination mechanisms of the Coordinated Market Economy.

The rest of the chapter is organized as follows. The next sections on primary institutions look at the nature of property rights in China and their relationship to the legal system; and explore the nature of the state, the dominant coalition of elites, examining the relationship between the CCP and the state apparatus, the CCP’s relation to institutional development and its changing composition. I then look at the meta-institutions of organizational forms of enterprise and corporate governance, focusing on the corporatization of SOEs, the launching of stock markets in the early 1990s and the governance relationships between the state as owners, managers and employees. I conclude with thoughts about China’s Variety of Capitalism.

Primary Institutions: Property rights and the legal system

As in previous chapters, I am building on Milhaupt and Pistor’s (2008) framework (see chapter 2) analyzing the relationship between property rights and legal systems. There are three main dimensions of differentiation of property rights systems: according to how centralized or decentralized the legal system is, meaning whether law emanates from the centre with strong state influence or is created in a more dispersed fashion – both geographically and in terms of power structures. This is aligned  with how contestable  property rights are, meaning whether individuals or groups can bring cases through the courts, can challenge decisions, bring class actions, whether they have access to lawyers and the influence that lawyers and judges have on the system (in turn related to their numbers, their status, their education and therefore influence).  The third dimension is assessing the various different functions that property rights systems provide, distinguishing between their protective function, their coordinative function giving different groups a place at the bargaining table, and their signalling function to provide a lead on the direction that policy is taking.  I add to this a fourth dimension which I have been highlighting in previous chapters, concerning the type of assets that are being protected through the legal system: tradable assets of investors based around ensuring fair market trading and protection of minority investors (in the liberal Britain and United States); protection of strategic assets of more closely held firms with a strong coordinative function to property rights and the state as regulator (in Continental Europe); or where the legal system and property rights supports the state/Party elites’ interests with a stronger role for the state as coordinator, and in the maintenance of order (in Tanzania and China). Which assets are protected bears a strong relation to which groups form the elites in each society.

This chimes with David Kennedy’s (2013) arguments outlined in chapter 2, that legal systems of property rights always have distributional implications; property rights – whether they are private or public legal regimes, or playing off formal rules against discretionary standards – are always decided or clarified in favour of particular groups and in doing so harm other groups. Identifying who those groups are at particular points in time is a theme of this chapter.

Property rights in land for small farmers, were initially strengthened between 1949-56 (Prosterman, 2013). As Prosterman says, the Chinese revolution, led by the CCP, was supported by the 60 per cent of the rural population who were poor tenants paying rents to landlords. Farmers were issued with land certificates and titles to land.  Post-1956 individual rural property rights disappeared and have remained weaker than rights accorded to urban development. With collectivization from 1956, individual rural land rights disappeared with disastrous results of falling production and famine and up to 30 million deaths between 1956-62.

From the period of opening up in the late 1970s, there are the beginnings of the use of market incentives which heralded a sort of capitalism.  There were no formal individual property rights protecting private property until the property law in 2007, although post-2004 private property rights were recognised. But this has been a process of recognition of property rights of those who will deliver economic growth through private enterprise.  Property rights have been informally recognized or tolerated rights, backed by local officials.

Given the incentives of the CCP, those groups which through enterprise development could foster economic growth and results – through GDP, exports, employment – at the local level were recognized as legitimate. They have extended – through the HRS – to giving incentives to rural farming households. But in any contest between rural farm and urban enterprise development, it is the latter that has won out.

In China both clarity of property rights and the notion of individual liberty are not concepts that have the same resonance as in the west. The United States enshrines liberty to include property rights. Zhang quotes Western jurisprudence on liberty and property: ‘you can’t give up one without losing the other’ with property rights as the cornerstone of liberty, the right to own private property being an essential human right as well as the basis for economic growth (Zhang, 2008). Western ideas of liberty means both right to private property and freedom from government interference, (the possessive individualism talked about in chapters 4 and 6; Macpherson, 1962; Laslett, 1960) and in particular governments may not interfere with property rights without the process of law. In China it is different. The notion of inalienable individual rights is much weaker. If rights are recognized, they are deemed to have been given or granted, and can therefore be taken away as well. Having said that in 2004 the National People’s Congress (NPC) amended the constitution to protect the individual, ‘freedom of the person’ and the personal dignity of citizens as inviolable’ (Constitution of China, 2004)

Private property rights were not fully acknowledged until the 2004 amendment to the constitution. Under Article 13 of the constitution, as amended in 2004, citizens’ lawful private property was declared ‘inviolable’. This became the property law in 2007 granting legal protection to private property rights. It placed private property on equal footing with public property for first time.

What I am interested in is the period up to that point in 2007, where economic reforms and private enterprise grew up in the absence of such legal recognition and protection of private property. How secure was private property and contracting and private enterprise that produced goods for the market? And how were those property rights secured? There remained a stigma against the term ‘private’ as it was deemed to signify ‘capitalist’ in an era when official ideology remained socialist. The superiority of public ownership had been enshrined in the 1954 constitution in Article 6. The 1975 constitution added ‘socialist public property is inviolable’ and 1982 constitution read ‘sacredly inviolable’. Under the 1982 constitution, the state owned urban land whereas the collectives owned rural land, administered by local officials (Volberda et al., 2011: 673).

In the 1982 constitution there was the shift from pure public ownership to multiple ownerships – recognizing that the market, to the extent that there could be a socialist version, required a broader notion of property ownership. Getting rich, which was endorsed as legitimate at this time, required at least non-public ownership and a need to respect private rights. The 1986 civil code – General Principles of Civil Law of China – had the purpose of protection of lawful civil rights, whilst not calling them private or individual rights. The 1988 Amendment to the 1982 constitution allowed the private sector to exist as a supplement to the public economy. It protected the lawful rights and interests of the private sector and allowed the transfer of right to use land. It did not use the term private property or ownership but the term private economy as a supplement with state powers to guide, supervise and control the private economy. The 1988 amendment was a legal watershed. Private property was recognized in the 1980s, but not as strongly protected as public property.

Whose property rights? Rural agricultural land rights vs urban development

Property rights are a bundle of rights: the rights to control, the rights to derive income from property, the rights to transfer property even in the absence of full ownership (Oi and Walder, 1999). Rural land rights did not include rights to transfer ownership: in the 1990s farmers were granted 30 year leases, but could not use the land as collateral for loans nor sell it. They could rent it out but paid a fee to the local administrator for doing so (Volberda et al., 2011: 669). This compares with urban residential leases, which were for between 40 and 70 years. Farmers’ land was not secure from seizure by the state; compensation to farmers was for its agricultural value, a tenth of its market value, with the village administration taking a cut. The government did not want a free market in rural land, with farmers selling holdings. This compares with urban private property, which individuals have used as collateral for loans and have been able to trade, creating huge wealth for individuals. In 1998 rural land rights were reformed somewhat: farmers were issued land-use contracts, and in 2003 there were restrictions introduced on collectives reassigning land within villages and strengthening farmers’ rights to transfer land between farmers, for farming (Volberda et al., 2011: 672-673).  This contrasts with more liberal urban rights; the urban housing market was privatized in 1998 and workers could buy their houses.

