Overview: Class Wars
The ascent of the mainland in international production chains was, however, only made possible because of rapid and far-reaching changes to the decaying class structure left behind by the developmental regime. In this section we detail the formation of both the top and bottom of a capitalist class system in mainland China. The decades covered here are the final years of the transition, marked by rapid expansion of the market, rapid financial restructuring, the conversion of state-owned enterprises into multinational conglomerates, and the final destruction of the socialist-era industrial belt in the Northeast. By the early years of the new millennium, China had completed its transition to capitalism.
The process of transition is a contingent one, with subsumption into the capitalist economy taking a markedly different character in different regions at different times. One feature of the Chinese case, explored throughout, has been the wholesale exaptation of certain mechanisms from the developmental regime in order to stabilize the transition, ensuring conditions necessary for the accumulation of value. In the transition to capitalism, novel adaptations are of course important, with the commodity form, the wage and the specifically capitalist role of money all playing such a role. But equally important are features that originate from previous modes of production, adapted to serve the needs of accumulation. As suggested above, this extends to the market itself, with pre-capitalist commercial networks exapted into the capitalist world in both Europe and Asia.
Another case more specific to China that we have emphasized here and elsewhere is the hukou system. Whereas its function in the socialist era was to secure the urban-rural divide by freezing population movement, the process of transition gave the hukou an opposite function: facilitating migration while also generating a dual labor market in the cities, thereby helping to suppress both wages and unrest. The early proletariat was a product of the collapse of the rural economy, and for many years, full inclusion into this emerging class was largely a matter of one’s rural hukou status. But even after proletarian conditions generalized, hukou remains to this day an important dimension of state control, helping to maintain accumulation overall.
A similar process of exaptation helped to form the top of the class hierarchy, as technical and political elites within the developmental regime’s bureaucracy fused. This fusion positioned these elites such that they became the main beneficiaries of the privatization taking place in the nineties and into the new millennium, which would transform this provisional ruling stratum of “red engineers” into a properly capitalist class. In this way, the administrative capacities of the bureaucracy would be exapted, transforming the party into a managerial body of the bourgeoisie.
But these processes were not without conflict. The transformation of the ruling class and the birth of the proletariat took place through a sequence of struggles in the final decade of transition. The first of these was the Tiananmen Square movement in 1989, which would ultimately set the terms of continuing reforms—ensuring that they would both exclude the interests of the old industrial working class and be defined by a process of marketization helmed by the existing party, rather than some new political organ. The crushing of the unrest ensured the stability necessary to attract new rounds of investment throughout the subsequent decade, and to engage in a wide-ranging process of financial reform, remodeling the banking system and capital markets in mimicry of the high-income countries.
We open Part IV with an analysis of Tiananmen, then, as the event that secured the position of the new ruling class and made possible the following decade of reform. The second major struggle in this period was the gutting of the developmental regime’s industrial heartland in the Northeast at the turn of the century. This process was defined by mass privatization, layoffs, and protests. The end result was the disintegration of the final remnants of the developmental regime’s class system, and the completion of the transition to capitalism. We therefore close with the defeat of these protests and the creation of the Northeastern rustbelt.
Tiananmen Square and the March into the Institutions
By the mid-1980s, a small but increasing number of urbanites had broken out of the iron rice bowl of the danwei (state work unit) system, with its guaranteed employment and state grain rations, jumping into new opportunities created by an expanding urban consumer market. Small business was encouraged by the state to fulfill increasing demand. Shops opened up all over Beijing, for example, selling cheap goods usually produced by the TVE (township and village enterprise) sector and/or by new migrant labor, such as workers from Wenzhou who produced popular leather jackets in small, family-run businesses in Beijing’s Zhejiang Village. In Haidian, Beijing’s university district in the northwest of the city, the morning brought a train of peasants on donkey-drawn carts carrying produce to sell on the open market. Street vendors also proliferated, creating a much more vibrant nightlife in the city. Families started privately run restaurants by breaking holes in the walls separating the sidewalk from small danwei buildings. Customers stepped through the hole in the wall into a restaurant that focused on serving good food marketed to changing urban tastes, markedly different from the bland taste of state-run restaurants with terrible service.
This was the point at which marketization could clearly be seen to be transforming the fundamental spaces that composed the socialist-era city. Markets bustling, new migrants settling and the literal opening of the autarkic danwei walls all seemed to symbolize a new era of free movement. On one level, this echoed traditional patterns of urban development on the East Asian mainland, such as the shift from the ward system of the Tang dynasty to the open cities of the Song. Such cities had always been marked by a tension between cloistering and openness. At the same time, the space began to mirror new structures of power and inequality that were only just emerging. The slow trickle of escapees from the danwei system created an emergent class of urban entrepreneurs (known as getihu), who could be seen travelling the city on motorcycles and even in private cars. Meanwhile, peasants entered urban spaces more regularly, both as small-scale produce vendors and as new migrant workers. This broke down one of the fundamental spatial divides that had existed in the socialist era, beginning the transformation of the hukou system from a method for sealing the cities off from the countryside to a method of segmentation used to enforce labor discipline on a new proletariat. The spaces inhabited by peasants in the city made clear that they didn’t enter on equal terms: the informal character of the street vendors’ carts and the ramshackle quality of new migrant settlements signaled this, and began to stoke fears among urbanites of the possibility of growing urban slums—something rendered in the official literature as a risk of “Latin Americanization.”
For the vast majority of urban workers, who were still dependent on the danwei system, living standards improved only slowly. Meanwhile, the changes led to shifting class formations and alliances that destabilized the urban political scene. Stories and complaints about corruption proliferated. The foreign cars that appeared on the streets, passing urbanites riding slowly to work on buses and bikes, became a particular object of scorn, and stories spread rapidly about leaders driving around the city in Mercedes. Discontent was at first largely held in check by a combination of state repression and improved living standards. But as price reforms and high inflation (especially on food) began to cut into incomes from the mid-1980s, it became increasingly difficult for the state to keep criticism of the party from turning into open protest. When inflation first began to spike in 1985 and 1986, students began a series of protests for political reforms and against corruption. These protests spread from Anhui Province, where they began in early December of 1986, to 17 major cities around China, including Beijing. Yet the protests failed to gain support outside of universities (the largest protests occurred in Shanghai and Beijing, and yet even there only about 30,000 students participated in each) and were quickly suppressed. Party General Secretary Hu Yaobang, seen by other CCP leaders including Deng Xiaoping as too lenient on the movement, resigned a few weeks later in mid-January 1987.
As the old danwei system continued to strain under the reforms, however, dissatisfaction among urbanites erupted into the largest reform-era protests in the spring of 1989, with the participation of up to two million people in Beijing at the peak of the movement in May. This time urban workers joined a stage initially set by student protestors, but the alliance was temporary at best. While there was a diversity of opinions among both groups, interests generally pushed students in one direction and workers in another. As the politics rapidly unfolded, individuals were caught up in a movement that none really controlled. Students—representing a rising class of entrepreneurs and managers in the expanding market economy—were mostly critical of the way that the reforms were being implemented. Workers were more directly critical of the content of the reforms. Following the repression of the movement in June of 1989, students would never again unite with workers in the old socialist industries. The educated class of managers became key beneficiaries of the reforms, while workers lost out, left to protest sporadically and alone, until the remnants of the socialist-era working class were finally extinguished in a wave of deindustrialization at the turn of the century.
