The socialist market economy (SME) is the economic system and model of economic development employed in the People’s Republic of China. The system is based on the predominance of public ownership and state-owned enterprises within a market economy. The term “socialist market economy” was first used during the 14th National Congress of the Communist Party of China in 1992 to describe the goal of China’s economic reforms. Originating in the Chinese economic reforms initiated in 1978 that sought to integrate China into the global market economy, the socialist market economy represents a preliminary or “primary stage” of developing socialism. Despite this, many Western commentators have described the system as a form of state capitalism.
The Chinese economic reform toward the socialist market economy is underpinned by a Marxist analysis using historical materialism. In the late 1970s, then-Chairman Deng Xiaoping and the Communist Party leadership rejected the prior Maoist emphasis on culture and political agency as the driving force behind economic progress and started to place a greater emphasis on advancing the material productive forces as the fundamental and necessary prerequisite for building an advanced socialist society. The adoption of market reforms was understood to be consistent with China’s level of development and a necessary step in advancing the productive forces of society. From the Marxist perspective, a fully developed socialist planned economy can only come into existence after a market economy has exhausted its historical role and gradually transforms itself into a planned economy, nudged by technological advances that make economic planning possible and market relations less necessary.
The socialist market economy is seen as an early stage in the development of socialism, variously called the "primary" or "preliminary" stage of socialism, where public ownership coexists alongside a diverse range of non-public forms of ownership. The Communist Party of China maintains that, despite the co-existence of private capitalists and entrepreneurs alongside public and collective enterprise, China is not a capitalist country because the party retains control over the direction of the country, maintaining its course toward the building of socialism. 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.
Cui Zhiyuan traces the theoretical foundations of a socialist market economy to James Meade's model of "liberal socialism" in which the state acts as a residual claimant on the profits generated by state-owned enterprises which operated independently of government management.
Initially advocated as a necessary stage for the development of the economy to a point where a planned socialist economy would become possible, recent Chinese leaders including Xi Jinping have described the building of the "socialist market economy with Chinese characteristics" as the goal without any reference to a post-market socialist economy.
After the Great Leap Forward (1958–1961) and the ousting of the Gang of Four from power, Chairman Deng Xiaoping refocused China's efforts on economic growth and finding an economic system compatible with China's specific conditions. However, in doing so, he remained committed to the Leninist model of centralized political control and a one-party state.
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 Montreal'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." The concept was later adopted by the Đổi Mới in Vietnam. 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.
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 opening the economy to foreign investment in the late 1970s and early 1980s later led to large-scale radical reforms, consisting of corporatization of the state sector, partial privatisation of some enterprises, 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 US$150 billion to more than $1.6 trillion, with an annual increase of 9.4 percent.
Many commentators and scholars have described China’s economic system as a form of state capitalism, particularly after the industrial reforms of the 1980s and 1990s, noting that while the Chinese economy maintains a large state sector, the state-owned enterprises operate like private sector firms and retain all profits without remitting them to the government to benefit the entire population. This makes the rationale for widespread public ownership questionable as well as the applicability of the descriptor "socialist", and has led to concern and debate regarding the distribution of state profits.
However, starting in 2017 as part of its state-owned enterprise reform program, the central government began to encourage state-owned enterprises to start paying dividends to the government. Other reforms have transferred state-owned assets to social security funds to help finance pensions, and the Shenzhen municipal government has proposed using their state-owned enterprises to finance a social dividend-type of system for its residents.
Chinese economist Cui Zhiuyan argues that James Meade's model of "liberal socialism" is similar to China's socialist market economy and can be used to make sense of the model. Meade's model of market socialism involved public ownership of firms with independent management, where the state acted as a residual claimant to the profits generated by its enterprises but did not exercise control rights over management and operations of its firms. The benefits of this model are that the state would have a source of income independent of taxation and debt, enabling a reduction of the tax burden on individual incomes and the private sector while promoting greater equality. Cui points to the Chongqing experience with municipal state-owned enterprises enabling high social expenditure alongside low taxes and extremely high rates of growth as validation of the socialist market economy model.
The Chongqing model made use of state enterprise profits to fund public services including housing and to provide a source of public finance to lower its corporate tax rate to attract foreign investment.
Julan Du and Chenggang Xu analyzed the Chinese model in a 2005 paper to assess whether it represents a type of market socialism or capitalism. They concluded that China’s contemporary economic system represents a form of capitalism rather than market socialism because financial markets exist which permit private share ownership – a feature absent in the economic literature on market socialism – and because state profits are retained by enterprises rather than being distributed among the population in a social dividend or similar scheme, which are central features in most models of market socialism. They concluded that China is not market socialist nor is it a stable form of capitalism.