Enterprises in the 1980s, security of property rights and capitalist incentives.

The nature of property rights and contract enforcement need to be understood in the context of the growth in various forms of the private economy or non-state sector from the 1980s. The growth of these enterprises was closely related to the stimulus of market incentives allowed by the state. In other words, being allowed to keep surpluses, selling above the quotas onto a market constituted a form of private property right that had not been allowed previously, a right over resources sanctioned and protected by official dictum.

There were four forms of private enterprise: private farming and the Household Responsibility System (HRS); Town and Village Enterprises (TVE), Special Enterprise Zones (SEZ) and Geti (individual urban) enterprises (Coase and Wang, 2013). In agriculture, the institution of the HRS adopted in 1982 gave households the ability to keep the residual once their plan quotas were fulfilled. The State had formal ownership of land and controls over pricing. But households replaced team contracts and could buy means of production. Agriculture took 71 per cent of labour force in 1983.

The TVEs represented rural industrialization with non-farming jobs for peasants, coming out of old commune and brigade enterprises which employed 28 million peasants in 1978. The 1984 No. 4 resolution renamed these as TVEs, named because of their location rather than ownership. TVEs grew to employing 135m people in 1996, with the share in GDP growing from six per cent to 26 per cent of a growing GDP. 1980s saw a flourishing of rural entrepreneurship – the setting up of private businesses especially in the poorer provinces (Huang, 2008: chapter 2). This is the period when private enterprise was often disguised as red hat (Tsai, 2006). The private economy was still held in contempt: parents would not allow daughters to marry men in the private sector. There were three nos for the private sector: no promotion, no publicity and no ban. So these enterprises were tolerated for the tangible economic benefits they were bringing but had second-class status in terms of formal recognition and protection.

Property rights and contracting were not guaranteed by law but by power structures, agreements between officials and local family structures (Mann, 2013: 229).  Officials and local families reached agreements; there were mutual synergies between local governments and local economies; investments were channelled into favoured projects (Shamburgh, 2008: 17). The role of local officials was critical in the security of property rights; they had decentralized authority with incentives to obtain regional growth. This was an iterative process between experiment on the ground, delivering economic results, this being recognized as beneficial by local officials and the official line adapting to reflect and acknowledge practice. There was also corruption and rent-seeking; what Shamburgh terms ‘organized dependence’ between the Party/state apparatus and citizens (Shamburgh, 2008: 20).  So state socialism in the urban sector was counter-balanced by the more dynamic and productive household-centred small rural businesses in the rural sector, with poorer provinces in the vanguard in the 1980s (Huang, 2008).

Who owned the TVEs? Xu (2011) says the community governor was the de facto owner and that property rights were vague. Huang (2008: xiv) argues that ten million out of twelve million TVEs in 1985 were completely privately owned.  How secure were these property rights in the opening up period? Huang (2008) talks of security of the proprietor rather than the security of property; that it became less dangerous to open an enterprise, compared with the cultural revolution period. One example that Huang (2008) gives is of the watermelon seed seller, Nian Guangliu in Anhui province, who became a millionaire. But Deng had to speak out for him in 1984 and 1992 to defend him from imprisonment. Others suffered assaults on private business. In 1982 there were 16,000 cases of economic crimes, 30,000 people arrested. Many private businesses were disguised as red hat enterprises or survived by bribing state enterprises to be part of them (Tsai, 2006). ‘Rural enterprise, that’s our second treasury’ said a local official (Mann, 2013: 230).

Township governments provided infrastructure, financing land and training labour. In exchange, TVEs had access to resources. Official recognition overcame weak legal protection and weak contract enforcement. There was a mixing of enterprises with officials: in Jiangsu province, large manufacturing plants employed local village labour and were run by local officials; officials assisted in steering enterprises towards cheap state credit, how to qualify for funds, arguing for tax breaks, inflating the size of the workforce. There were tight relations between local officials and enterprises. Regional administrative measures acted as substitutes for law and law enforcement (Xu, 2011).  Pistor and Xu (2005) argue for the movement in China from de facto to de jure rights, that laws developed after business practice. The roles of the municipal governments of Taizhou and Wenzhou of Zheijiang province, where the private sectors were ahead of the legal framework, catalysed the legalization of private property rights (Du and Xu, 2008).

There was variety between regions. Prototypes were tried out in Anhui, Sichuan and Guangdong with land and output quotas contracted out from local governments to households. This was then rolled out. So in 1981 45 per cent of households participated; 80 per cent in 1982 and then 99 per cent in 1984. Households kept their residual incomes; control rights of allocation and management of land resources was kept by local officials. Jiangsu province had a long history of entrepreneurship; the Sunan model in southern Jiangsu gave a leading role to community government. The Guangdong model was linked to the SEZs and foreign direct investment (FDI) from Taiwan, Hong Kong and the diasporas. The Wengzhou model, in the poorer mountainous region, local officials were key entrepreneurs, labelled red hat with protection, with regulatory remedies for lack of property rights. Administrative provisions for registered operations gave private business in Wenzhou a legal identity. For example, there were local clusters of footwear firms with distributed but coordinated ownership, with government owning land and buildings. In Zheijiang province, 60 per cent of the province’s output was private by 2000, with local government support. (Xu and Zhang, 2009)

Huang (2008) emphasizes the upsurge in the 1980s in the creation of enterprises: Village party secretaries became capitalist bosses (Chen, 2003 in Huang, 2008); private cooperatives grew with government credit; the military set up enterprises, prison camps set up enterprises. Urban control over rural areas was abolished in the 1980s: collective production in communes was replaced by the contract responsibility system whereby farmers could market their surpluses out to nearby urban areas. Rural industrial firms were emerging as competitors to the state sector. Xu (2011) says that agricultural output increased by 61 per cent between 1978-84, with 78 per cent of the increase attributable to the institution of the HRS according to McMillan, Whalley and Zhu (1989). Coase and Wang (2013) argue that it was the poorer provinces that were in the vanguard. TVEs accounted for 4/5 of output of the non-state sector by the early 1990s. Between 1981-1990, industrial output of the TVEs grew 28 per cent per annum, compared with that of the state sector which grew at 7.7 per cent per annum.

Special Enterprise Zones were regions of private enterprise. This was part of state policy – that of having designated SEZs that were containment areas for the market economy and particularly for foreign direct investment. FDI was negligible in 1978; it was driven by the institution of the SEZ. In 1985 37 per cent of FDI was in SEZs; by 2005 this figure was 93 per cent, accounting for a similar proportion of exports. SEZs were initiated by local governments, the first four were in Shenzhen, Zhuhai and Shantou in Guangdong province, and Xiamen Fujian in 1980. In 1984 they were rolled out to 14 cities, and reached 342 cities by 2005.

Privatization of state-owned enterprises (SOEs) was gradual, carried out by regional governments at their discretion. They would not do it if it hurt growth. It was done from the mid-1990s, a de facto privatization through leasing of SOEs, whereby firms paid subnational governments a proportion of their profits. In Zhucheng in Shandong province, lossmaking SOEs were sold to employees. The policy was to retain the large (large firms in strategic industries), release the small. Privatization increased after 1997 through share issues, joint ventures, sales to outsiders (Gan, Guo, Xu, 2008). De facto ownership was turned into de jure by the mid-2000s; in 2005 regional governments still owned 31,000 SOEs, whereas central government had control of 166 firms. This was still state ownership but was on the way to privatization; regional governments sold land for development to raise revenue, taking property away from agriculture.