At the same time, the weakening of state control over university campuses created a new space for political debate, even as the state added ideological education in the aftermath of the 1986 protests. Students looked for the deep causes behind China’s turbulent political past, especially the Cultural Revolution. Turning to existentialism, liberalism and neo-authoritarian ideas, students tended to argue that Chinese culture itself was to blame for political repression, arbitrary bureaucratic power over daily life, corruption and party factionalism. A new May Fourth movement was necessary, and it had to be led by intellectuals. Ironically, neo-authoritarianism was one of the most popular ideologies among students. Its basic idea was that a single strong leader in the CCP needed to take control of the party to stop the factional fighting and bureaucratic stasis that was holding up the progress of reform. That leader should take advice from intellectuals, who supposedly knew how to reform society. There were also liberal critics of authoritarianism among the students, along with a smaller group who were critical of the direction of the reforms for damaging the living standards of ordinary citizens. For all the vague talk about “freedom” and “democracy” at the time, however, most students seemed enamored with the idea that they alone understood how to solve China’s problems.
When Hu Yaobang died on April 15th, 1989, students immediately began to write posters on campuses and hold discussions. Hu was especially popular among students and intellectuals, as he was tasked with rehabilitating intellectuals and rebuilding the party’s relationship with them at the beginning of the reforms. Seen as incorruptible, Hu was a symbol of correct leadership within the party sidelined by hardline bureaucrats protecting their privileges. Small student groups, especially those with good connections within the party, left wreaths commemorating Hu on the Monument to the People’s Heroes at the center of Tiananmen Square (as urban residents had done for Premier Zhou Enlai following his death in 1976, leading to the April Fifth Movement). The first student protest was a nighttime march of around 10,000 to the square from the university district on April 17th. At the lead, students carried a banner that proclaimed themselves to be the “soul of China”—an elitist formulation that would characterize their politics for the next two months. The monument at the center of the square soon filled up with wreaths left for Hu, and in the first days it became a site where anyone could jump up on the first ledge of the monument to give a speech to hundreds of onlookers. At night, protesters often gathered at the gate of Zhongnanhai, the main compound in which top CCP leaders lived.
Students and intellectuals, however, were quickly joined by young workers and unemployed urbanites, most importantly by forming the Beijing Autonomous Workers’ Federation (北京工人自治联合会). Yet these two social groups did not come together to form a coherent social movement even as they took part in the same events. Momentarily brought together by their shared opposition to corruption in the party, which had been worsened by market reforms, the two groups were divided by much more than what unified them. In terms of protest styles, students claimed exclusive ownership over the movement, in fear that they could not control other groups, who might use violence or provide the state with an excuse for repression. They tried to keep others out of the protests or, failing that, to sideline other groups as mere supporters and not full participants. As students and intellectuals believed that they were the only ones truly able to “save China,” they often blamed “peasants” for leading the country astray during the revolution and the socialist era. In the early days, students set up a coordinating organization in an attempt to control the movement, the Autonomous Student Union of Beijing Universities (北京高校学生自治会) with an elected leadership. The student union organized a widespread boycott of university classes beginning on April 24th. As the protests developed, other student organizations formed and competed for control. The independent Beijing University Student Dialogue Representatives Group (北京高校学生对话代表团) attempted to discuss demands with party leaders, discussions broken up by other students. The occupation of Tiananmen Square was controlled by the Headquarters for Defending the Square (保卫天安门广场总指挥部), yet another independent student organization. The Headquarters’ leadership was elected by those occupying the square, and the main power it enjoyed was control over a loudspeaker system at the center of the protest. Further, students cordoned off the center of the square around the Monument to the People’s Heroes with a hierarchical series of concentric circles. To get into the outer rings of the circles, one had to be a student, deeper towards the center required you to be a student leader with some connection to the Headquarters. The students forced the workers’ organization to set up its tents across the street from the square itself.
Students also had a very different relationship to the reforms compared with workers. Students largely wanted the reforms to move faster, to be better organized and more efficient. They were afraid that corruption was leading to a weakening of the reforms. By the mid-1980s, however, workers had begun to see their interests being undermined. There was new unemployment (as state enterprises, now responsible for profits and losses, were given the right to lay off some workers), stagnating wages, and, most importantly, high inflation, reaching levels of hyperinflation by the end of 1988. For workers, the reforms had to be slowed down or significantly rethought. Price stabilization in particular was crucial, since workers were in the process of losing their guarantee to cheap, state-subsidized grain. While students at first focused largely on mourning the pro-intellectual Premier Hu Yaobang, the workers’ criticism of the party and its reformist policies were more broadly political than those of students early on in the movement. For the workers, corruption was seen as a problem not because it was weakening the reforms, but instead because it indicated the emergence of a new form of class inequality. In handbills, workers asked how much Deng Xiaoping’s son lost in bets at the Hong Kong racetracks, whether Zhao Ziyang paid for playing golf, and how many villas the leaders maintained. They further questioned how much international debt China was taking on in the reform process.
The students and workers also had very different ideas about democracy. Students spoke vaguely about democracy, but often called for intellectuals to have a special relationship to the party. Most were more interested in having Zhao become a more powerful, enlightened leader for whom intellectuals could play the role of advisers, showing him how a market economy should really work. When one talked with workers, they had a much more concrete idea of democracy, one that had emerged over a long period of worker struggles in China, clearly visible, for example, in the strikes of 1956-1957, the Cultural Revolution, and the 1970s. For many workers, democracy entailed workers’ power within the enterprises at which they worked. Workers complained about the policy of “one man rule” in work units, wherein a factory director was a virtual “dictator.”
The students, unlike the workers, were intimately involved in the factional fights going on within the CCP. Students largely took the side of the more radical market reformer, Zhao Ziyang, who headed the party at the time. Zhao wanted to push the reforms through more quickly. On the other hand, the students largely reviled Li Peng, the head of state, well before he became the figurehead of martial law in late May. A moderate reformer, Li was seen as an old style bureaucrat who stood in the way of a rapid and efficient transition to a rational market economy. Workers did not really take part in this factional fight. They’d gained little by participating in factional fights before, specifically during the Cultural Revolution and the Democracy Wall movement of the late 1970s and early 1980s. The workers’ federation warned that “Deng Xiaoping used the April 5th movement [of 1976] to become leader of the Party, but after that he exposed himself as a tyrant.” Party members returned the favor in kind, with the All-China Federation of Trade Unions publicly backing the students but ignoring the workers who participated and their fledgling organization. Party elders, however, shifted away from supporting General Secretary Zhao’s policy of concessions to the students as May developed. At a contentious May 17th meeting of the Standing Committee of the Politburo held at Deng Xiaoping’s residence, Deng and Li Peng criticized Zhao’s approach, claiming he was splitting the party. Deng pushed for the declaration of martial law, which was formally announced on May 20th. In the early morning of May 19th, Zhao went to the square to warn students to leave, saying they should not sacrifice themselves for a movement that was over. Then Zhao left the square, having lost his position within the party, and was soon put under house arrest for the rest of his life. The late May announcement of martial law sharpened the politics of participants, with the workers’ federation announcing that “‘the servants of the people’ [the party] swallow all the surplus value produced by the people’s blood and sweat,” and that “there are only two classes: the rulers and the ruled.” The majority of students, conversely, still held out for support from Zhao’s faction even after martial law was declared. A potential alliance between students and workers never materialized under the pressure of the rapidly changing political context.
