Excerpted from The China Questions 2: Critical Insights Into Us-China Relations, edited by Maria Adele Carrai, Jennifer Rudolph, and Michael Szonyi, published by Harvard University Press.
Concerns about the nature of the Chinese economy figure prominently in global suspicion about Chinese power, especially in the re- cent souring of Sino-US relations. Arguments for bringing China into global markets under the assumption that economic competition and institutional commitments would push it toward capitalist economic practices legible to Westerners have given way to concerns that the state’s role and power in the economy make competing with China unfair or impossible and make collaboration dangerous. China is frequently labeled a case of “state capitalism,” a term loosely used to describe systems in which the government dominates the economy through state ownership, financial intervention, and heavy-handed industrial policy. Although some of these features are found in many democratic countries, including Brazil, India, and Norway, the term takes on a more ominous connotation when applied to autocracies in general and China in particular as it has become a global economic powerhouse.
China’s political economy is increasingly organized to facilitate the Chinese Communist Party’s (CCP) dominance and is directed toward managing domestic and international risks. This marks a departure from more common variations of state capitalism mainly intended to promote domestic economic growth or help domestic firms compete globally. China’s system also has these functions, but its increasing focus on political stability and party dominance makes its version of party-state capitalism a distinct form of economic organization.
In this chapter, our description of “party-state capitalism” stresses the importance to the regime of risk management plus three prominent features of China’s political economy not found in other economies. These three features are the rise of widespread state shareholding, blurred boundaries between the state and private firms, and in-creasing demands on both domestic and foreign firms to accede to CCP political demands. Ironically, the prominence of party power and interests generates self-undermining dynamics. The central goals of party-state capitalism are to consolidate political power and maintain stability, yet implementing these goals has generated alarm both at home and abroad. Domestically, the bolder CCP role may alienate capitalists whose entrepreneurship and innovation have led Chinese growth for forty years. Internationally, the party-state’s centrality and the perception of political-economic fusion sow dis- trust, generate political blowback, and limit the maneuverability of Chinese firms globally.
What is Party-State Capitalism?
State capitalism typically refers to state economic intervention or ownership of firms with the goal of promoting growth and bolstering geostrategic or economic competition, or both, particularly in globalized industrial sectors. Party-state capitalism is distinct from state capitalism because regime survival is the overarching priority. Economic goals still feature prominently in the state’s interventions, but the political purpose is uppermost, making regime survival the prime aim of economic policy. This political bottom line is illustrated by several recent trends.
One trend is the increased party-state role as shareholder or investor in a wide swath of Chinese firms. The regime has extended its stake in businesses that are not majority-owned by the state-owned Assets Supervision and Administration Commission, the main agency of state ownership since 2003. For decades, economists have distinguished between state-owned enterprises and private firms on the assumption that private enterprises operate in a more market-oriented and independent manner. In recent years, however, state entities motivated by political considerations have assumed greater financial and corporate governance roles in nonstate firms. Party cells have expanded in private and foreign firms, and government officials have been given senior posts, including in some of China’s best-known companies abroad such as the automaker Geely and the e-commerce giant Alibaba.
Expanding state investment in private firms is part of China’s current push to upgrade its industrial base through the Made in China 2025 program. Hundreds of “industrial guidance funds” were established to direct state and private capital into innovative firms in frontier and strategic sectors such as semiconductors, artificial intelligence, quantum computing, and others. Since 2012, the CCP has become increasingly worried about relying on global supply chains for critical and dual-use (military and civilian) technologies. Other state investments are less economically and globally strategic and more clearly prompted by worries about risk management. When a crisis in China’s stock market seemed to threaten overall financial stability in 2015, for example, the state intervened in domestic equity markets so heavily that it eventually held half the shares of all listed firms. This willingness to use state funds to manage economic risk reflects the CCP’s goal of maintaining political stability by preventing potentially disruptive market swings.
The conventional public-private dichotomy is further eroded by Beijing’s use of large private firms to take on governance roles and pursue political objectives. For example, private firms have become involved in domestic security programs, especially to manufacture and manage big data and surveillance technology that monitors China’s large population. Large private firms also have been given welfare-oriented assignments by investing in infrastructure to expand rural commerce under the umbrella of CCP secretary-general Xi Jin- ping’s antipoverty campaign.
The fixation on risk management means that when private firms face problems, the party-state increasingly feels compelled to take action. In recent years, several large firms have entered state receivership due to excessive debt or even criminal malfeasance. Meanwhile, the government has targeted various high-profile capitalists who have expressed politically sensitive opinions. In 2020, the property tycoon Ren Zhiqiang was sentenced to eighteen years in prison for graft after calling Xi “a clown” for his handling of the COVID-19 outbreak. The same year, Beijing abruptly suspended the sale of Ant Financial shares in what would have been the world’s largest initial public offering after Alibaba’s founder, Jack Ma, publicly criticized regulators for stifling financial innovation and accused state banks of operating with a “pawnshop mentality.” Under party-state capitalism, entrepreneurs are expected to demonstrate political loyalty—or else.
