Is China Socialist?

General Characteristics of Socialism

Four criteria to evaluate a plausibly socialist system:
- Capacity: Government controls a sufficient share of economic resources to shape outcomes.
- Intention: Government intends to shape the economy differently from a noninterventionist market.
- Redistribution: Policies benefit less well-off citizens through growth, social security, and pro-poor redistribution.
- Responsiveness: Mechanisms exist for the population to influence economic and social policy.

Evolution of Socialism in China

1978: China was a command economy, a familiar socialist model.
Late 1990s: China discarded the command economy and shifted to a market economy.
Government tax revenues relative to GDP declined.
Social service provision collapsed in rural areas.
Inequality soared.
De facto privatization enriched a group of people.
China today has more government influence than most middle-income or developed economies.
State firms and banks are prominent.
Five-year plans are important.
The Communist Party remains in power.

Government Resources to Shape the Economy

In the 1980s and 1990s, the government lost control over national income, facing a crisis of state capacity.
Today, China's government is large, powerful, and intrusive in the market economy.
Government ownership is substantial in strategic, large-scale, and capital-intensive sectors.

Control over National Income

China's government controls a large proportion of national income flows, which have grown as a share of GDP since the mid-1990s.
Figure 1 shows an expanded concept of government revenues:
- Budgetary revenues (excluding social security)
- Social insurance premiums
- Land revenues
- Net income from state-owned enterprises
This expanded concept indicates government control of resources, which tripled as a share of GDP between 1996 and 2013.
Fiscal revenues as a share of GDP increase as an economy becomes richer (Besley and Persson 2014).
Low-income countries average 14.5% of GDP in taxes.
Middle-income countries average 18.7%.
High-income countries average 32.5%.
China was below the low-income average in 1996 with 11% of GDP in fiscal revenues.
In 2015, China increased to above the middle-income average at 21.8% of GDP.
OECD data for developed countries (OECD 2014) show:
- 22.4% of GDP in taxes
- 10% of GDP in social security contributions
China's fiscal revenue of 21.8% in 2015 (excluding social security) equals the OECD average and is above the US level of 18.9%.
- In 2015, Personal income tax was only $1.3$ percent of
  GDP in China, and property taxes are also small.
- Taxes on goods
  and services (especially the value-added tax at $4.6$ percent of GDP) and enterprise
  income taxes ( $4$ percent of GDP) are the largest categories, along with a dizzying
  array of transaction taxes (on land transactions and stock transactions, plus business
  and luxury taxes).
Social insurance contributions in China were 6.8% of GDP in 2015.
Adding ordinary budgetary
revenues and social insurance contributions together gives $28.6$ percent of GDP,
which is clearly higher than China’s expected level as a middle-income economy.
Land in China is publicly owned: urban land is owned by the state.
Households hold long-term leases, typically of 50–70 years.
Commercial developers pay local governments to lease development rights.
State-owned enterprises pay profit taxes and a proportion of after-tax profits to governmental owners.
The financial system is dominated by state-owned banks, which generate substantial profits.
These funds peaked in 2010, with land revenues at 7.1% of GDP and after-tax profits of state-owned enterprises at 6.1% of GDP.
In 2015, they totaled 9.5% of GDP.
Summing all four components, the Chinese government had direct or indirect control of 38% of GDP in 2015.