Students initially told workers not to strike so the movement’s focus would remain on themselves and their power within it could be retained. After martial law had been declared on May 20th, however, students finally saw the importance of worker participation, though again only in a supporting role, and they finally asked workers to undertake a general strike. By that point, however, participation in the protests had dropped dramatically, and it was too late for workers to fully mobilize their forces. Nonetheless, workers were still able to pull large numbers to resist the implementation of martial law. In fact, workers continued to put more people into the streets even as student numbers dwindled. But by this point, the party had marshaled up to 250,000 soldiers in the outskirts of the city. Workers and other urban residents were initially able to stop the entry of soldiers into the city from the night of June 2nd into the 3rd, blocking roads and surrounding troops in vehicles. This led to only a small amount of violence, with urbanites often feeding the tired soldiers caught up in the crowds for several hours before they gave up and pulled out of the city center. This only encouraged more resistance the following night.
From the night of June 3rd into the 4th, however, the army moved more resolutely towards the square to put an end to the protests. That night it was mainly workers and unemployed youth who attempted to slow the approach of the army in the streets leading up to the square, and many of them paid for it with their lives, with hundreds of civilian deaths (among whom very few were students). Along Chang’anjie—the main east-west avenue bisecting the city at Tiananmen—workers and other Beijing residents built blockades with buses, often setting them afire. Molotov cocktails and rocks were thrown as soldiers approached. The intersection around Muxidi on Chang’anjie to the west of the square was particularly hard hit, with pitched battles between workers and soldiers. Many deaths were concentrated there. As the first soldiers in armored personal carriers (APC) arrived on the square, some students and residents continued to resist, and an APC was set on fire. Several civilians were killed on the edges of the square. Once the main body of the army reached the square they stopped, and by the early morning they were negotiating with the remaining student occupiers, allowing them to leave the square and walk back to their campuses—though not without several being beaten by soldiers first. The protests in the capital were over, but the repression continued. Workers were hit the hardest in terms of prison sentences and executions in the days and weeks that followed, with student participants getting more lenient sentences.
The harsh crackdown on worker participants became a condition for the acceleration of market reforms in the 1990s, most notably the liberalization of the food market in the early 1990s, which the workers clearly would have otherwise continued to resist. As the Chinese economy became increasingly integrated into global capitalism after 1989, the economic interests of students and workers diverged further. The students of the 1980s became the middle and entrepreneurial strata of the 1990s, benefiting from the continuation of the market reforms that the crackdown on the protests enabled. In the late 1990s, workers in many older state-owned enterprises were laid off, rural-to-urban migration increased rapidly, and a class of “new workers” came into being, making low wages and living a precarious existence within the global manufacturing system. As worker and peasant protests increased again from the mid-1990s, they were not joined by students or intellectuals, who had mostly moved to the right when they still had any politics at all, arguing for the protection of property rights and free speech or increasingly taking nationalist positions.
Bureaucracy to Bourgeoisie
The events in Tiananmen were, in retrospect, a key moment in the formation of a domestic capitalist class out of the ruins of the socialist era bureaucracy. The protests and their crushing set the terms for this process in a number of ways. First, it became evident that there was a new, highly-educated faction of urbanites who now sought incorporation into this ruling class, and were, moreover, prone to push for accelerated reforms, expansive privatization, and various new state structures that (they imagined) would best accommodate the operations of a market economy. In this way, the position of students in ’89 would prefigure the position of purely private capitalists who gained their wealth with little help from the state and today remain un- or under-incorporated into the existing party patronage structure. At the same time, the students themselves demonstrated the importance of incorporating new intellectuals (and the new-rich more broadly) into the party, from whence they could also begin to accrue capital in the market economy.
Second, the crushing of the Tiananmen movement also made clear that the nucleus of a new capitalist class would largely be incubated within the party itself. Of course, there were (and still are) a large number of private capitalists who stand entirely outside the party, and throughout the 1980s it seemed to be an open question how much power and political leverage would be allowed newly-rich mainlanders or old capitalist families returning from Hong Kong or overseas. But the events of ’89 made clear the limits of this leverage. There could be no tolerance for reforms that outpaced party control—even if basically all the economic policies advocated by the student groups would eventually be implemented. Meanwhile, the party itself was opened even more to intellectuals and the newly rich. With socialist era class designations officially abolished in 1978, the total numbers of cadre continued to grow and new members would come from increasingly better educated backgrounds. This process was in many ways continuous with trends in the growth of bureaucratic privileges that had long plagued the socialist era. More importantly: the ability to draw from a well-organized, ready-made ruling class exapted from the tops of the tumultuous class structure of the late developmental regime gave the entire process of transition a much more stable, systematic character than that seen elsewhere—particularly for a country lacking the direct military patronage and geopolitical oversight of the reigning hegemon, which had ensured relative stability during industrialization in Japan, South Korea and Taiwan.
We will explore the current character and composition of the Chinese ruling class elsewhere—in the final part of this economic history, as well as in other articles, interviews and translations—but in order to understand the nature of the transition, it’s essential to trace out the precursors to the development of a capitalist class on the mainland, gestated within the party bureaucracy inherited from the developmental regime. This was a process marked by apparent continuity, but also defined by important internal changes to the structure and priorities of the party itself. The crushing of unrest that defined the “short” (’66-’69) cultural revolution gave way to the “long” (’66-’76) cultural revolution, during the latter two thirds of which any potential popular movements had been essentially defeated, but factional conflicts within the upper ranks of the party existed in an uneasy détente—exacerbated by the ossification of the developmental regime, the growing power of the bureaucracy and the direct militarization of production. This détente saw a continual increase in the absolute number of cadres, alongside the maintenance of the power and privileges of those at the top. But the period also saw a number of reforms that, on the one hand, seemed to arise from the recognition that the system was ossifying and needed to be modified, and, on the other, acted as pragmatic tools to stifle the power of particular factions. In order to serve both functions, recruitment was prioritized among those with lower education, and state investment was redirected. The clearest symbol of this process was the closure of universities, the rustification of the highly-educated children of high-ranking officials, and the expansion of primary education, particularly in the countryside. In addition, there were several high-profile promotions, placing figures like Chen Yonggui (a nearly-illiterate peasant leader from the model village Dazhai) into some of the highest positions within the party.
It is not at all unusual for the earliest members of a country’s capitalist class to emerge from the upper echelon of the increasingly archaic class structure that precedes the transition. In some cases, this process took the shape of a forcible subsumption into the global economy imposed by European powers on conquered peoples—where it was common for the colonial apparatus to selectively delegate power to a subset of pre-existing local leaders willing to capitulate to the colonial state, giving the new class structure an appearance of continuity with “indigenous” systems of power. But even outside the colonies, the same phenomenon has been a feature of almost every instance of capitalist transition. This includes the textbook case of England, where the early enclosures that led to enhanced agricultural productivity and the rapid growth of the industrial economy were in fact instigated by landowners already empowered by the aristocracy. The continuity is equally apparent in the first few “late” developers, such as Germany and Japan, where the role of feudal landowners combined with a pre-existing state bureaucracy to facilitate the transition in a way that retained the power of various pre-capitalist ruling classes—but also effectively transformed them into capitalists, or at the very least landlords and rentiers in the sense described by Marx.