The flipside of property rights being at the behest of regional governments with law making and contract enforcement under their control, was that property rights of the agricultural population were weak. Regional governments favoured urbanization and urban development and they ignored the land quota system controlling the conversion of arable land to non-arable. Arable land was de jure collectively owned by the commune and village. Rights of use and income were assigned to farm households in the early 1980s. But farmers and village authorities could not alter land usage, nor transfer it; they were subject to the whims of local governments in the question of land conversion. Kung, Xu and Zhou (2013, in Stiglitz, Kennedy) argue that conflicts between local officials and farmers have been the outcome.

Rule of law in China

There are two sorts of argument put forward here in considering what role the rule of law has had in Chinese economic development. The first point of view stresses the subservience of the rule of the law to the CCP, the lack of independence of the judiciary (through low status, poor educational standards) from the political system and the CCP. The second viewpoint (Milhaupt and Pistor, 2008; Pistor and Xu, 2005) stresses the difference in functions of the legal system from its independent protective function in the west, more to do with coordination, signalling and credibility of policy than protection of investors. Again I want to tread a conciliatory middle ground: that the legal system is weak, is non-western, and is subservient to political processes and CCP policy; but it has evolved and is evolving and has grown in stature and independence. The judiciary remains however fundamentally less powerful than in western liberal systems. I deal with each argument in turn.

The legal system in China was created by the CCP which abolished the previous laws, decrees, judicial systems of the Kyomintang government in its September 1949 common program (Zou Keyuan in Brødsgaard and Yongnian, 2006). The first constitution of 1954 established the socialist legal system. The cultural revolution destroyed this legal system, smashing the structures of public security, procuratorate, courts. Post 1978 the legal system had to be rebuilt. The third plenum of the eleventh central committee of the CCP in December 1978 declared its purpose to strengthen the socialist legal system so that democracy was systematized and written into law. Formally the law was elevated and the equality of all people before the people’s laws, denying anyone the privilege of being above the law.

Rule of law, the constitution and the CCP

The Chinese system is less bounded in terms of what can be made law than the western system: the law is not independent from what the CCP can create and the constitution is used to enshrine principles and policies by which the CCP wishes to operate. The rule of law has been created by the CCP and is not independent of it. It can, therefore, be interpreted and unmade by the CCP. The rule of law was incorporated into the 1982 constitution (Zou Keyuan in Brødsgaard and Yongnian, 2006).

The Party constitution and state constitution have a close relationship; the Party directs what is to be adopted and measures made in the Party constitution are adopted into the state one. Constitutional changes follow changes in the Party constitution: amendments in the Party constitution were in 1987, 1992, 1997 and 2002; amendments in the state constitution were in 1988, 1993, 1999 and 2004.

For example, the state constitution adopted in 1982 embodied the principles of the 1954 constitution of all citizens being equal before the law, with the people’s democratic dictatorship replacing the proletarian dictatorship; it also enshrined the policies of economic reform, seeing the construction of modernization as a national task (Zou Keyuan in Brødsgaard and Yongnian, 2006).  This process has continued:  the 1988 amendment to the 1982 constitution legitimated the existence of the private economy, giving a constitutional basis of the commercial transfer of land use rights and constitutional protection to different forms of non-state ownership. The rule of law and its status therefore falls within the political sphere of power; it is seen as something political rather than as an independent institution and in the 1980s the rule of law was set as a political priority in terms of political development.

The Party decides policy and then makes the law. Any law of major principle has to be reported to the CCP central committee for approval. The Party has discretionary power to intervene, especially on economic, administrative and political laws. And it has control over appointments to the National People’s Congress, the legislature. CCP members account for over 70 per cent of NPC representatives and is, therefore, regarded as a rubber stamp for Party policy.  The chairmanship of the NPC is taken by the Party secretary general. In 2003 22 chairmanships of provincial People’s Congresses were filled like this. The CCP therefore will not allow laws in conflict with it. When Tiananmen Square protests happened, martial law was passed hastily. Zou sees this as a way for the CCP to legitimate itself, through the use of process and rule by law. For example, administrative procedural law gives the right to citizens to bring Party members or organizations to court.  But at the same time the CCP has been clear to retain control over legislation, despite using legal procedure.

The status of law has shifted in different periods according to political priorities. The early 1980s was a period of discussion of democracy and the rule of law. From 1996 Jiang Zemin at a law lecture for the CCP Committee made it an objective requirement to rule the country in accordance with law; it was seen as a symbol of civilization and guarantee of stability. Post-2001 there has been an emphasis on rule by virtue, meaning belief in communist ideals and collectivism, with legal and ethical norms going together.

The relationship between the state and the rule of law is critical to determining how China fits into the North et al. (2009) framework. They argue that Open Access Orders have a series of conditions relating to the rule of law: impersonality of the rule of law, that it does not matter who you are, you will be treated equally before the law; independence of the judiciary from the state; a legislature creating law that is independent of government; and government bound by the rule of law (North et al., 2009).

China has a different take on what is meant by the rule of law in western institutional terms. The Chinese rule of law does not match up to these western ideals. The CCP has used the rule of law to legitimate its processes: the Party is above the law but there is recognition that there is need for law.  Despite constitutional declarations, there is not equality before the law, nor stability of law; in this sense China does not fulfil the North et al., conditions to be an Open Access Order (OAO).  For example, in dealing with corruption, the Party investigates corruption ahead of the judiciary (Manion, 2004).

Milhaupt and Pistor (2008) assert that western style indicators of rule of law are not the appropriate measures to consider how the Chinese legal system has worked. This goes against La Porta et al. 1998, 2008, who argue that China’s formal legal system is weak, politicized, controlled by the CCP. The Milhaupt and Pistor, (2008) framework (see chapter 2) has two leading dimensions: how decentralized or centralized is the legal system and how contestable is the legal system. The legal system in China is a peculiar mix of centralized and decentralized: law-making has followed centralized CCP policy-making but enforcement of law has been decentralized to the regions. Formal law expanded over the thirty years since 1978. Focusing on central government law misses what is going on at the regional and local levels: for example, for the SEZs a specially designated set of rules was designed to attract foreign investment and stimulate exports. Regional company laws, securities laws, bankruptcy laws were decentralized.  The system has not been contestable in that it has been difficult for plaintiffs to mount cases. In the late 1980s laws were passed making litigation against government agencies possible; the 1989 administrative litigation law allowed individuals to sue government agencies. The legal system has not been about legal protection for investors although there have been actions taken by investors according to Milhaupt and Pistor (2008). It has not been easy to litigate and only 20 per cent of possible litigation during 2001-6 was pursued. People’s Courts have heard one million plus cases; plaintiffs win 30 per cent of them.

The point Milhaupt and Pistor are making is that the function of law has been evolving, that the legal system is a living dynamic system. The Chinese state set out to use the law to coordinate and as an instrument of state control but also to signal the direction of policy. However, the legal system takes on life of its own and the government can’t control the law entirely.

