Socialist market economy

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Socialist market economy
Simplified Chinese 社会主义市场经济
Traditional Chinese 社會主義市場經濟

The socialist market economy is the economic model employed by the People's Republic of China. It is based on the dominance of the state-owned sector and an open-market economy, and has its origins in the Chinese economic reforms introduced under Deng Xiaoping. The ideological rationale is that China is in the primary stage of socialism, an early stage within the socialist mode of production, and therefore has to adapt capitalist techniques to thrive. Despite this, the system has widely been cited as a form of state capitalism.[1][2]


After the Great Leap Forward (1958–1961) and the ousting of the Gang of Four from power, Chairman Deng Xiaoping was willing to consider market-based methods of economic growth so as to revitalise China's economy and find an economic system compatible with China's specific conditions. However, in doing so, he remained committed to the centralized control and the one-party state central to Leninism.

The socialist market economy was a concept introduced by Deng Xiaoping in order to incorporate the market into the planned economy in the People's Republic of China. Deng first used the term during a meeting with vice chairman of the US Encyclopædia Britannica Company Frank Gibney and director of the East Asian Studies Institute of Canda's McGill University Professor Paul Lin Daguang, asking: "why can't there be a market economy in socialism"? We can't say that this is capitalism. Our planned economy is in the primary position; it integrates with the market economy, but this is a socialist market economy."[1] The concept was later adopted by the Đổi Mới in Vietnam.[3] Following its implementation, this economic system has supplemented the centrally planned economy in the People's Republic of China, with high growth rates in GDP during the past decades having been attributed to it. Within this model, privately owned enterprises have become a major component of the economic system alongside the central state-owned enterprises and collective / township village enterprises.

There are some similarities to Western mixed economies, with some fundamental differences. The fundamental distinction between the Chinese and Western mixed-market economy models lies less in the implementation of the mixed economic model but rather in the degree of state-ownership and underlying authoritarian political philosophy, which eschews Western notions of democracy, individual rights, and the rule of law.[4]

This type of economic system is defended from a Stalinist perspective which states that a fully developed socialist planned economy can only come into existence after first establishing the necessary and comprehensive commodity market economy and letting it fully develop until it exhausts its historical stage and gradually transforms itself into a planned economy (the Stalinist Two-Stage theory of revolution). Proponents of this economic model distinguish it from Market socialism: Market socialists believe that economic planning is unattainable, undesirable or ineffective, and thus view the market as an integral part of socialism, whereas proponents of the socialist market economy view markets as a temporary phase in development of a fully planned economy.[5]


Despite the official designation of "socialism", analysts often describe the Chinese economy as a form of state capitalism.

One analysis carried out by the Global Studies Association at the DePaul University reports that the Chinese economy does not constitute a form of socialism when "socialism" is defined variously as a planned economy where production for use has replaced production for profit; when it is defined as a system where the working-class is the dominant class (controls the surplus value produced by the economy); and when it is defined as self-management or workplace democracy. The study also found that as of 2006 capitalism was not the dominant mode of organization in the Chinese economy, suggesting that China is still a partially pre-capitalist agrarian system with almost 50% of its population engaged in agricultural work.[6]

Analysis of the "Chinese model" by the economists Julan Du and Chenggang Xu finds that the contemporary economic system of the People's Republic of China represents a state capitalist system as opposed to a market socialist system. The reason for this categorization is that financial markets exist in the Chinese economic system, which are absent in classic models of market socialism and in the market socialist literature; and that state profits are retained by enterprises rather than being equitably distributed among the population in a social dividend or similar scheme (which are central features in most models of market socialism). They conclude that China is neither a form of market socialism nor a stable form of capitalism.[7]

Other Marxist analyses point out that the current Chinese system contains capitalist commodity relations in production, dis-empowers the working class, and has contributed to a sharp increase in social inequality while growing the size and political power of a small capitalist class.[8] Classical Marxists believe a "socialist commodity economy" (or a "socialist market economy") is contradictory. Other socialists believe the Chinese have embraced many elements of market capitalism, specifically commodity production and privatization, resulting in a full-blown capitalist economic system.[9] Although many enterprises are nominally publicly owned, the profits are retained by the enterprises and used to pay managers excessively high salaries rather than being distributed amongst the population.

Proponents of the socialist market economy compare it to the New Economic Policy in Soviet Russia that introduced market-oriented reforms while maintaining state-ownership of the 'commanding heights' of the economy. The reforms are justified through the belief that changing conditions necessitate new strategies for socialist development.[10] According to Li Rongrong in 2003, chairman of the State-Owned Assets Supervision and Administration Commission of the State Council,

Public ownership, as the foundation of the socialist economic system, is a basic force of the state to guide and promote economic and social development and a major guarantee for realising the fundamental interests and the common prosperity of the majority of the people… The state owned economy has taken a dominant place in major trades that have a close bearing on the country’s economic lifeline and key areas, and has propped-up, guided and brought along the development of the entire socio-economy. The influence and control capacity of SOEs have further increased. State owned economy has played an irreplaceable role in China’s socialist modernisation drive.