None of this implies that such classes had somehow already been capitalist, nor that the state bureaucracy inherited by the Germans or Japanese was in some sense “state capitalist” prior to marketization. The absurdity here is self-evident: just because various feudal, tributary or other indigenous modes of production gave way to capitalism, and many families within old ruling classes retained their power throughout, does not mean that these pre-capitalist systems were actually already capitalist, even if they had been shaped indirectly by competition with the early capitalist powers. But exactly this sort of argument is often made for China. Since so many within the party-state bureaucracy would retain power and effectively bequeath it to their children, it is assumed that there must have been some secret capitalist kernel within the bureaucracy all along, ultimately unleashed by an artful combination of tragedy and betrayal.
Not only is the chain of logic here backwards, there is also an analytic error in conflating class and power. Just because power might span modes of production—embodied in the same families, the same locales, and even in a state that takes the same name—the class relations that generate that power nonetheless undergo a change. Class is not a simple designator for those who have authority and those who don’t, nor is it a sociological tool for cutting a population into brackets of income or education. Class is an immanent polarity generated by the social character of production. It is an emergent property of the way that things are made and basic human needs are met within a given mode of production. Constantly maintained and continually reproduced by this process, the power of a ruling class is largely power over the means of production and the force guaranteeing that production continue, but it is rarely a power over the nature of the mode of production itself. In this sense, not even those at the top of a system can simply choose to change it, as their position is constrained by inertial dynamics largely out of their control. This is particularly true for capitalism, where class emanates continuously from the circuit of capital.
Class conflict, therefore, does not simply designate the tug-of-war between two interest groups but instead a more fundamental conflict over class itself: when the circuit of accumulation begins to break down, the fundamental interest of the bourgeoisie is to restore it by whatever means necessary, while the drive of what used to be called a “class conscious” proletariat is the continual rupture of the circuit, which opens the potential of the proletariat’s self-abolition as a class via revolution. This is an important distinction, because it makes clear that mass movements can still be mobilized in the service of restoring accumulation, even if they have the appearance of class conflict. In fact, the class power of the bourgeoisie requires the participation of the proletariat at almost every stage of its deployment. The defining activity of the bourgeoisie as a class (aside from its everyday compositional activity, as the owners of capital and those who siphon surplus value from the work of the vast majority) is the perpetual maintenance of the material community of capital. It is in this sense that the Chinese Communist Party ultimately became a party of capital, acting as both the attendants of original accumulation and the intra-class managerial organ for the domestic bourgeoisie.
Since class is not static, but instead an emergent process, we can only understand the growth of a capitalist class system in China via its relation to the changing nature of production. Even the many reforms that brought intellectuals and, later, businesspeople into the party could not have secured the existence of a capitalist class without the simultaneous creation of its opposite, mutually-dependent pole: the proletariat. Accounts that overemphasize the early stages of ruling class formation, then, tend to place these internal reforms at the center of the narrative. While it’s true that a heightened concentration of power in the bureaucratic class (combined with the political purging of lower-born leaders starting with the 1976 arrest of the Gang of Four) certainly helped to facilitate the smooth creation of a capitalist class, the mere shifting and concentrating of power within a bureaucracy does not make a bourgeoisie. In reality, such reforms were simply important precursors, which could only be completed alongside the emergence of commodity relations, the proletarianization of the vast majority of the population, and the existence of widespread exposure to the global economy.
The period that we review here is largely the era of such precursors, rather than the era in which a clearly and fully capitalist class would wield full power. This means that factional conflicts continued within the bureaucracy throughout, often helping to facilitate the cyclical process of reform and retrenchment that marked the period. But the process of composing a new capitalist class is highly contingent, and even though the transition is neither caused nor completed by the “betrayal” of the pre-capitalist ruling class, the local character of this class-in-formation can wield a disproportionate influence on the trajectory of the transition itself. Comparing the collapse of the Soviet Union and the subsumption of the Chinese developmental regime should be clear enough evidence of this fact. In the Chinese case, the new ruling class developed its initial form as an alliance, and then fusion, of political and technical elites who had ascended to power somewhat separately within the turbulent class structure of the developmental regime. Before it was a bourgeoisie, then, the capitalist class took its preliminary form as a class of “red engineers” who had ascended to power through the party machinery, giving them a vested interested in ensuring the stability of the party itself. It was this stability that allowed the party to nurse the growth of a new bourgeoisie.
The back and forth of educational reforms were key to this process, but the categories used can often be misleading. Much of the discussion of violence in the Cultural Revolution, for instance, emphasizes attacks on “intellectuals,” or those whose families had “counterrevolutionary” class backgrounds. The turn to reforms, meanwhile, saw the abolition of these official designations (which had de facto become inherited), and a move to re-open universities, offer party membership to previously banned groups, and to return rusticated youth to the city (and often to the newly reopened colleges). In the narrative that sees the reforms as initiated by an act of betrayal, this seems to be a shift whereby those formerly designated “counterrevolutionary” were now regaining power—as if the transition were purely a backward slippage, led by the same forces that had helmed the first, stalled transition in the Republican era. But this is hardly the case. Many of those who held bad class backgrounds under the developmental regime had, by this point, inherited those designations from parents who had little or no way to transmit pre-revolutionary class privileges, the most important of which would of course be intergenerational wealth transfer. This is precisely why the question of education became so central to debates on class power within the late developmental regime.
But even the category of “intellectual” is deceptive. In its current connotation in English, this term seems to imply a certain academic or artistic faction of elites, maybe at most stretching to include the work of think tanks, policy planners and others who act within the political sphere or in an advisory capacity. Today, the term only barely covers the roles played by engineers or others with high-level technical knowledge. Nonetheless, given the educational emphasis of the developmental regime, those with such technical knowledge composed a large fraction of the “intellectuals” who sat at the center of the debates on education policy. And there is no ambiguity to which side those debates ultimately fell: While as late as 1985 “the bulk of party members were still from the poorly educated classes” the composition was changing rapidly, with “new members categorized as intellectuals [growing] from 8 percent in 1979 to 50 percent by 1985.” But this was by no means a new generation of the old, pre-capitalist class of classical intellectuals. Instead, “the heart of the New Class was made up of Red [i.e. those with political power] and expert cadres who had been trained at Tsinghua and other universities during the Communist era.” The same period saw mass retirements from the party, particularly among the now-elderly members who had joined before or just after the revolution—many of them poorly educated peasants or workers at the time—shifting the balance in favor of these newer members.