How independent is the judiciary from the CCP?

It is quite clear that the legal system in post-1978 China is not set up on a parallel basis with western liberal systems, despite officially being modelled on the civil law systems of Germany and France. As with property rights we have to distinguish between official pronouncements and practice on the ground, both of which have been changing.

First, the judicial system was not conceived as being independent from political control. President Xiao Yang in 2007 said ‘the power of the courts to adjudicate independently doesn’t mean independence from the Party. It is the embodiment of a high degree of responsibility vis-à-vis Party undertakings’ (Yang, 2007); the judiciary is not independent of the Party and its loyalty is a requirement.

The intertwining of judicial and political authority has meant that alongside the construction of the 1980 organic law of the People’s Courts and the 1982 state constitution, there were established four levels of courts and adjudication committees for courts at every level to review cases, find errors and interrogate judges. There are special courts for military, transport and forestry, which are more explicitly political, dealing with plundering, bribery, sabotage.  It is a highly centralized structure under the Supreme People’s Court having four tiers; in 2004 it had 3,500 courts and 220,000 judges (against 70,000 in 1988). If branch courts are included, there were over 10,000 courts in 2004 (Cabestan, 2005; Grimheden, 2006).

The political legal committee of the CCP was founded in 1980 and was put in charge of big issues. On it were the heads of the Supreme Court, the Supreme Procuratorate, the Ministry of Public Security and Ministry of Justice. It gave instructions to courts on the handling of cases. It could issue legal documents; it could strike hard yanda campaigns on crimes by mafia gangs, for example, 1993 yanda against kidnapping of children and women, 2000 yanda against gangs. Punishment could bypass normal legal procedures, with courts following Party instructions. The CCP Discipline Inspection Committee, whose remit is to safeguard the Party constitution and rules, interferes with judicial work and is an alternative to using the courts. For example, in 2002 the Party discipline inspection committee listed 861,917 cases for investigation and punished 846,150 persons. It handed over to the judiciary only when the cases had been through the discipline committee (Zou Keyuan in Brødsgaard and Yongnian, 2006:91).  Cheng Weigao, the Party Secretary of Hebei Province, was accused of accepting bribes and his two personal secretaries were sentenced to death. He was brought to the discipline committee and expelled from the Party, and his case did not go to the judiciary. This is an overtly politicized legal system; the Party mechanisms are seen as alternatives to the judicial system. Only 0.5 per cent of lawbreakers are punished, says Zou Keyuan, and only 0. 056 per cent are punished for corruption. The influence of the CCP over the judiciary is huge. There are certain Party documents – red-dotted documents – that are above the law. In 2003 Zhang Yinghong, a cadre in the Party organization of Hunan, published an essay on how the political legal committee hampers judicial independence; this was condemned and he was pushed out.

However, there are signs that this predominance of the CCP over the judiciary has begun to change. This attitude has in 2012 been officially softened. There have been more recent reforms – in 2011 and 2012 prohibiting self-incrimination, barring illegally obtained evidence, and speeding up trials for suspects. The 2012 state council paper on judicial reform does not mention the subordination of the judicial system to the CCP (Lubman, 2012). So things are changing. It is nevertheless a highly centralized and incontestable legal system, hard for individuals or class actions to be taken up independently against either other individuals or against the state.

Low status and poor education of Chinese judges

Judges have been seen as political animals (Wall Street Journal, 2014). Many are leaving, fed up with time wasted on political study, on transmission of attitudes, reflecting on important speeches (Liu Shibi, veteran court judge on Weibo). It is unusual for judges to speak out; but there is much discontent and many are leaving.

There has been recent attention paid to promoting the rule of law and fighting corruption under President Xi Jinping. They are not aiming to create a western legal system. They protect Party authority over politically sensitive issues. But there are many disputes, strikes and protests – over 100,000 per year. Liberation Daily (2014) reported that on average 67 judges per annum have resigned from the Shanghai courts since 2009. Making judges more independent of local officials is one aim, by transferring power over local court budgets to provincial authorities.

Compared with the western judiciary, judges’ education level is extremely basic. Judges in 2014 come to courts from law school and are on the bench after a couple of years as clerks. Ten years previously, in 2004 they had no legal training. Ai (2008) survey on judges’ educational levels stresses the poor level of training and qualifications in 2004. Their pay has been low which has made them open to corruption. They have been pushed to consider issues of social stability when deciding cases. Courts are seen to be the weakest point of Chinese government (Cohen 2014).

Primary Institutions: Nature of the state

I talked about the relationship between the state and rule of law and property rights in the previous section. I cannot consider how centralized/decentralized and how contestable property rights and rule of law are in this system without understanding the structure of the state administration. This section talks about the structure of the state: its regional decentralization and the relationship between Party and state.  It is also looking to answer the question is of who the elites in China have been and are and whether they are within the state, the Party or in civil society.

I divide this section on the nature of the state into:  regional decentralization and the relationship between the central state and provincial governments and how the centre has maintained control over the provinces despite regional autonomy over expenditure; the relationship between the state bureaucracy (cadres) and the Party in terms of administrative structures and incentives and changing composition over time.

Regional decentralization and state incentives

A key ingredient in the contribution of ‘institutions’ to Chinese development has been the structure of incentives – structure in terms of geography and organizational structure.  China has had a peculiar mix of decentralization of authority to provinces, municipalities, prefectures whilst maintaining a centralized control over careers of its state cadres. Chenggang Xu (2011) calls this a regionally decentralized authoritarian regime, with a combination of regional decentralization and political centralization. Xu argues that this structure is responsible for the success of the HRS and non-state enterprises. This is how regional economies have worked: they are self-contained in the sense that subnational governments have been responsible for initiating and coordinating reforms, providing public services, making and enforcing laws, giving these local governments huge powers over land resources. The 1958-2002 average for local government expenditure was 55 per cent of public expenditures, well above the figure for the average democracy of 25 per cent decentralization of expenditures (Landry, 2008). Xu (2011) gives a higher figure for 2006, that subnational governments have been responsible for 70 per cent of public expenditure, compared with 46 per cent in US, 40 per cent in Germany, 38 per cent in Russia (Xu, 2011). China has had one of the lowest proportions of central fiscal revenue (World Bank, 1990). Fiscal reforms of 1993-4 recentralized somewhat, with a clearer institutional separation between central and local tax bureaux. Relative to western economies, such as the US and Germany, a far higher percentage of expenditure has been devolved to the regional level.

Competition between regions has been an important incentive, with economic reform built into the incentives of officials, and a ranking between provinces, municipalities, cities according to various measures of economic performance. Regional governments have been controlled by the central state through the rotation of governors (Xu,Wang and Shu, 2007). Various forms of competition have been used as incentive mechanisms, such as performance targets with target responsibility contracts with superiors, ranking of officials by lists, for township officials, for governors of provinces, and using rotation and promotion of governors as a reward and incentive mechanism. Xu likens the governance structure of government to an M-form hierarchy: regional governments were granted autonomous powers but were controlled through appointments by the central state or CCP. Between 1978 -2005 80 per cent of provincial regions had rotation of governors imposed by central government (Xu,Wang and Shu, 2007).

