Communists and Capitalists

“The national bourgeois will eventually cease to exist. But at this stage, we should rally around them and not push them away.”

That’s Mao Zedong back in September 1950, laying down the economic law at the 3rd Plenum of the Seventh Central Committee. Not the most comforting words for those running businesses.

After the Communists won, they had to figure out what to do with private firms and the running capitalist dogs who ran them. They knew how the countryside worked - but the cities were generally new to them. Broadly, there were two schools of thought. (Big hat-tip to Huang Jing’s excellent Factionalism in Chinese Communist Politics for some of the details here.)

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Liu Shaoqi - who had spent a good part of the 1930-40s in industrial Tianjin, building the CCP’s Northern Bureau - proposed establishing a “new democratic phase”, in which private business would continue to operate. By April 1949, some 70% of Tianjin’s businesses had shutttered, their bosses petrified about what the communists would do to them, and many jumping on boats not waiting to find out. Inevitable result: unemployment, shortages of goods, and unhappy masses. General Secretary Liu spent a month in city , telling private businesses that they were needed, that capitalists had a role to play in building “New China”. “Its that there’s not enough capitalists, not that there’s too many”，he said (孟昭庚，“1949年，刘少奇的天津之行让工商吃下定心丸”， 中国共产党新闻网， 2011年12月23日). Socialism needs to be built upon an advanced economy, he said, so China needed a 15-20 year period in which private and public firms co-operated to build the wealth.

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Gao Gang was Liu’s main competitor for Mao’s affections. He had built his pre-1949 political base up in the northeast, around Shenyang. Heavy industry dominated, and the agriculture there was tougher, more dispersed, more grain-based than around Tianjin. Many of the firms there had been owned and run by the Kuomingdang. So, as the cities fell, Gao’s CCP groups went in and “took over all units”, administrative and commercial, root and branch. No need for the capitalists, even temporarily.

It was Gao’s line which was passed at the second plenum of the 7th: to “use, restrict and transform” China’s capitalists. And it was Liu and his group, including Chen Yun and Bo Yibo, who fought a rearguard action to stop that insanity.

Gao successfully undermined Liu - and Mao’s heart was in a quick move to socialism. He pushed Liu out of economic policy making in 1953, effectively demoting him, and put Gao in charge of the first Five Year Plan. Gao, however, did not get far - he spent much of the following year lobbying around the top echelons of the Party, trying to build bonds with Lin Biao and others in the army. Mao, who had an acute sense of smell for fellow-plotters, quickly turned on him. Only his mountain-top spanned both the government and the army. At a December 1953 meeting, Mao accused Gao of trying to establish a Second Headquarters, code for an alternative power base. And in August of 1954, Gao committed suicide. But it was the nationalisation line which got implemented, and tens of thousands of “capitalists” were killed.

After the catastrophes of the Great Leap Forward and Cultural Revolution, Deng revived the “primary phase of socialism” idea to legitimize private activity again. And in the 1990s, General Secretary Jiang Zemin even ‘welcomed’ private entrepreneurs into the Party; indeed, the CCP represented them, given they were one of society’s most productive forces.

And so we come to last week’s “Best friends with the Capitalists Again” meeting at the Great Hall of the People. On one side of the table was Xi, three other members of the Politburo Standing Committee and other senior CCP men. And on the other, and distributed around the hall, were stalwarts of China’s private economy.

General Secretary Xi Jiping: “The public economy and the non-public economy ought to be complementary, not opposing or offsetting. This is written in the constitution, in Party articles, it can’t change. Any rejection, doubt or hesitation on this is not in line with state policy. All private companies and entrepreneurs can eat a relief pill (吃下定心丸）and get on with developing with a settled heart.”

This blizzard of niceness comes after concern has erupted in the private sector about a return of socialism. New Leftists have been claiming that the historical mission of the private sector is coming to an end (i.e. we’re moving from the primary to the secondary phase of socialism). Private firms have had to establish and empower Party Committees. A Shanghai friend tells me that the heads of fund companies are having to join the Party in order to make sure they decide staff compensation. SOE reform seems to mean just making already-massive SOEs bigger, blocking out even more of the sunlight from the private sector. There’s been an attack on tax evasion too, staring Fan Bingbing. The smart thing to say is that private businesses cannot survive without evading some taxes (though Ms. Fan did not go hungry). The more cynical (and perhaps even smarter) thing to say is that local governments are fine with tax evasion since in the short run they enjoy the bribe, and in the longer-run it gives them something to use when they want to expropriate your assets.