This demand for obedience extends beyond China’s borders. The global reach of party-state capitalism is evident in the CCP’s pressure on foreign firms to adhere to its own political narratives. Institutions ranging from the National Basketball Association, punished for showing support for Hong Kong protesters, to airlines that list Taiwan as a country of destination have been forced to backtrack and apologize under threat of losing access to China’s lucrative market. In these instances, the party-state wielded leverage to ensure recognition of its territorial claims. In a short time, Chinese capitalism has shifted from courting foreign investors to placing political conditions on their market access.
How Does Party-State Capitalism Interact with Global Capitalism?
For some time, especially before Xi’s era began in 2012, debate about China’s global economic role focused on issues typical to state capitalism: how preferential policies toward state-owned firms may distort competition, limits on foreign participation in sectors of strategic importance, and so forth. As the party-state’s political objectives have superseded developmental ones, however, the concerns of trade partners and host governments have moved beyond critiques of China’s economic practices to security concerns. And though China’s external investments are only a fraction of those of Western multinationals around the world, they have given rise to anxiety and coordinated political resistance outside of China. China’s global eco- nomic engagements are thus constrained due to concerns about its form of political economy.
Above all, China’s economic model makes it difficult to disentangle the state’s strategic motives from the commercial motives of Chinese firms. The high-profile case of Huawei, a technology conglomerate registered as a private company, is indicative. Is Huawei’s attempt to expand its technology network abroad a smart market play, an effort by the Chinese party-state to intrude into foreign networks for espionage reasons, or both? Similarly, although Hikvision, a producer of video surveillance technology, was founded by private entrepreneurs, its global market dominance has inspired similar questions, leading to the 2019 US blacklisting of its products. Although the stated reason for the ban was human rights abuses in Xinjiang, concerns about a Chinese company having access to sensitive surveil- lance data was a key motive for the American decision.
Chinese conglomerates’ rapid increase of investing and contracting abroad has reinforced these suspicions, particularly as they are often backed by state policy banks such as the Export-Import Bank of China. Private technology companies such as Hikvision and Huawei now supply “smart city” surveillance networks to over a hundred countries, including some with repressive regimes. Leaders of wealthy industrial countries have speculated that this is an effort to “export the China model” under the veil of smart city construction, perhaps because China seeks to demonstrate the benefits of authoritarian domestic control combined with capitalist practices. The Belt and Road Initiative, an international infrastructure program established in 2013, is frequently cast in this light, emphasizing China’s presumed desire to convert development projects into broader political influence, such as support for China in the United Nations.
Within the developing world, overseas activities by Chinese con- glomerates, both state-owned and private, have spurred domestic backlash in some recipient countries. For example, upon his return to power in 2019, Malaysian prime minister Mahathir Mohamad vowed to renegotiate or cancel what he termed “unfair” Chinese infrastructure deals, warning of “debt trap diplomacy.” In 2020 the Thai government cancelled a major Chinese project to build a 120-kilometer canal through the Kra Isthmus, replacing the Chinese plan with its own. In Pakistan, Baloch separatists have attacked Chinese citizens, claiming that the Chinese-financed and -built Gwadar Port is a colonial effort to pillage Balochistan’s natural resources. These examples show how the widespread perception that Chinese capitalism reflects the strategic interests of the party-state poses challenges for the country’s external investments.
To be sure, many leaders of developing countries welcome Chinese overseas activities as positive contributions to economic development. Rwandan president Paul Kagame, for example, frequently praises China’s infrastructural investments in Rwanda. Nevertheless, high-profile incidents of backlash have captured Beijing’s attention. Whether financed by state or private capital, Chinese firms increasingly face political risk when operating abroad. Meanwhile, the party-state itself is reevaluating the sustainability of its earlier developmental model.
Interactions Between Domestic Trends and Global Capitalism
Over the past decade, a more globally recognizable expression of state capitalism in China has evolved into a form of political economy better captured by the term “party-state capitalism” due to the over-arching prioritization of regime survival under the leadership of the CCP. Ironically, in response to slower growth rates and a less welcoming global environment, China’s policy shift to promoting self-sufficiency and self-reliance through industrial policy has only deepened international skepticism about whether private Chinese companies operate independently or as instruments of the party-state. Beijing’s recent promotion of a “dual circulation” strategy explicitly calls for stimulating domestic consumption to reduce its long-standing reliance on export-led development. If realized, a Chinese decoupling from international markets could disrupt global supply chains.
The party-state’s strategy poses a dilemma domestically. On the one hand, internally driven growth requires the cooperation of domestic entrepreneurs. They need to be at the forefront of techno-logical innovation. On the other hand, the party-state’s shrinking tolerance for maverick chief executive officers and outspoken capitalists runs the risk of alienating those who lead innovation. Although stringent capital controls to stem capital flight remain in place, China’s growing ranks of billionaires have diversified their assets abroad and found exit options.
As the boundary between state and private economic entities has become blurred, party-state capitalism interacts with global capitalism by generating a vicious cycle of mutual distrust. Evidence of politically motivated economic intervention provokes external backlash and negative headlines. Anti-China sentiment in turn confirms the party-state’s sense of threat, thereby reinforcing its mindset of risk management and the perceived necessity of political interventions. This self-reinforcing loop exacerbates tension both at home and abroad.
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