Competition between the regions has had a particular structure. At each level – provinces, municipalities, counties, and townships – careers have been linked to performance, measured in terms of various types of economic growth such as GDP total or per capita, growth rate, FDI attracted and where that unit is in the rankings. The upgrading of counties to municipal levels, an advantage in terms of resources, has been based on performance. This has been helped by regional lack of specialization, with each region as a self-sufficient unit with a mix of industries. This has weakened interdependence between regions and has fostered competition.

This contrasts with the industrial structure in the USSR where there was specialization and high interdependence between regions. Xu calls this tournament competition between regional officials, where regional officials’ promotion has been related to the performance of the jurisdiction relative to the national average: if the average growth rate was higher by one standard deviation, this raised the probability of promotion by 33 per cent. If the growth rate is lower by one standard deviation, this increased the probability of termination by 30 per cent. These incentives have had an impact; provincial growth has mattered for governors and officials. The upgrading of cities, which gives municipal governors greater authority has been dependent on higher growth rates. This has created an endogenous cycle of career promotion, upgrading authority, attracting FDI and domestic investment leading to faster growth and further career promotion. Xu argues that this process has worked better with simpler non-conflicting targets such as economic growth and led to ditching more complex redistributive targets such as lessening inequality. Local officials have balanced their raising of revenues against giving incentives to non-state players through the HRS, land tenure, the SEZs and TVEs. To the extent that enterprises and private ownership brought in taxes and fulfilled economic targets – in terms of employment, numbers of enterprises, economic growth – this relationship (between officials and the private sector) has been symbiotic.

Party control over state capacity and state structure

The Chinese economy was decentralized in structure with authority for expenditure at the provincial level. But this gave rise to a fear of local elites and their independence. This was countered and controlled by the structure of the Party administration. Higher authorities had leverage over their subordinates; locally managed enterprises remitted a portion of their revenues to the county level bureaux. This created a form of control from above over local revenues (Blecher and Shue, 1996 in Landry, 2008). The political capacity of central government is not captured by the degree of fiscal centralization. Institutional control has been maintained through Party administrative incentives. The mechanism of control is through the selection of leaders by the CCP at all levels – national, intermediary and local (White, 1998 in Landry, 2008). There is a dual state structure of state cadres and CCP members and a linkage between the cadre management system and political control over the elites. There is a Party web of veto points throughout the cadre hierarchy: Party approval was and is needed for access to offices at all levels of central, provincial, municipal, county and township officialdom. No cadre was appointed without the assent of the CCP committee.

The CCP used the appointment system to get responsiveness to policy from the provinces. The one level down system of cadre management was a mechanism for decentralizing but not giving local autonomy; this was how the CCP dealt with the idea that ‘the sky is high and the emperor is far away’. Although expenditures were devolved to the local level, control over local elites was maintained, using the incentives of getting economic growth and rewarding officials for it (Yin, 2001 in Landry, 2008: 39). Personnel policy controlled by the CCP has been used as a critical intermediary variable. The cadre responsibility system meant that central government steered local leaders and held them accountable, using promotion, dismissal, transfer to enforce their authority. Performance contracts were used whereby Party secretaries and township officials signed contracts pledging to reach targets, and were held responsible for them. There was a ranking of different targets into soft, hard, priority or bottom line. If the township did not make its priority targets, this would cancel out all other work performance.

The elite, the CCP

Shamburgh (2008) talks about the changing nature of the communist party state from its mobilization phase under Mao towards its bureaucratic phase, a move from a totalitarian regime towards an authoritarian regime. The government’s rationale has been to hold onto power and to adapt itself and adjust in order to do so, what Shamburgh calls both atrophy and adaptation.  There is division over how strong or coherent the CCP is. It has relied on its capacity to deliver economic growth (Hutton, 2006). Others have emphasized the predation and corruption of the CCP, rent-seeking of officials and rural discontent, what Minxin Pei (2006) calls a trapped transition. Optimists have emphasized the benefits of economic reforms in strengthening state capacity.

What is clear from the reflections on the nature of communist states at the fall of communist parties in Eastern Europe from 1989 and with the disintegration of the Soviet Union in 1991 is the reflexivity of the process, that the CCP learned lessons from the failure of these communist parties and resolved to adapt themselves in order to hold onto power. Shamburgh (2008) talks of the CCP view that within the socialist system the market could and should be used, that there had been too little emphasis on agriculture in the USSR and too much emphasis on industrial economies of scale, on the state monopoly of property rights, there was over-centralization and too low a tax base. A Central Party School member, Zhao Yao, in criticizing Gorbachev, implicitly thought it possible to have market-like economic reforms whilst maintaining political authority and not going down the bourgeois democratizing route (Shamburgh. 2008: 170). Stability was thought to be paramount and Party leadership over the state apparatus was core. Evolutionary gradual change was thought to sustain this. This fits with the Limited Access Order framework of North et al. (2008), placing stability and lack of violence at the centre of concerns.

Who are the elites in this system?

The hub of the CCP structure was and is the Organization Department, in charge of personnel, the first department under heaven (Landry, 2008: 136; Shamburgh, 2008: 141). It was and continues to be in charge of retiring and replacing old ideological revolutionaries and recruiting younger, more technocratic and meritocratic members to the CCP. It was secretive, with no public phone number, no sign on the building near Tiananmen Square, with highly confidential and detailed dossiers, handling high level personnel decisions secretly. Its incentives were aligned with economic growth: to foster growth, create employment, attract FDI, control social unrest, achieve targets (Hoffman and Wu, 2009). In terms of incentives for local officials, if they managed to promote growth in their region, they could keep the surplus for reinvestment and would be more likely to be promoted from local to central officialdom. Shamburgh has an estimate of 70 million plus party members in 2003, with three levels of privilege: the nomenklatura system for the top 2,500 party officials at minister level and governor and party secretaries in the 31 provinces and four centrally controlled municipalities; the bianzhi system which is the system of the state bureaucracy administered by the state council and numbered 33 million personnel in 2004; and ordinary party committee assignments to the 168,000 party committees.

The Organization Department has processed several thousand cases a year to give approval to appointments, and has been in charge of the nomenklatura system since 1949 (Burns in Brødsgaard and Yongnian, 2006). There was greater openness in the 1980s about the role of the nomenklatura and then more secrecy in the 1990s following Tiananmen. Since China entered the WTO in 2001, greater openness has been required. Patronage extends to jobs, tendering, licensing requests. Economic development and the market system has been a challenge to the nomenklatura system, with individuals accumulating resources outside party control. The CCP stress on performance has been undermined by corruption and nepotism too. There have been moves to reform the bureaucracy for it to become more meritocratic, with no life tenure, to raise its education levels and to punish corruption.