Another analysis carried out by the Global Studies Association at the DePaul University in 2006 reports that the Chinese economic system does not constitute a form of socialism when “socialism” is defined as a planned economy where production for use has replaced production for profit as the driving force behind economic activity, or when “socialism” is defined as a system where the working class is the dominant class which controls the surplus value produced by the economy. The Chinese economy also does not constitute “socialism” in the sense of widespread self-management or workplace democracy. The study concluded that, as of 2006, capitalism is not the dominant mode of organization either and is partially a pre-capitalist agrarian system with almost 50% of its population engaged in agricultural work.
As of 2015, Curtis J. Milhaupt and Wentong Zheng classify China's economic system as "state capitalism" because the state directs and guides all major aspects of the Chinese economy, including both the state and private sectors, while not collecting dividends from the ownership of its enterprises. They note that Chinese SOEs and privately-owned enterprises (POEs) share many similarities with respect to state subsidies, proximity to state power, and execution of government policy objectives. Within the state sector, the emphasis is more on government control than on the ownership of assets.
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.
According to Li Rongrong in 2003, chairman of the State-Owned Assets Supervision and Administration Commission of the State Council, China's socialist economic system is underpinned by the foundational role of public enterprise:
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.
Other Marxist analyses point out that because the Chinese economic system is based on commodity production, has a role for private capital, and dis-empowers the working class, it represents a capitalist economy. 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. 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.
Public ownership in the socialist market economy consists of state-owned assets, collectively-owned enterprises, and the publicly-owned share of mixed enterprises. Various forms of public ownership play a dominant role in the socialist market economy alongside private and foreign enterprises.
The socialist market economy consists of a wide range of state-owned enterprises (SOE). Beginning with the 1978 reforms, in the 1980s during the industrial reforms state enterprises were gradually corporatised and transformed into joint-stock corporations with the state retaining either full or majority ownership of their shares. By the early 2000s most major SOEs in non-strategic sectors were listed on the Shanghai and Hong Kong stock exchanges, and some SOEs adopted mixed ownership structures where the central government and various other state entities - including state banks, other SOEs, provincial and local governments - own varying degrees of the firm's listed shares alongside foreign and private shareholders. The result has been a highly diffuse form of public ownership where state-owned enterprises are owned by various different government entities, agencies and other state-owned enterprises. This makes gauging the true size and scope of the state sector difficult, particularly when SOEs with mixed ownership structures are taken into account. In 2013 the public sector accounted for 30% of the number of firms in China but 55% of assets, 45% of revenue and 40% of profits.
In 1996 China implemented a comprehensive series of industrial reforms termed "Grasping the large, letting go of the small". These reforms involved closing unprofitable state enterprises, merging smaller enterprises, and privatization of other small-to-medium enterprises. Centrally owned SOEs were reformed into joint-stock companies with the aim of delegating more authority to SOE managers. SOEs at all levels shifted their primary focus to profitability and shedded their social welfare function of providing social services and benefits to their workers in what was known as the "Iron Rice Bowl" system. The State-Owned Assets Supervision and Administration Commission (SASAC) was formed in 2003 to oversee the management of the large centrally owned state enterprises.
Modern SOEs are operationally very different from those in the 1990s. SOEs are much larger in size, fewer in number, with central government-owned SOEs clustered in "strategic sectors" including banking, finance, mining, energy, transportation, telecommunications, and public utilities. By comparison, provincial and municipal level SOEs number in the thousands and are involved in almost every industry including information technology and automobiles design and production. State sector reform is an ongoing process in China. As of 2017 the Communist Party has rejected the Singapore model of Tamasek-style state investment companies for China's SOEs, where SOEs operate solely to maximize profits on a commercial basis. In particular, China maintains that centrally owned SOEs also pursue national and industrial policy objectives. As a result of recent reforms to increase profitability and unload debt, the government reported the profits of central government-owned SOEs rose by 15.2% in 2017.
Despite becoming increasingly profitable, SOEs in China have not paid dividends to the state, causing some analysts question the rationale for public ownership in the first place. As part of SASAC's ongoing reforms, SOEs will now be encouraged and required to pay a higher portion of their profits as dividends to the state, with some state-owned assets being transferred to social security funds to help finance pensions for China's aging population. This is part of a broader reform effort of restructuring the state sector to become a source of finance for public services. As part of the SOE reform goals outlined in 2015 by SASAC, SOEs are to be classified as either commercial or public service entities, with the former being required to distribute a higher proportion of their profits as dividends. Dividend payments are set to rise from 5-15% to 30% by 2020.