The influx of “intellectuals” into the party was in reality the influx of those with high-level technical training and pre-existing political influence (often the children of those who had held privileged positions within the developmental regime). On top of this, many had experienced a certain degree of hardship during the Cultural Revolution, such as rustication or attacks on their families—though notably not the massacres, military crackdowns and long prison sentences meted out to radical workers. Though later the educational focus of these new elites would diversify somewhat, in the early years science and engineering dominated. The trend was made evident as these elites graduated into the highest-level positions within the party: “The proportion of the party’s ruling Political Bureau that was made up of individuals with science and engineering degrees had grown dramatically, increasing from none in 1982 to 50 percent in 1987, 75 percent in 1998, and 76 percent in 2002.” During the Sixteenth Party Congress in 2002, “all nine members of the Political Bureau’s Standing Committee, the most powerful men in the country, had been trained as engineers, and four, including Hu [Jintao], were Tsinghua alumni.” Only the last two decades have seen the educational composition of the capitalist class in China begin to shift more toward the global norm—precisely when the bottom of the class structure would take full form through mass privatizations, allowing this precursor class of red engineers to phase into a properly capitalist class.
Prior to this point, however, the preliminary nature of this new class also meant that privileges still accorded much more readily to those with political connections and technical skill than to those who directly controlled production. When large-scale privatization did occur, it was not coincidental that the managers of successful state-owned enterprises and the local and provincial officials in league with them were largely drawn from this class-in-formation. Privatization would entail that “most state-owned and collective enterprises became the property of their managers,” completing the formal transition of power from mere political privilege into direct ownership of the means of production. This also meant that the wealth of such elites was now linked much more directly into the circuit of value production, creating a mutual (albeit uneven and exploitative) dependency of the ruling class and the proletariat.
Nonetheless, the heritage of the “red engineers” would carry a certain inertia. The patronage system established within the party soon proved an efficient way to mobilize capital and prevent destabilizing factional conflicts among members of the ruling class. The disciplinary mechanisms of the developmental regime state, overseen by “red” bureaucrats, would also become useful in establishing and preserving the conditions necessary for continued accumulation. Maybe most directly: the important role that would be accorded to the newly marketized SOEs (transformed into global conglomerates) increased the power of high-level managers and others who had climbed the ladder of industrial engineering in the transition era, producing some of the wealthiest capitalists helming some of the most powerful corporations in the world today. Altogether, this inertia would ultimately result in the divide between these capitalists “inside the establishment” (体制内) and those “outside,” foreshadowing greater conflicts to come.
The Resurrection of the South
The ten years stretching from the early 1990s to the dawn of the new millennium was the period in which China’s domestic economy would begin to be fully and directly integrated within the global capitalist market, no longer insulated by the “air locks” imposed on currency and commodity trade throughout the previous decade. The 1990s would also see the coastal character of China’s new industrial structure take full form, establishing a new geographic divide that both traversed and sharpened the socialist-era inequality between urban and rural. Coastal development and global integration began with a new wave of foreign direct investment following the state’s successful containment of the urban crisis of 1989, which had been marked by rapid inflation and widespread social unrest. When the uprisings in Beijing and elsewhere were crushed and inflation brought down through a period of economic retrenchment, the Chinese state proved its stability, in sharp contrast to the rising tide of popular uprisings throughout the socialist bloc. Even while Western governments sought a series of sanctions in the wake of the widely publicized Tiananmen Square Incident, capital had already begun to pour in from the bamboo network.
A strong signal was given to foreign investors by Deng Xiaoping’s 1992 “Southern Tour” (南巡), which was both a symbolic statement of the administration’s commitment to continued reform and an announcement that a wide array of new sectors, including real estate, would be open to foreign investment. Particularly important in terms of global market integration was a new policy allowing foreign-funded manufacturers the opportunity to sell on the rapidly growing domestic market in exchange for investment. This package of reform policies was ratified at the Fourteenth Party Congress in October 1992, the first time that the party’s highest echelon formally endorsed China’s adoption of a “socialist market economy.” The shift in rhetoric justified renewed support for domestic market forces on multiple fronts: cutting back the remnants of central planning even further, extending market pricing to the majority of the economy, instituting a new tax system that treated private ownership more equitably, and giving state-owned firms far more ability to lay off workers. At the same time, the shift symbolized the end of the conservative retrenchment with regard to foreign investment. Private domestic enterprises were allowed to engage in joint ventures with foreign firms, the Shenzhen and Shanghai stock exchanges (founded and re-opened, respectively, a few years prior) now allowed foreigners to purchase a limited number of shares for the first time, the dual exchange rate was abolished in favor of a unified (heavily regulated) market rate in 1994. All of this opened the door to the fundamental restructuring that would occur throughout the decade, effectively liquidating the old socialist-era class of urban grain-consuming industrial workers.
Export growth had already ensured that China was running a large and growing trade surplus, which helped to dampen the fear of running into the sort of payment problems that had plagued the era of oil-backed trade. Secured by this surplus, reforms where followed by a flood of foreign investment into the new coastal hubs. By 1993, FDI reached $25 billion, which was “almost 20% of domestic fixed investment,” and in the same year foreign-invested firms’ share of domestic industrial production “may have surpassed 10%.” Though the continuing role played by the Chinese state would draw comparisons between the “Chinese Miracle” and its predecessors in Taiwan, South Korea and Japan, this period of rapid growth was far more dependent on foreign investment and far less driven by large state-owned (or simply well-connected) monopolies than in any of the other “miracle” economies. In 1991, with incoming FDI at slightly more than 1 percent of its GDP, China had already matched or surpassed the FDI-to-GDP ratio reached by Japan, South Korea and Taiwan during either their industrial booms or their later periods of internationalization. By 1992, the share had increased to over 2 percent, and by 1994 it reached a staggering 6 percent, making the Chinese boom much more comparable to the similar export-driven growth waves experienced in Southeast Asia, “where inflows around 4%-6% of GDP have been common.” But even this is an understatement, since China’s less developed interior acts as a statistical damper when such figures are averaged for the country as a whole. In Guangdong and Fujian provinces—both comparable in population and land area with most countries in Southeast Asia—the period from 1993 to 2003 would see an average annual FDI to provincial GDP share of 13 and 11 percent, respectively.
The new geography of production was pronounced: between 1994 and 1998, the Southeast Region as a whole (Guangdong, Fujian and Hainan) contributed some 46 percent of all China’s exports, trailed by the Lower Yangtze (Shanghai, Jiangsu and Zhejiang) at 21 percent and the socialist-era industrial hub in the Northeast at 23 percent. All other provinces contributed a mere ten percent. This imbalance was not coincidental. On the one hand, it marked the ascendance of seaborne trade and coastal logistics hubs. On the other, it was also a relic of much older, pre-capitalist market networks that dated back to the Ming and Qing dynasties, now revived in the form of the bamboo network. Guangdong and Fujian were the two major home provinces of most overseas Chinese families—and even those who had lived in Southeast Asia for decades often retained some level of linguistic, familial or at least cultural ties to these locations. In many cases, these connections were quite direct, with recent out-migrants in Hong Kong and Taiwan seeking to reconnect with relatives who had remained on the mainland after the revolution. In Dongguan, for instance, residents “had at least 650,000 relatives in Hong Kong and Macao” in 1986, “and another 180,000 (huaqiao) in other foreign countries, mostly North America.” As many as “half of the contracts [local cadres] had signed were with former Dongguan residents now living in Hong Kong.”  But even overseas Chinese who had lived several generations in other countries were given extremely favorable terms of investment by the Chinese state, and capital from the bamboo network was frequently treated as if it were domestically sourced. The early ascent of the Pearl River Delta and, to a lesser extent, places like Xiamen in Fujian, were therefore direct results of these global connections. Once these areas had been industrialized, they exerted a massive gravity for both labor and investment, securing their position even as new sources of FDI began to flood into the country over the course of the 1990s.