State and CCP structures

How does the Party structure mesh with the state bureaucratic structure? Local government is a nested hierarchy under the state council with three tiers of provinces, counties and townships. There are some exceptions such as the autonomous prefectures responsible for the same things as municipalities, where the supervision of officials is weaker, or the central cities which are managed directly by the counties.  There are also local people’s congresses (LPCs) elected by representatives. All levels above the county have bureaucratic authority over the next level down. The strength of the LPCs and the rule of law have been limited. This structure runs in parallel with the CCP structure with the CCP replicating the states’ hierarchy at each level and asserting authority over the state via Party committees (Landry, 2008: 57). This is a highly complex administrative structure with dual accountability to both government and to the Party. Local cadres have some ability to take local decisions but the higher state hierarchy is monitoring them and Party officials above and outside the locality are monitoring the state officials.

The Party trumps state cadres. To be promoted, an official needs to be a CCP member as part of the route up. Village Chairmen and the Party Secretary are often the same people. As a snapshot in 1998, states cadres numbered 40 million, CCP members 60 million; of the 40 million state cadres, 25 million were non-Party and 15 million were Party. Of the 60 million CCP members, 15 million were state cadres and 45 million were outside the state cadres (Walder in Brødsgaard and Yongnian, 2006).  Walder estimates the CCP political elite to have been 0.5 million, with a state bureaucracy of 40 million and 45 million Party members outside the state cadres. If all groups stick together, then there is cohesion. Defections in May 1989 threatened the hold of the CCP. Challenges to the elite can come from both within and outside the state and Party membership. Underperforming cadres are not pushed out but are kept in post and in the Party, to control their opposition.

Composition of the CCP

In terms of who the elites are, I am interested in the social characteristics of Party members and composition of the Party. Hong Yung Lee (1991) talks of the change in the CCP from revolutionaries to technocrats. Dickson talks of the red versus expert debate (2003: 31). Landry (2008) says that there has been a shift from class credentials to being more educated. Dickson (2003: 31) says that post 1978 the period of class struggle was over; there were reconciliation policies with new goals of economic modernization creating new elites. They needed to include these new groups or be threatened by them. Hong Yung Lee (1991) reports on increasing proportions of college educated members, with a large peaceful elite turnover. In 2001 on the eightieth anniversary of the CCP, there were 64.5 million members, which amounted to five per cent of the population; 17 per cent were women, six per cent were ethnic minorities, 50 per cent were under 45 years old. This was a squeezing out of the proletariat. A 1990 study of 30,000 workers in 50 enterprises found 18 per cent had been Party members in 1982 which had fallen to eight per cent in 1990 (Dickson, 2003: 33). The Tiananmen period was an interlude of the party losing cohesion. From 1994 there was a renewed recruitment of workers and farmers as well as a push towards technical and entrepreneurial people and those in universities. Dickson (2003: 35) says 40 per cent of college teachers and administrators were party members in the mid-1990s. In general terms it has helped the career to be a member of the Party.

The Party has had different influences on rural and urban populations. The Party is less present in rural areas, with a declining membership. In rural areas, the Party branch committee supervises the village administration, controls the promotion of chairmen to party secretary; if there are candidates for election, it selects out anyone it sees as a troublemaker such as local activists (Landry, 2008: 234). There is more direct Party influence on urban committees with voters having less say than in villages. The relations between the CCP and enterprises have changed over the decades; Party thinking has shifted from seeing private enterprise and entrepreneurs as class enemies towards harnessing their economic benefits and recruiting them into the Party. There was a ban on entrepreneurs being in the Party from 1989-2001 which was then lifted (Dickson, 2003).

Tensions between development and democracy, market and CCP

Does economic development lead to civil society and lead to democracy?  The relationship between development and various freedoms, one of which being democracy, is not straightforward. nor is it a causal one (Robinson, 2006; Sen 1999; Lipset, 1959; Dahl 1971). The extension of markets means the dispersal of power, greater competition, choice, private citizens and firms having bargaining power, through their resources and through their position in civil society, acting as a counterweight to state power. Walder (in Brødsgaard and Yongnian, 2006) argues that the market system has eroded the institutional pillars of the communist system cutting out the mediation of the Party. Just as the legal system has had a life of its own in terms of escaping from control by the Party, so markets too have evolved beyond the reach of Party control.

China has confounded the North et al. (2009) idea of a double balance – that inclusiveness and development in the economic and political spheres necessarily go together. China has combined greater openness and market development in economic terms with no move towards democracy in political terms; the CCP has retained its hold on the political system. This process of economic liberalization without political democratization has created shared interests between middle classes and state officials (Dickson, 2003: 13). Entrepreneurs have supported the regime by and large; they have benefited from it and fear that political change would threaten their property interests.  The symbiosis between local officials and entrepreneurs, talked about above, has created joint interests; officials are partners in enterprises, they get fees for joint ventures, they tax farmers and firms.

Dickson (2003: 19) argues that civil society is not counterposed to the state in China but is embedded within the state, is not outside the state system, but rather inside it. The system is defined by the state and civil society is not antagonistic to it (White, Howell and Xiaoyuan, 1996). Dickson distinguishes between what he calls the critical and the non-critical realm. The critical realm includes outsiders to or non-beneficiaries of the system, protesters, some intellectuals; the non-critical realm includes entrepreneurs, managers, professionals who are anti-political in character and not engaged in political activities. For instance, they did not support the protesters in Tiananmen. The non-critical realm is crucial; if the critical and non-critical are not joined, the state supports the market dynamic but represses the political dynamic. State policies have been inclusive towards the non-critical realm. Entrepreneurs have not been interested in political power; they have solved issues of property rights and contract enforcement through clientelism, with a state that is sympathetic to local business views. This can be seen as a corporatist framework that binds state-society relations together. This contrasts with western civil society based on pluralism with the state as an independent actor (Dickson, 2003: 24). For example, the organization law of 1989 made every organization register with the government, supervised by the Party or government unit, creating limits to the autonomy of civil society organizations.

Has the CCP itself been changing?

As the CCP has been less in absolute control, there has been the need for it to work through other organizations (Dickson, 2003; March and Olsen, 1989) with the recognition of the need for mediation through market institutions. The CCP itself has been dependent on the growth of the private sector and the use of market forces, which themselves have undermined the status of the CCP: the working classes have become more independent of the state, there has been greater occupational and geographical mobility, challenging the Party’s ability to monitor and control. In response the CCP has moved towards co-opting businessmen, technocrats and professional classes. This has been done by ditching social goals and ditching the rural farmers. Huge inequalities have opened up – between provinces (especially coastal vs inland provinces), within provinces, and between rural and city areas (Dickson, 2003). The CCP has pushed the interests of employers over workers and of urban development over rural farmers’ interests. I turn now to how this gets worked out in terms of Chinese corporate governance.

Meta-institutions: Corporatism, organizational forms and corporate governance institutions

The Party/State (Mann, 2013) has created a corporatist framework as part of state-society relations, to bind society together (Dickson, 2003: 24). In this corporatism, unlike the west, labour side interests are not represented; it is corporatist on the business side.