It is a good thing that all this concern reached Zhongnanhai, and that there was an attempt at a response. Xi stated that its a long-term policy （长期执政）of the Party that the private sector plays an important role in the market socialist economy. “You’re our people”, he said (我们自己人). And then came the helpful policies:

While the departing CEOs Weibo-ed relief, thanks and renewed faith, I bet in the cars back to the airport many of them wondered whether they’d just joined a fancy propaganda meeting. After all, alongside the economic seniors (Wang Yang & Liu He) sat Wang Huning, chief CCP ideology officer, Huang Kunming, Propaganda Ministry chief, and You Quan, who runs the United Front. These guys’ jobs is to make sure the private sector is on-board with CCP priorities, and to make sure everyone is happy enough to keep working hard. Wang is thought to have been behind Jiang’s “Three Represents”, which bound the capitalists forces to the Party. But the words “You’re our people” are not so comforting if you think it means “We own you”.

Frankly, the policies announced did not amount to much. A moderate VAT tax is coming down the line. Banks have been told to lend more to SMEs - but, SOEs aside, banks are usually smart enough to lend only to those who have a good chance of repaying (or who can generate other benefits). Xi announced that local governments should establish funds to help struggling private firms - exactly the kind of thing which will be abused by local officials. And is the Party really going to ‘improve policy implementation’? Xi criticised local governments doing one-policy-fits-all (一刀切) stuff - but that always happens in response to super-important directives coming out of Zhongnanhai. Of course, local officials zealously over-implement anti-pollution measures - shutting down production of everyone, especially private firms. That is how the system currently functions. Xi shouts, everyone jumps really high.

This bunch of entrepreneurs knows how the system works. Tencent’s Ma Huateng is a delegate to the National People’s Congress, as is Wahaha’s Zong Qinghou. Chen Tianshi, the tech wunderkind who co-runs Cambricon, the AI-chip firm, has a ton of state capital backing him. Wang Xiaolan, who heads up the Shidai Group, used to head up Beijng’s CCP controlled Business Association (工商联). Etcetera. Jack Ma, the most famous entrepreneur of them all, and who is not a delegate to anything, did not attend the meeting. Maybe he’s still hiding in his cave.

Third, if there ever was a clearer sign that the government has been side-lined in the running of the economy, and the Party ennobled, it was this meeting. Where was Premier Li Keqiang?

Finally, one has to wonder if the Communist ideology chief has forgotten about contradiction? The speech had public and non-public sectors working in beautiful harmony. But the economy does not work like that. Those with state backing grab the best land, get the best deals, have the juiciest most stable access to financing, and can better skate the regulation - all the while the competing private firms lose. Who is going to force a state-backed to pay its bills to a private company - as the CEO of Shandong’s Hetong Information, also in attendance, has complained. When the government cannot get its act together on games licenses, who suffers? Tencent. Did Danone get fair treatment when Zong Qinghou decided to set up his own competing drinks businesses within the shell of their joint venture? Are competitors to state-backed Cambricon going to face a level playing field?

The speech suggested, again, that certain folk think they can have everything: a strong economy and deleveraging, an industrial policy which aims to replace MNC firms with domestic champions and happy relations with the US and Europe, strong and expanding SOEs and vibrant private firms. But much of these policy ambitions are contradictory; you have to chose more of one than the other.

The competitive landscape for private firms cannot improve without two things happening. First, serious reform which forces SOEs to disperse non-core assets, to stop edging into juicy-profitable sectors, and to pay their bills. Second, the government bureaucracy needs to be downsized - the problem firms face day-to-day is dealing with multiple government bureau all wanting their cut, all designing their new regulations. Just telling them to support private firms is not going to cut it.

It was President Reagan who said that scariest words in the English language were “I’m from the government and I’m here to help.” It’s a cute joke, with more than a grain of truth to it. And some deviousness: government can do much that’s good and useful. But when it comes to business, the best way for the Party to help the private sector is to step aside. But, like Mao said, the current strategy is to rally around them.

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