Though Hong Kong and Macao remained dominant as sources of investment, the importance of Taiwan grew rapidly and FDI from the US, EU and Japan (often via tax-free holdings in the Virgin Islands) increased in spurts. The prominence of wholly foreign owned enterprises in total realized investment also began to grow, spiking in the late 1980s and then again in the mid-‘90s. But the role of direct investment on the part of developed countries would remain subdued, with FDI from the US, EU, Japan and Canada composing only a quarter of China’s cumulative inbound FDI between 1985 and 2005. By comparison, “worldwide, developed countries accounted for 92% of FDI in 1998-2002.” Meanwhile, the absolute volume of international investment skyrocketed, reaching record-high levels around the turn of the millennium. Both total investment into China and China’s share of the growing global total increased markedly in this period. Only the US and UK received more incoming FDI in these years, and both were superseded by China in the 21st century. Out of all developing countries, the Chinese share of global FDI fluctuated from between 20 to 50 percent. This signaled not only China’s own reliance of foreign capital and export industries, but also its growing ability to out-compete competitors in Southeast Asia in order to secure this investment.
Recentering East Asia
Trends in the profit rate of the world’s major producers defined this process. It is not coincidental, for instance, that the Chinese investment boom occurred at the same time as the brief recovery of profitability experienced by US industry, particularly manufacturing. The 1990s saw GDP increase continuously in the US for the longest recession-free stretch ever experienced (just under a decade) paired with declining unemployment, low inflation and rising productivity driven by the growth of computerization. Job growth reached record levels, consumer credit continued to expand, and a boom in consumption followed. This was all, in turn, facilitated by the cheapening of consumer goods produced via Pacific Rim supply chains, with China able to secure growing shares of this trade throughout the decade—ultimately at the expense of its Southeast Asian competitors. In this period, the significantly more labor-intensive, lower-tech Chinese manufacturing industry did not threaten higher-tech US producers, since it specialized in goods much farther down the production chain. This sort of production was simply not feasible within the US (due to higher wages) and the profits often accrued in part to US corporations nonetheless through contract hierarchies. But US demand was only part of the picture. In the end, the Chinese ascent could only be secured through crisis.
First, the bursting of the asset bubble saw Japan’s power in the region reduced. The Plaza Accord had severely hindered Japanese domestic production, leading to a rapid outflow of capital beginning in the mid-1980s, alongside speculation at home. When the bubble burst in 1990, it threw the Japanese economy into two decades of relative stagnation. Even prior to the Plaza Accord, profitability had already declined rapidly and most major Japanese firms had responded to this by pouring capital into speculative financial devices and booming real estate markets. After the bubble burst, this left them burdened with a mass of severely deflated assets and large interest payments incurred on credit obtained during the boom. Even where profits remained steady, such firms had to increasingly direct their revenue toward paying down this debt, rather than funding new investment. This was despite the ready availability of extremely low-interest loans offered in the name of stimulating an economic recovery. The traditional monetarist response to crisis (increase liquidity and money supply) stagnated in the face of plummeting demand for new credit as firms sought to rectify their balance sheets. The Japanese state therefore stepped in to keep the economy afloat, providing a base level of demand for the banking system and funneling the money into new infrastructure or other vaguely Keynesian projects. Though this was insufficient to stimulate a full recovery, it did arguably prevent an outright collapse. The result was two Lost Decades of extremely slow growth, persistently high (though not staggering) unemployment, increasing precarity among the workforce and slowly growing nationalist sentiment.
For China, the results of the Japanese decline were clear. Japanese capital was too weak in this period to act as a significant counter to the bamboo network, even though it was Japanese investment that had stimulated much of the network’s early accumulation. At the same time, low growth rates at home still ensured a steady flow of FDI from Japan into China and elsewhere. In contrast to China-bound FDI from the bamboo network, Japanese funds were not as heavily centered on Guangdong and Fujian. China-Japan trade instead helped to stimulate the boom of the central and northern coast, in particular in Shanghai, the largest recipient of Japanese investment in the 1990s. Between 1991 and 1994, Japanese FDI into China grew at a rate of 53 percent per year. It peaked in 1995 at $4.5 billion, or about 8.8 percent of total FDI into China, then declined throughout the latter half of the 1990s, reaching a trough in the years of the Asian Financial Crisis before rebounding in the new millennium. But despite continuing regional prominence as an investor (and dominance in R&D and high-tech patents) Japanese capital was now forced to share influence with the bamboo network, and therefore could not enforce the more rigid, Japan-centric hierarchies experienced elsewhere in the region. Meanwhile, capitalists within the bamboo network (as well as those in South Korea) would soon see increasing economic interdependence with the Chinese mainland as a profitable alternative to reliance on Japan.
The second major turning point was the Asian Financial Crisis, which began in Thailand in 1997. The profit rates of Thai manufacturing, construction and services had all begun to decline as early as 1990. Far more dependent on exports than the Japanese, South Korean or Taiwanese precedents, manufacturing had begun to confront both vertical and horizontal limits due to its position in global trade hierarchies. First, Thai firms were unable to successfully implement labor-saving technology, preventing them from moving up the value chain. Second, they were caught in a “realization crisis” that grew in intensity throughout the 1990s, in which Thai producers were unable to secure sufficient shares of market demand in the face of rising competition, particularly from China. The stagnation in Japan also meant that consumer demand in Asia’s largest economy plummeted. The US and Europe thereby became the most important export markets, and competition for access to these markets increasingly became a zero-sum game. With the Chinese share of the US import market growing from 3.1 percent in 1990 to 7.8 percent in 1998, Thailand’s stagnant, meager share of 1.4 percent throughout the same period was evidence of this “realization crisis,” and, paired with rising wages in manufacturing, led to the rapid growth of speculative investment in banking, insurance and real estate, similar in character to the Japanese asset bubble.
Meanwhile, the Chinese currency reforms of 1994 had the effect of devaluing the yuan but not floating the currency entirely, further enhancing Chinese competitiveness while also retaining a moderate level of insulation from currency speculation. FDI into Thailand hit a trough in the same year, and when it recovered, the bulk of investment was in real estate, rather than manufacturing. All of this was facilitated by a wave of liberalization and deregulation measures encouraged by the Thai state. Restraints on the financial sector were lifted and, most importantly, faced with mounting debt, “the state dismantled most foreign exchange controls and opened the Bangkok International Banking Facility, which allowed offshore borrowing in foreign currencies and reconversion into Thai baht” which was kept “pegged to a basket of currencies favouring the dollar” and then floated in 1997. The end result was the collapse of the real estate bubble followed by a wave of currency speculation that threw the entire region into crisis. In Thailand, real wages fell due to combined devaluation and inflation and unemployment more than doubled. Laid-off workers funneled into the countryside, raising the rural poverty rate and leading to a wave of populist unrest. In Indonesia, inflation grew rapidly, a wave of anti-government and anti-Chinese riots shook the country, and the Suharto regime was forced to resign. In South Korea, the stock market crashed, financial institutions collapsed, a number of chaebols were restructured, bought out or went bankrupt, and the IMF had to step in to bail out the severely indebted government.