The path of institutional development has been therefore very different from that taken in the liberal democracies. It is a more extreme version of the coordinated corporatism of Germany and France (to a lesser extent). The emphasis has been on institutionalizing the participation of key groups, achieving consensus and common goals (Dickson, 2003: 62). Corporatist structures have substituted for coercion, propaganda and central planning of the former era, as the state’s grip lessens. Every organization has had to register with the government and be sponsored by a state unit, with one organization for each profession or activity, so that they do not compete with each other. Leaders of such associations have been in the CCP, the Party not liking organizations to be outside its control (Dickson, 2003). Corporate groups are, therefore, not independent in the sense of acting as checks and balances on the state. Unger and Chan (1996) compare this process with that in Japan, South Korea and Taiwan which transitioned from state to societal corporatism, where groups acquired autonomy from the state as a consequence of democratization. Dickson’s (2003: 37) survey of business associations in China concludes that they are not agents of the state, but nor are they autonomous.

As to how inclusionary or exclusionary the Chinese state is, Dickson (2003: 68) argues that it is selectively inclusionary, incorporating some individuals and groups but excluding others. The CCP’s corporatism excludes the critical intelligentsia. It includes technocrats and entrepreneurs of the non-critical realm. The entrepreneurs in Xiamen disapproved of the student demands of 1989, placing stability above democracy (Wank, 1995 in Dickson, 2003: 96). In the 1990s there were ways of getting round the ban on private enterprise – through disguising them, through co-opting entrepreneurs into the Party. In the late 1990s the legality of private enterprise was established. By the 2000s there were special classes and programmes for entrepreneurs by the Party.  In return for official discretion and protection from competition, entrepreneurs were expected to contribute to the local community schools, roads and ward off jealousy of them, labelled red-eye disease. Guanxi and the corruption that went with it were diminishing; there has been greater reliance on laws and regulation. But there has not been a growth in liberal faith in parliamentary democracy; reform has been initiated by the Party rather than by society. In terms of political culture and beliefs, enterprises and beneficiaries of development would rather have those interests protected and see them and their prosperity better protected by the existing political system than through any democratizing principle.

I follow Aguilera and Jackson (2010) interpretation of corporate governance as ‘the study of power and influence over decision-making within the corporation’. As Aguilera and Jackson say, the corporation is itself an institution with the rights and responsibilities of different parties linked to law and politics.  There are diverse parties associated with the firm: owners, managers, employees, state and these have different structures and roles across countries; for example dispersed individual share ownership contrasts with concentrated blockholder ownership; the role of institutional investors varies across countries; the role of employees varies– whether formally represented on boards or having works councils within firms or representation within trades unions or very few rights and representations. And the role of the state varies – from being hands-off with very little remit to interfere except through regulation, to being involved as a coordinating agency between parties to being a blockholder owner and immersed in the politics of certain firms’ decision-making.

In making comparisons between Chinese capitalism and western capitalisms, as in the previous chapters, I look at organizational forms. Chapters 4, 5 and 6 contrasted the pre-eminence of the corporation in Britain and the US – as a legal person, backed by common law, independent of the state and held through dispersed shareholding tradable in markets – with the more closely-held, concentrated holdings, unlisted and less tradable organizational forms in Continental Europe, that had the effect of protecting the strategic assets within those firms rather than protecting investors’ rights through shareholding of those firms. Where do Chinese companies sit in this spectrum?

In addition to the non-state enterprises described earlier, there has been a transition of state-owned enterprises into enterprises listed on the newly-created stock exchanges of Shanghai and Shenzhen in the early 1990s. Liu (2006) gives data of 1400 firms having made initial public offerings between 1992-2002, raising US$100 billion, with market capitalization of US$500 billion, with 130 securities firms, 100,000 practitioners and 70 million investor accounts (CSRC website in Liu, 2006: 421).

The 1994 company law was designed for corporatization of SOEs, to impose some discipline on management despite the state retaining ownership of the majority of shares of listed companies. Thousands of companies were incorporated. 1,300 SOEs were listed on the two stock exchanges by 2004. This enabled them to raise equity finance from investors rather than relying on banks (Pistor and Xu, 2005).

Despite listing on stock markets, these firms remain heavily influenced by the government in various ways. These data show that these listed firms have concentrated ownership, and the majority have a parent company, often a SOE. Liu calculates that the controlling shareholders for over 80 per cent of listed firms are central or local governments. Listed companies are not by and large private companies (Liu, 2006). There is limited independence of Boards from political and state-controlling owners. Chen, Fan and Wong (2004) argue that 80 per cent of directors on boards have some connection with the state. There are different classes of shares – state shares, legal person shares and public shares – with only public shares being tradable; the transfer of the other two types being controlled by the government.

This is different from the publicly-owned and traded corporation of the liberal economies and also from the privately-owned and less traded GmbH-type company. I have argued that the coordinating and signalling functions have been stronger than the protective function of property rights in China, especially than protecting individual investor assets. There has been instead much stronger protection via control of state assets, restricting trading, influencing Boards, changing top management in favour of politically-approved managers. I would argue that these listed companies are not ‘private’ in the western sense.

Relation between law and corporate governance

Formal legal shareholder protection and regulatory quality for instance by the La Porta et al.  indicators show Chinese formal protection to be below the average for transition economies (Pistor and Xu, 2005). Shareholder protection has been weak and private enforcement very weak. In 2001 courts were unable to hear cases brought by investors whose rights had been infringed by misrepresentation of accounts, insider trading, asset stripping. Public enforcement was done by the China securities regulatory commission (CSRC) and the Chinese Supreme Peoples’ Court (SPC). They have vetted which litigation is permissible. Gradually more litigation has been allowed by the private securities litigation rules, issued in 2003, to allow joint litigation but only where the defendant company is registered. The Pistor and Xu data for 2001-2004 reported that no civil law case resulted in a court imposing a liability. Public enforcement has also been weak

In China corporate governance as an issue has been debated more closely in relation to the governance of listed companies, on the Shanghai and Shenzhen stock exchanges, from 1990. Between 1990 and 2005, the Chinese stock market grew to be the eighth largest in the world by number of firms and market capitalization (Liu, 2006). Listed firms nevertheless accounted for fewer than five per cent of large and medium-sized firms in China and a small fraction of GDP (Allen, Qian and Qian, 2005). Liu (2006) argues that listed firms’ governance has operated in a similar fashion to non-listed firms, under the norms of administrative governance. The listing of former SOEs was seen as a way of raising equity, rather than of distancing the state from direct control over the levers of management.  The state has maintained blockholder ownership of the majority of listed companies. Liu (2006) names the model of governance over listed firms a control-based model, where controlling shareholders – usually the state – use governance mechanisms to continue to control the firm. Thus ownership structures have remained concentrated and often linked, through pyramids, to non-listed SOEs (Sutherland and Ning, 2015). Boards have been constructed that were friendly to management, with little financial disclosure to the public and lacking an active takeover market (Liu, 2006). The careers and turnover of top management of listed firms have been influenced by the CCP and state administration. (Ning, Prevezer and Wang 2014).

This represented then a change in manner of control by the state, from direct state/Party management towards indirect control. This goes hand in hand with the continued ownership stake by the state in publicly listed companies. Around 70 per cent of shares on the Chinese stock market remain owned by the state and a controlling interest is kept in leading enterprises (Mann, 2013: 233).  Ownership structures of listed companies are not transparent: the state often has acted as a holding company structure with branches of the company listed on stock exchanges to raise capital from private and foreign sources but with the state maintaining strategic control through pyramidal ownership (Sutherland and Ning, 2015). This mirrors the kind of pyramid control structure found in other countries (Continental Europe, Latin America) where control is maintained often by a family through pyramid structures.