The state sector

By 2005 the market-oriented reforms, including privatisation, were virtually halted and partially reversed.[11] In 2006, the Chinese government announced that the armaments, power generation and distribution, oil and petrochemicals, telecommunications, coal, aviation and shipping industries had to remain under "absolute state control" and public ownership by law.[12] The state retains indirect control in directing the non-state economy through the financial system, which lends according to state priorities. Liberalization continues to be rolled back in the state-sector by the consolidation of state enterprises into large "national champions" with the goal of consolidating efforts and creating internationally competitive national industries.[13]

The state sector is concentrated in the 'commanding heights' of the economy with a growing private sector engaged primarily in commodity production and light industry. Centralized directive planning based on mandatory output requirements and production quotas has been superseded by the free-market mechanism for most of the economy and directive planning in large state industries.[14] A major difference from the old planned economy is the restructuring of state companies along a commercial basis, with the exception of 150 large state-owned enterprises that remain and report directly to the central government, most having a number of subsidiaries.[15]

By 2008, these state-owned corporations have become increasingly dynamic largely contributing to the increase in revenue for the state.[16][17] By 2009 the government considered a state insurance scheme to expand healthcare coverage.[18] The state-sector led the economic recovery process and increased economic growth in 2009 after the financial crises, partially because most of the Chinese stimulus package was directed towards these state-owned firms.[19] The state-sector make out 40 to 50 percent of China's GDP.[20]

Enterprise forms

The socialist market economy consists of a wide range of state enterprises and mixed-enterprises. Following the 1978 reforms, most state enterprises were reorganized into Western-style corporations and joint-stock companies, with the government retaining control through owning controlling shares in these corporations.

  • State-owned enterprise: Commercial enterprises established by either the central government or a local government, where managers are appointed by the government or public bodies. This category only includes wholly state-funded and managed firms. Most state-owned enterprises are not entities of the central government. Central government state-owned enterprises are subunits of the State-owned Assets Supervision and Administration Commission (SASAC).[21]
  • State-holding enterprise: State-holding, or state-controlled enterprises, are publicly listed firms where the state owns a large share or a controlling share within the firms, thereby exerting influence on the management of the firm. These include firms that receive foreign direct investment.
  • Privately owned enterprise: This category includes private limited liability corporations, private share‐holding corporations, private partnership enterprises and private sole investment enterprises.
  • Urban Collectives
  • Township-Village Enterprise


The transition to a socialist market economy began in 1978 when Deng Xiaoping introduced his program of "Socialism with Chinese characteristics". Initial reforms in decollectivising agriculture and allowing private businesses and foreign investment in the late 1970s and early 1980s later led to large-scale radical reforms, consisting of partial privatisation of the state sector, liberalisation of trade and prices, and dismantling of the "iron rice bowl" system of job security in the late 1990s. Since the beginning of Deng Xiaoping's reforms, China's GDP rose from some 150 billion USD to more than 1.6 trillion USD, with an annual increase of 9.4 percent.[22]

The private sector's share of the GDP rose from less than 1% in 1978 to 70% by 2005, a figure that is still increasing. Due to the poor performance of traditional state enterprises in the market economy, China embarked on a massive restructuring program of corporatization. Under this scheme, the state retains ownership and control of large enterprises but the central government has little direct control over the operations of state-owned enterprises.[23] Recently the Conservative Hu-Wen Administration rolled back many of Deng's reforms, leaving observers dubbing 2008 the "third anniversary of the end of reform.[24]

See also


  1. "The rise of state capitalism". The Economist. 21 January 2012.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  2. Bremmer, Ian (2009). "State Capitalism Comes of Age". Foreign Affairs. Council on Foreign Relations. |access-date= requires |url= (help)<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  3. Vuong, Quan Hoang (2010) Financial Markets in Vietnam's Transition Economy: Facts, Insights, Implications. ISBN 978-3-639-23383-4, VDM Verlag, 66123 Saarbrücken, Germany.
  4. Yu, Verna (7 September 2010) "Shenzhen speeches show divide on 'political reform'", South China Morning Post
  5. Market Economy and Socialist Road Duan Zhongqiao
  6. China: Market socialism or capitalism?
  7. Market Socialism or Capitalism? Evidence from Chinese Financial Market Development, by Julan Du and Chenggang Xu. 2005. IEA 2005 Round Table on Market and Socialism.
  10. C.J. Atkins. "The Leninist Heritage of the Socialist Market Economy". Political Affairs. Archived from the original on 22 November 2008. Retrieved 7 September 2010. Unknown parameter |deadurl= ignored (help)<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  11. Hederman, Rea. "10 China Myths for the New Decade | The Heritage Foundation". Retrieved 7 September 2010.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  12. "China names key industries for absolute state control". China Daily. 19 December 2006. Retrieved 7 September 2010.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  13. Hederman, Rea. "Liberalization in Reverse | The Heritage Foundation". Retrieved 7 September 2010.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  14. "The Role of Planning in China's Market Economy" (PDF). Retrieved 7 September 2010.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  15. "Reassessing China's State-Owned Enterprises". Forbes. 8 July 2008. Retrieved 7 September 2010.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  16. "InfoViewer: China's champions: Why state ownership is no longer proving a dead hand". 28 August 2003. Retrieved 7 September 2010.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  18. Ramzy, Austin (9 April 2009). "China's New Healthcare Could Cover Millions More". TIME. Retrieved 7 September 2010.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  19. "Business | China grows faster amid worries". BBC News. 16 July 2009. Retrieved 7 September 2010.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  20. Chinese companies shore up government ties to survive
  21. Hearing on Chinese State-Owned and State-Controlled Enterprises
  22. China has socialist market economy in place (People's Daily Online, 2005).
  23. "Reform of China's State-owned Enterprises A Progress Report of Oxford Analytica". Retrieved 7 September 2010.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  24. Scissors, Derek, Liberalization in reverse, (2009)