Though growth and investment in China also declined, the worst of the crisis was avoided. The US remained a strong export market (and would become even more important after its own dot-com bubble) the yuan was protected from rampant speculation, the profit rate of manufacturing remained robust, and, most importantly, all of China’s major regional competitors were essentially eliminated. The result was that, by the end of the millennium, mainland China would become the center of a new Sinosphere of capital, soon capable of outcompeting the Japanese for economic hegemony in the Pacific Rim. Maybe most importantly, this sequence of Asian financial crises was convincing justification for new experiments in monetary control, finance and the management of major conglomerates, emphasizing the ability of the Chinese capitalist class, coordinated by the party-state, to intervene in dangerous cycles of speculation driven by the parochial interests of smaller fractions of the class. This logic of monetary protection and managerial oversight would define the restructuring of core industries at the turn of the millennium. But China’s integration into the market could never be entirely immune from the same dynamics that had plagued its neighbors.
Though ultimately key to its success, these regional crises also combined with new domestic limits to threaten the stability of the Chinese transition. Another period of retrenchment had followed the events in Beijing in 1989, as leading reformers were purged from the party, inflation was reigned in and planners sought again to scale back the extent of the market. But the very attempt to restrain the force of the market only created the conditions for it to extend even farther. On the one hand, the suppression of the unrest generated by the unevenness of the transition helped to restore stability to the economy, and this stability would convince international investors that conditions were secure enough to guarantee future returns. On the other hand, the unrest itself was a signal of deeper crises. Throughout the 1980s, local leaders were encouraged to funnel massive amounts of capital into TVEs and commercial real estate development, regardless of risk. In order to facilitate this process, hundreds of unregulated banks sprung up across the country, themselves becoming a seemingly lucrative investment in the process. Non-existent financial policy had paired with booming growth to create a massive TVE bubble, probably the first distinctly capitalist crisis of the new era. By the early 1990s, it had become clear that many TVEs were simply not productive, commercial real estate was often extremely overvalued, and the new banks were mostly composed of bad loans.
Meanwhile, since the events in Tiananmen had seen a brief credit embargo levied against the country, the trade deficit had grown just as access to external funding was temporarily limited. Part of the retrenchment, then, was an intentional attempt to reduce domestic demand for investment by imposing strict quotas and suppressing wage increases. Bank credit slowed, growing only 10.6 percent between 1988 and 1989, compared to almost 30 percent in previous years. A drop in fixed investment followed, declining eight percent in 1989, and plummeting “from 32% of GDP in 1988 to 25% in 1990.” The state again increased its share of total investment, and the demands of urbanites were partially met with a renewed focus on shielding SOEs from the effects of austerity. But aside from a few preferential policies for urbanites, new price controls (especially on producer goods) and some increased planning allocations, the conservatives within the party were now unable to offer any truly extensive plan to scale back reforms or even to solve the many problems that had arisen from the instability of the transition. Instead, they seemed cursed to repeat the same minimal, insufficient program that had been offered whenever reform seemed to get out of hand. And, again, the effects were to induce a recession that helped to clear the market, restore stability, and create the conditions for a new wave of reforms.
The recession saw consumption decline alongside investment, with households withdrawing what money they could from speculative schemes and pouring their income into savings accounts. The drop in demand also eliminated the persistent shortages that had built up in the last years of the 1980s, and this in turn allowed the market to re-orient toward less speculative sources of demand. Despite the credit embargo, foreign markets remained open to Chinese exports and the SEZs to FDI. For the first time, exports began to consistently overtake imports as a share of GDP. Meanwhile, unemployment increased, particularly in rural areas, providing an ever larger reserve army of labor for coastal production hubs. Paired with the collapse of socialist regimes across Eastern Europe (and soon the USSR itself), the growing surplus population seemed to forebode future unrest. But conservatives had no functional plan to reignite growth or to incorporate this population back into the planned economy. Meanwhile, foreign investment had already started to pour in from new locations such as Taiwan, eager to exploit the same factors that had begun to catapult Hong Kong into a hub for global finance.
The attempt to shield urban SOEs from the worst of the recession, though marginally successful at stifling further discontent among workers, ultimately caused a shift from the slow, competition-driven profitability growth seen in the late 1980s to a rapid plunge in profitability in 1989 and 1990. As the share of unprofitable SOEs began to grow, the state sector itself became less and less reliable as a source of funding. This further undercut the state’s potential to act as a stand-in for the market. While such trends continued to erode the basis for any large-scale return to the plan, a new reform agenda was slowly cobbled together in response to the many macroeconomic policies that conservatives seemed unable to address. Central to this agenda was the reform and consolidation of the banking system, which would streamline access to household savings. This was a lynchpin reform, finally cutting through the recurring crises of state investment and placing the financial system on an entirely new foundation. Such a change had only become possible because rising incomes (now more often monetized) had ensured that personal savings had been increasing rapidly from 1978 onward. Soon, this mass of household savings would serve as the single most important source of investment, capable of replacing the declining contributions of the state-owned sector.
At the advent of the transition period, there was no true banking system in China, and the only financial model readily available was a rough blueprint left behind by Soviet advisors in the 1950s. Nominally, there was a single bank: the People’s Bank of China (PBOC), which was a sub-department within the Ministry of Finance, employing only eighty people in 1978 and serving almost none of the functions associated with banking. But the TVE boom in the 1980s both expanded demand for investment and made evident the need for an investment infrastructure outside the planning apparatus that would be capable of dealing with the dispersion and complexity of the emerging industrial structure. The result was a rapid, largely uncontrolled proliferation of financial institutions over the course of the 1980s, including everything from banks to pawn shops: “By 1988, there were 20 banking institutions, 745 trust and investment companies, 34 securities companies, 180 pawn shops, and an unknowable number of finance companies [including local ‘banks’ and credit unions] spread haphazardly across the nation.” All of this was done in the name of financial “modernization,” with new financial institutions emerging at every level of government and thereby mirroring the decentralization of the planning infrastructure that had taken place in the middle of the socialist era.
Throughout this boom, it was actually local-level party cadres who held institutional power over the banking system and drove its rapid expansion. Throughout the decade, the PBOC, for instance, had its senior branch managers appointed by the local party organs, rather than the central state. Just as in the decentralized planning apparatus of the socialist era, the structural interest of local party committees was to stimulate growth, since their political performance was measured by the economic output of their district. Now, however, growth was no longer measured in just sheer output, but often in value, and specifically “value-added” for export. At the same time, there was the added benefit of embezzling funds, signing lucrative contracts with Hong Kong (denominated in valuable HKD or USD), and profiting directly off the labor of workers within the new enterprises. In the past, similar structural pressures had encouraged cadres to exaggerate output, particularly in key industrial or agricultural products, in order to secure more material from the central state’s investment apparatus. The same sort of exaggeration occurred in the 1980s, but now it had a more distinctly speculative sheen: every district’s real estate and TVEs sectors were portrayed as unassailable growth industries, with each new wave of investors gaining an interest in maintaining the illusion, at least until they could sell their own shares. Rather than exaggerating output in order to secure additional investment from the central state, local governments set up their own inconsistent, speculative and extremely volatile financial infrastructure in order to attract the growing bulk of floating, non-plan profits and personal investment funds. Between 1984 and 1986, the number of loans grew more than 30 percent each year, then lowered slightly to just over 20 percent per year from 1987 through 1991. This, in turn, stimulated rampant inflation, and when the state attempted to impose some administrative control on the new financial system the result was a run on local bank branches, helping to stoke building unrest in the final year of the decade.