Privately owned enterprises are recognized as one of the components of the socialist market economy alongside state, collective and individually owned enterprises. The private sector has played an increasingly large role since the adoption of the 1994 Company Law. Additionally, the boundary between public and private enterprise has blurred in China; many publicly listed firms are under mixed ownership by various state and non-state entities. Additionally, private sector firms that operate in industries targeted for growth may receive favorable loans and preferential government treatment while SOEs might be exempt. As an example, ZTE Corporation is a majority state-owned enterprise that had to rely on equity markets whereas its private-sector competitor Huawei is viewed as a "national champion" and therefore received major state funding from state banks. Like their state-owned counterparts POEs are expected to follow state policies and are subject to control, suggesting that the distinction between "public" and "private" ownership is less meaningful in understanding China's economic model. State control and state-directed development is the overriding feature of the Chinese economic system and has played a more substantial role than public ownership.
While the private sector has been accorded a role in the socialist market economy and has greatly increased in size and scope since the 1990s, the private sector does not dominate the Chinese economy. The exact size of the private sector is difficult determine in part because private enterprises may have a minority of their stock owned by state entities and because differences in classifying ownership forms. For example, in the first quarter of 2016, the National Bureau of Statistics of China reported fixed investment by private firms at 35%, by wholly owned SOEs at 27%, with the bulk of the remainder belonging to non-wholly state funded limited liability corporations. However the number of people employed in the private sector is greater than public sector employment.
There are a few major forms of State-Owned Enterprise in China today:
By the early 1990s Soviet-type central economic planning had been replaced with market relations and markets became the fundamental driving force in the socialist market economy, with the State Planning Commission being reformed into the National Development and Reform Commission in 2003. Indicative planning and industrial policies have substituted material balance planning and play a substantial role in guiding the market economy for both the state and private sectors. The planning system consists of three layers, with each layer using a different planning mechanism.
Compulsory planning is limited to state-owned enterprises operating in strategic sectors, including research, education and infrastructure development plans. Compulsory planning outlines targeted outcomes and the supply of raw materials and financial resources needed. Contractual planning sets objectives and the overall means of achieving these goals, and then negotiates with enterprises and local governments to establish detailed objectives and how resources are to be allocated to the targeted sectors. Indicative planning operates at the lowest level of the planning system, where the government outlines industrial targets and then uses market instruments (tax exemptions, subsidies, favorable bank loans) to induce firms in the targeted industry to meet these targets.
The development of the economic system with public ownership playing a dominant role and diverse forms of ownership developing side by side is a basic characteristic of the socialist economic system at the preliminary stage…The public economy consists not only the state-owned economy and the collective economy, but also the state-owned and collective component in the mixed-ownership economy. The dominant position of the public ownership is represented that: the public assets have a dominant proportion in the overall assets of the society; the state-owned economy controls the lifeline of the national economy and plays a leading role in the economic development, as is from the aspect of the whole country.
The World Bank report (2005) generated public concerns and debates. Those supportive of the distribution of SOEs dividends hold the following three views: (1) Since the state is the investor of SOEs; it has the right to participate in dividend distribution as a shareholder. By name and under law, the shares of SOEs should belong to all citizens. The governmental departments are only exercising administrative power on their behalf. Therefore, all citizens, as opposed to certain grounds, should become direct beneficiaries. (2) The high wages and welfare benefits of monopolistic SOEs come from their high profitability as they enjoy institutional monopolies. These profits should be turned over to the State and then, through secondary distribution of the government, be used to safeguard public undertakings such as education, medical care and old-age pensions. If a monopoly industry determines the distribution of its profits without the consent of its shareholders (i.e. the people), it has abandoned the people’s trust and infringed upon the wealth which ought to be the property of the entire people.
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the planning system is a three-layer system: compulsory, contractual and indicative. At the upper level, the planning system is compulsory: documents outlining detailed sets of targets, including the human resources needed and the supply of raw materials and the financing needs, such as infrastructure programmes; development plans of the western provinces; education plans; health expenditures; research objectives, and so on. Generally speaking, included within compulsory planning are state-owned companies and banks and the monopolistic sectors under tight government control such as the Ministry of Railways. At the second level, the planning system is contractual: planning sets the objectives; the ways and means of a given industrial sector; and then negotiates with the corporations and the offices concerned to establish detailed objectives, as well as the allocation of resources to the targeted sectors. At the third and lowest level, the planning system is only an indicative: government schedule; industrial sector targets; the companies involved and inducement measures (government subsidies, tax exemption, bank lending and financial markets).