The CCP has less control and influence in purely private enterprises; there is weak party building in both private and foreign-owned sectors. (Dickson, 2003: 42). The enterprise law gives stockholders the authority to hire and fire board members and management; if the enterprise party committee has no shares in the firm, it cannot control hiring and firing. Party committees can influence standards for selection and approve decisions of owners and shareholders but can’t directly remove managers and others. There has been resistance in Shenzhen to taking on unproductive Party people. Instead Shenzhen has a private enterprise association, a new form of Party organization.

Status and role of workers/labour/employees in the firm

Since 1978 the status of workers in Chinese firms and in the economy in general has declined. The reforms in the SOEs have reduced the status and power of workers (Cai Yongshun, in Brødsgaard and Yongnian, 2006). Since the reform, there is greater disrespect and falling in consultation, in perks, in authority. Under Mao in the SOEs there was job security, subsidized prices for essentials, egalitarian wage policies, welfare benefits, housing. This was not a question of labour autonomy: under Mao labour was controlled through state-run unions, there were party members in each factory; workers were encouraged to join the party. But there was the iron rice bowl, a basic level of welfare provision organized by the work unit (Mann, 2013: 220). Since 1980 these worker-oriented rights have gone. With priority given to economic growth and much greater precedence given by the Party to non-state activities, the reform of inefficient SOEs has meant layoffs and diminished power of the workers. Disrespect and weak rights is reflected in things like poor treatment in cases of injury or healthcare, long working hours, flouting of labour laws. ‘We were the master but we are not now. In the 1950s when we walked in the street with uniforms, even the police would show their respect to us and we felt proud of ourselves; but now if you walk in the street with your uniform, even the salesperson is reluctant to talk with you, and we feel inferior to others’ (Cai Yongshun, in Brødsgaard and Yongnian, 2006: 174).

Lee (2007) contrasts the old SOE dominated northern city of Liaoning with the booming coastal industries. In the former there was unemployment as SOEs collapsed; in the booming areas there was low wages, abuse of migrant workers, working six sometimes seven days a week. ‘Workers and peasants appeal to the law, and the bourgeoisie – employers and officials – flout it (Lee, 2002 in Mann, 2013: 239). No-one wishes to be a worker with its low social status and widening income gap, with 70 per cent of enterprise workers having below average salary in the mid-1990s (Cai Yongshun, in Brødsgaard and Yongnian, 2006:176).

The role of trade unions (TUs) in communist states has always been difficult with the state supposed to be on the side of the worker and therefore unable to tolerate independent TUs. In the reform period, membership of TUs fell; political activists in SOEs were the first to be laid off. For example, there was a fight over forcing workers to buy shares and sacking them if they did not; the interviewee was sacked.

In terms of formal rights, workers’ councils used to have decision-making powers in enterprises but since the 1980s these have become powerless. They lack knowledge, they are threatened with punishment by management if they object to plans, they are not the legal owners and their approval for reforms is no longer sought. The Party is no longer constrained by socialist ideology in its dealings with workers. Are the Trade Unions moving towards social representation in China? Are they agents of the state or of their members? Yunqui Zhang (1997: 125) and Dickson (2013: 62) argue that they are both, having a dual role, wanting both autonomy and embeddedness.

Changing role of management

In terms of manager-worker relations, the reforms have brought increasing management autonomy, formalized in the MRS, the Management Responsibility System. This is equivalent to the HRS for agricultural households, but here allowing SOEs the freedom to dispose of surpluses over quotas. In terms of Party representation, the MICPC (Manager in charge under the leadership of the Party Committee) gave way to the MRS, starting in the early to mid-1980s. The Party committee became secondary in terms of types of decision-making in enterprises, demoted from financial affairs and key strategic decisions. The enterprise law of 1988 legalized the status of manager. In the 1990s the Party was still in control of selecting managers in theory but in practice managers were selected by higher level (Party) authorities, with the priority of economic development and generation of surpluses. Coase and Wang (2013) talk about the chaos of the MRS with managers each negotiating different prices and tax rates. The tax reform of 1994 and the contract system reform of 1993 led to a simplification of taxes with a uniform 17 per cent VAT to manufacturing. It was a centralization under a national tax administration and ended the tax negotiation between central and provincial governments. Coase and Wang argue that this fostered regional competition between regions rather than there being regional fiefdoms.

Conclusions: Nature of China’s Variety of Capitalism

China’s development has been predicated on the survival and development of the Party hierarchy, on economic expansion, on the expansion of the numbers of college educated and on slow privatization. It has legitimized capitalism. Stability has been at its core and mostly lack of violence. Walder (in Brødsgaard and Yongnian, 2006) stresses the huge expansion of college-level education, transforming the urban elites, with faster growth in college students than economic growth. From 1949-79 there were three million graduates; since 1979, 12 million. The privatization of state assets has been very slow compared with Eastern European counterparts; the private share in GNP in China in 1999 was 55 per cent compared with Poland’s 65 per cent, Russia’s 70 per cent and Hungary and Czech Republic’s 80 per cent (Walder in Brødsgaard and Yongnian, 2006: 18). Correspondingly, the elite turnover has been higher in former communist countries compared with that in China.

So what is China’s Variety of Capitalism? Does it resemble at all the Liberal Market Economy or the Coordinated Market Economy? It combines a curious mixture of highly liberal labour markets, with low employment protection and labour rights, with high coordination masterminded by the CCP, at least in the non-private areas. Even in the private sector, owners and managers require good relations with state officials and are subject to their coordinating pressures.

How far does the primacy of shareholder value of the LME hold in China? This is not a model that supports shareholder primacy. The shareholder is not king; the state is. Minority shareholders are not protected; the stock market does not accurately reflect values of companies.  How far does the autonomy of the CEO of the LME hold? The CEO of the non-private enterprises has much less autonomy than in the LME, being subjected to pressures from the state. So this in various respects is not a Liberal Market Economy. Is there coordination through the state along the lines of the CME?  The stakeholder model, enshrining rights of labour, along German/CME lines does not hold in China? This is not a classic Coordinated Market Economy with its stakeholder model of bringing all parties to the table to negotiate conditions.

I concur with Naughton and Tsai (2015), that China’s Variety is a form of state capitalism – a Political Market Economy, borrowing some features from the LME in the diminishing of worker/employee rights and protection and in increasing managerial autonomy; but very different from both LME and CME in the role of the state-management nexus. Naughton and Tsai (2015) call it state capitalism; Mann (2013) calls it a capitalist party state but demurs from calling it capitalism.  The role of the state/Party has shifted from having direct Party involvement in enterprise decision-making through having leadership positions on the board to a more indirect hands-off control through share ownership, through higher Party level monitoring of managerial careers but greater managerial autonomy and responsibility for strategic decisions in the enterprise. A politicized but not direct state control. Above all, state-owned and controlled assets are protected in a variety of means: through dominance over the legal system, over the stock market, over management and careers in enterprises. But non-state assets are also selectively protected, via the relationships cultivated between private entrepreneurs and the political class.

WORD COUNT: 14,130


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