Assets: Government Ownership of Production Means

In 1978, most of China's productive assets were state-owned or in rural agricultural collectives.
Liberalization, entry, and de facto privatization have transformed ownership, with goods-producing sectors now predominantly private.
Diversification and privatization contrast the increased government control of income streams.
Since the 1990s, the government has grown even as it released control over productive assets.
State ownership has been shaped by entry and competition, particularly in the industrial sector.
The state share of industry declined as private and foreign-invested firms entered and grew rapidly.
Uncompetitive and loss-making state-owned enterprises were closed or sold off in the late 1990s.
Workers in state-controlled firms make up only 12% of the total industrial labor force (2013 Economic Census).
The official position is that state ownership is the “leading force,” while multiple ownership systems coexist.
Barriers to entry meant that government ownership was retained in capital-intensive sectors: resources, utilities, and heavy industrial sectors.
Government ownership is tiny in food products, textiles, and garments.
In 2014, state ownership of industrial assets was 39% of the total.
The government controls at least 85% of banking sector assets, the entire telecommunications and transport network, and essentially all education and scientific and technological services.
The Communist Party owns and controls virtually all public media.
Government has maintained substantial control of upstream sectors and large intermediate good and machinery producers.
Some sectors, like oil and gas, are structured to generate monopoly rents.
Government has maintained control over all land and almost all financial institutions.
Government assets in China are about three times GDP, and net assets are almost one-and-a-half times GDP.
The four primary government asset holdings are land, assets in nonprofit “public service units,” state-owned enterprises, and state-run banks and other financial enterprises.
The value of government assets in China, relative to GDP, is much higher than in other countries.
The US government has nonfinancial assets worth about 34% of GDP.
Government debt in China is substantial, although not as large as in developed countries.
Government debt is 71% of GDP, and state-owned enterprises have debt equal to 81% of GDP.
China's government maintains significant net wealth and control of assets.
The Chinese government does not own the “means of production” but has a strong ownership position overall.
It is easy for the state to transform ownership of urban land, resources, and other assets into income streams.
Twenty years ago, the Chinese government faced a crisis of state capacity, but it has since increased the share of income under its control.
Today, the Chinese government is wealthy and has the capacity to intervene strongly in the economy.

Government Steering of the Economy

The Chinese government emphasizes how it steers the economy because it sees strong economic performance as part of its political legitimacy.
Two mechanisms foster development:
- Bureaucratic incentives that reward officials for growth (of GDP and revenue).
- Planning centered on national-level Five-Year Plans, including sectoral, regional, and project plans.

Pro-Growth Incentive System for Bureaucrats

China’s system of incentives for local bureaucrats to encourage growth is extremely unusual, and seems to exist only in China.
China's system of incentives for local bureaucrats is unusual, linking career incentives with local economic performance.
Formal “target responsibility systems” establish targets for bureaucrats at all levels, with economic targets like GDP growth and fiscal revenue increases.
Good performance brings cash awards and increased chance of promotion.
The power of these formal incentives is enhanced by China’s vast bureaucratic system and deal-making incentives of local officials.
Land development and support for businesses can enrich cronies and relatives, contributing to growth and investment.
Knight argues that China is a “developmental state” because of the priority for developmental objectives.
China has been investing 48% of its GDP since 2009.
Urban land is often used for industrial or commercial development over residential.
Municipal governments allocate three times as much land to industry as other countries.
The price of land for industrial uses is one-sixth that of land for residential use.
Within months of the 2008-2009 global financial crisis, China mobilized an investment effort equal to over 10% of GDP.
Local governments were mobilized to initiate infrastructure projects.
State-owned banks loaned without restraint to those projects.
State-owned enterprises undertook the business and construction work.

Planning

Forty years ago, China was a command economy with central plans.
By the late 1990s, China essentially had no long-range plans or industrial policies.
Since the turn of the 21st century, long-range plans and industrial policies have made a comeback.
China today operates with scores of national plans and hundreds of local government plans.
At the center of this activity are the successive five-year plans, including the just completed 13th Five-Year Plan (2016–2020).
These plans combine three elements:
- A vision statement, communicating policy objectives.
- A handful of binding targets, like environmental targets and poverty alleviation.
- A panoply of associated sectoral and local plans.
- In the early 2000s, the State Council approved
  between zero and two industrial policies per year, whereas during 2016 at least 50
  sectoral plans associated with the 13th Five-Year Plan have been given official status.
“binding” targets sends an additional strong measure
to decentralized actors that they must take environmental objectives seriously.
The Chinese plan incorporates and summarizes many existing programs, so it may not be particularly consistent, or announce much new
Sectoral and local plans push decentralized actors to specific interventions.
Plans influence local governments, state financing institutions, and other bodies.
The increase in government resources has been accompanied by an increase in targeted interventions.
Financing
guided into targeted sectors can be very large: for example, a high-priority sector
like integrated circuits can expect access to over a hundred billion dollars in invest-
ment funding over the 13th Five-Year Plan.
The powerful sectoral incentives created may not align very well with the overall “vision” of planners.
The current 13th Five-Year Plan envisions a transition to service-led development, but the sector-specific interventions channel scarce resources into high-tech industry.
There is little evidence that planning in itself is effective in shaping development or that it is a cost-effective instrument.
Interactions Between the Two Types of Steerage
During China's high-speed growth era of 1980-2010, bureaucratic incentives were a blunt instrument fostering investment, while plans could lean against the wind.
Since about 2010, China’s “miracle growth” era has come to an end, due to rapid changes in labor force conditions, incomes, and external markets.
The Xi Jinping administration has since 2012 reduced the focus put on economic growth in official success indicators
The 13th Five-Year Plan seems to have become an instrument to maintain high-speed growth.

Intervention and Help for the Less Well Off

China's economy has grown faster for longer than any other economy in history.
Growth of per capita GDP at the rate of 7–8 percent per year for almost 40 years has meant 2014 GDP per capita is 20 times what is was in 1978.
China has improved from the “low human development” level of .42 in 1980 to the “high human development” level of .73 in 2014.
China’s income inequality substantially worsened. From being one of the most equal large-population societies in the world in the early
1980s, China has become a relatively unequal society
The national Gini is much higher than both the within-urban and within-rural Gini because of the
large gap between urban and rural incomes in China.
Average urban incomes were less than twice rural incomes in 1983, at the minimum, and increased to 3.3 times rural incomes in 2009.
Lack of an urban household residence permit continues to limit
access to income-earning opportunities and consigns rural residents to a second-
class package of social benefits.
Since the mid-2000s, wages for unskilled and migrant workers have increased relatively rapidly, and more rapidly than those of skilled urban workers.
Reflecting these changes, the urban/ rural household income ratio has narrowed to less than 3.

Poverty Alleviation

China's record in poverty alleviation since the start of the reform period has been excellent.
The reduction in the absolute number of those living in poverty in China between 1981 and 2010 accounted for
95 percent of the total reduction worldwide of those in poverty
By 2015, this total had again dropped by more than half, down to 56 million as
of 2015.
China has had an active policy of targeting poor counties since 1986.
The strategy is very much one of fostering local economic growth, especially nonag-
ricultural production.

Redistribution in China

China is certainly not a welfare state.
In China, transfer payments of all kinds are low and are also restricted in important ways.
Since the 1990s, the Chinese government has sought to restore the urban social
compact and spread a social safety net across the entire population.
The current extraordinarily complex system is—theoretically, at least—the beginning of
a protracted transition toward an integrated national social security system.
Budgetary outlays for education by China’s government were 3.6 percent of GDP; for health, 1.6 percent of GDP; and for public housing, 0.8 percent of GDP.
About 20 million urban dwellers and 50 million rural residents receive direct minimum income payments.
Direct relief payments to these 70 million recipients are set by local governments and vary substantially
across regions.
Personal income tax is levied only on wage income
and some types of interest income, so almost all entrepreneurial and investment
incomes escape coverage.
As a result, the scope for redistribution through progres-
sive taxation is small.
Institutional divide between rural and urban residents continues.
The proportion of migrant workers covered by social insurance increased until 2013, but only to 15.7 percent for pension plans and 17.6 percent
for medical insurance, and the coverage ratio seems to have stagnated since.
China’s population today is young, it stands on the brink of an
extraordinarily rapid aging process.
China has taken real and meaningful steps toward re-establishing at least a
rudimentary welfare system that covers its entire population.
After a decade of effort, the level of benefits provided
is still quite low and the safety net has some large holes.
The system has failed to tackle the fundamental inequalities of the old society, so that it redistrib-
utes income primarily among the comparatively well-off urban population.

Public Goods

For the past 20 years, as government resources have grown, China has engaged
in a massive physical infrastructure effort that has transformed China’s built envi-
ronment and dramatically expanded the stock of physical infrastructure.
China is now knit together with a complete grid of high-speed limited-access highways, and is well on the way to completion of a similar grid
of high-speed rail.
In sharp
contrast to its aggressive and activist record in physical infrastructure, China’s
record with respect to the environment is fair to poor.
Although strong conscious-
ness of environmental issues spread in China since about 2000, it took a decade
before serious measures began to reduce the emission of air and water pollutants
and create conditions for an improved environment.
China has experienced substantial environmental deterioration that shows clear
signs of flattening out, but only limited indications of significant improvement.

Government Responsiveness to Popular Demands

Socialist systems, such as those in the former Soviet Union, have a long tradi-
tion of being nondemocratic but claiming to speak for the interests of the masses
or the working class.
China is an autocratic government, with all political processes controlled by the Communist
Party.
One peculiar characteristic of China’s Communist Party is how frankly elitist
it is. In 2002, the Party redefined its claim to legitimacy and focused it on educated
elites and knowledge workers, rather than its traditional working class constitu-
ency.
The Chinese system has become partially institutionalized with term limits, leadership rotation, regular promotion, and credentialing for its officials.
There are channels for the 83 million Party members to express their views.
In policy formulation, the Party and government go to great lengths to
solicit opinions broadly and gradually form and enforce a policy consensus
Despite the quasi-institutionalization of the Chinese system, it remains wholly
without external accountability.
With power
so concentrated, with little transparency and few checks or balances, it is inevitable
that insider control will be pervasive and corruption a major problem.
Indeed, in
that sense, the major alternative label for China is “state capitalism”
Bremmer (2009, p. 41) calls state capi-
talism “a system in which the state functions as the leading economic actor and uses
markets primarily for political gain.”
For example, the land revenues and profits of state-owned enter-
prises described in an earlier section are not under the complete control of the state,
but rather are partially controlled by the interest groups that grow up around them.
Redistributive policies cannot be
carried through without fundamental reforms of the fiscal, financial, and decision-
making systems, which interest groups have so far been able to stall and deflect.
The interests are those of a
larger group of Communist Party officials, politicians and technocrats, and even the
urban population—at least those with urban residence permits—as a whole.
The response of President Xi Jinping to this state of affairs has been to attempt to
make China “more socialist.”
Xi has of course pursued a high-profile anticorruption campaign since he came to power in 2012.
Xi Jinping
has shown himself inclined to a revival of socialist ideals and increased loyalty to the
Communist Party.

Conclusion

Today, the question “Is China Socialist?” can reasonably be asked and left open.
Sixty years ago, everyone knew that Mao was leading a socialist China; twenty years
ago, everyone thought that political leaders like Jiang Zemin and Zhu Rongji were
leading China away from socialism.
China today clearly fulfills our first two criteria:
the government has the capacity and intention to shape economic outcomes.
On
the third and fourth of our criteria—redistribution and responsiveness—China
scores less highly than on the first two.
The objective of China’s state intervention has clearly shifted from growth at
any price to a more complex set of goals that includes redistribution and social and
economic security.
China under its current President is moving toward a more explicit embrace of socialism
and a stronger commitment to socialist goals
It seems broadly fair
to view China as moving towards a version of “socialism,” albeit a very particular
flavor of socialism that is authoritarian and top-down, but with a market economy
based primarily on private ownership.
However, this “growth miracle” phase is now ending
Fundamental demographic changes, completion of many infrastructure programs,
and a much-reduced distance to the global technological frontier are combining to
lower China’s potential growth rate in a dramatic manner.
China has less need for
growth-before-all-else, but this also means that the incentivization of the hierarchy,
so fundamental to the past growth model, is no longer central to China’s most
important goals.
In my opinion, China cannot be considered a socialist country until it makes much greater progress fulfilling its own declared policy objectives of universal social security, modest income redistribution, and amelioration of environmental problems.
Given socialism’s authoritarian history, some would argue that responsive- ness is not a necessary condition of socialism.
The Chinese leadership today, headed by Xi Jinping, has launched a broad campaign against corruption that implicitly acknowledges these problems.