The conservative retrenchment, however, simply sought to clamp down on credit, stifling total investment in the hopes of shifting the economy back onto the planning infrastructure. But the state-owned sector was already far too dependent on the non-plan economy, and the attempt only accelerated its atrophy. Aside from the anemic plan and the volatile new banking system, there was simply no other infrastructure for investment. The initial revival of reform that followed the retrenchment, then, was both dependent on this extremely unregulated financial system and tasked with forcing it through a painful period of restructuring. Ironically, it was the new reformist regime that would burst the bubble. The events of 1989 had already proven how volatile rampant inflation and uncontrolled speculation could be. Now, with the SOEs falling into deficit and the banks that had financed them holding more and more bad loans, the need for widespread financial reforms became evident. In the same year as Deng’s Southern Tour, a global recession hit and inflation again skyrocketed, threatening the revival of the reform agenda. But unlike in the ‘80s, reformists had at least formulated a rough solution to the problem. Now, rather than the vague blueprints left by Soviet advisors, the state turned to the American financial system as a model. The effort was led by Zhu Rongji, the former mayor of Shanghai who was promoted to vice-premier in 1991 for his successful management of the city. Concurrent to his term, Zhu also served as governor of the People’s Bank, where he oversaw monetary policy. In this dual capacity, he began to impose nationwide financial reforms beginning in 1993, just when annual inflation in large cities had again surpassed twenty percent. The economy was pushed into another period of austerity—but this time it was imposed by the reformist faction, rather than by the conservatives.
First, decentralization was addressed at multiple levels. The tax system, which had become a mess of locally negotiated tax rates, often specific to each enterprise, underwent sweeping reforms in 1994. These reforms were modeled on the federalist systems used in many Western countries, with tax categories clearly defined and apportioned between central and local governments. Given the level of decentralization that had become the norm both politically (from the 1960s onward) and financially (from the 1980s), the net effect of these fiscal reforms was to begin to recentralize fiscal authority, and thereby increase the ability of the central state to actually carry out its own policies. At the same time, the financial system itself was centralized, with the proliferation of unregulated, vaguely-defined small investment mechanisms consolidated into a more coherent infrastructure dominated by the “Big Four” state-owned commercial banks: Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), Construction Bank (CCB) and Bank of China (BOC). Each of the Big Four were given a slightly different mandate, ICBC dominating lending and deposits in the cities, ABC doing so in the countryside, CCB providing project financing and BOC handling foreign trade and foreign-exchange transactions. Alongside the Big Four, three major policy banks were formed: China Development Bank, Export-Import Bank and the Agricultural Development Bank. These banks were tasked with implementing policy projects announced by the central state, such as large-scale infrastructure construction or the international promotion of Chinese exports. By the turn of the century, the Big Four alone would control more than half of all capital held by all banking institutions and the policy banks another quarter. The remainder was composed of smaller credit unions, the postal savings system, and joint-stock commercial banks, all of which were dependent on the Big Four, which still today dominate interbank lending.
The double-collapse of the Hainan real estate bubble in 1993 and the Guangdong International Trust & Investment Company (GITIC) in 1998 illustrates the general arc of the era: severed from Guangdong and made into both a province and an SEZ in 1988, the poor tropical island province of Hainan saw a sudden influx of young speculators, with investment coordinated by twenty-one unregulated trust companies, the largest of which were effectively the financial wings of provincial governments. Though modeled on Shenzhen, the Hainain SEZ seemed to always push the development of export industry (and exploitation of local natural resources) off into the near future. Instead, the SEZ’s policy permitting the sale of land-use rights encouraged the bulk of these speculators to go straight into real estate. In the space of a few years, “20,000 real estate companies materialized—one for every 80 people on the island.” Even the port was purchased (by a Japanese developer) and turned into massive condo towers, since industrial land sold for far less than residential. After Deng Xiaoping’s Southern Tour in 1992, reaffirming commitment to the reform project and the importance of Southern China in this process, it seemed that nothing could stop the ascent of Hainan’s real estate values.
But in reality, the very beginnings of Zhu Rongji’s financial consolidation destroyed investor confidence in the Hainan bubble, which began to collapse as early as 1993. The burst bubble left a mass of bad debt that amounted to some ten percent of the national budget, accrued in a single SEZ over the course of five years—and Hainan was soon stripped of its SEZ status as well. But despite this one collapse early in the decade, most of the country’s larger financial problems persisted: the deficits in the SOEs had never been resolved and the accumulation of non-performing loans simply could not be ignored much longer. This became strikingly clear with the bankruptcy of the GITIC in 1998, during the Asian Financial crisis. This was “the first and only formal bankruptcy of a major financial entity in China,” and GITIC had controlled much of the international borrowing that went into Guangdong, by then the country’s richest province. Compared to the national crises that struck most of its neighbors in Southeast Asia, the GITIC collapse was relatively contained. Nonetheless, the dual failure of Hainan and GITIC proved that a financial system driven these volatile trust and investment companies could threaten a similar financial crisis in China.
This further stimulated the centralization of the Big Four into the hands of the central government, but it also led directly to the implementation of the second major component of financial reform, again spearheaded by Zhu (though formulated by Zhou Xiaochuan, head of the CCB), and again modeled on the American system: the plan was to spin-off all the bad loans now held by the Big Four into a series of asset-management companies, which would then salvage what could be salvaged from the original investments over a number of years—essentially the exact same method used by the US in dealing with the Savings & Loan Crisis. This would repair the balance sheets of the Big Four and bring the Chinese financial system more generally in line with international standards. The process, however, was never completed, and its failure would leave the Chinese financial system both dependent on bank financing, backed by consumer deposits, and particularly prone to inflating ever-larger speculative bubbles for the sake of maintaining investment.
Rural Boom & Crash
These national financial reforms had an equally devastating effect on the countryside, where a bubble had long been building. Initiated in the 1980s by rising rural incomes, the rapid growth of rural industry and the resurrection of rural markets, the 1990s would see the final stage of this rural bubble, capped by its collapse. The integration of the TVEs with the rapidly restructuring urban industrial sector (the SOE-TVE nexus, explored above), was one factor in this collapse. But beyond such external dependency, the rural bubble was riven with entirely endogenous contradictions that all but guaranteed an ultimate crash. Throughout, agriculture remained heavily shielded from the pressures of the global market and rural land remained nominally communal. These very protections provided the basis for rising incomes and relative stability. Paired with the rapid, largely unregulated growth of competitive rural industry, however, these conditions would create a boom and crash that would definitively destroy the socialist countryside.
After the wake of 1989’s urban protests had settled somewhat, the state began re-implementing serious market reforms for urban food subsidies. These food subsidies, a holdover of the socialist developmental regime, had acted to reduce the cost of living of the urban working class. But attempts to restructure these programs had been put on hold because of the rampant inflation caused by price reforms in 1988 and 1989 and the unrest that followed. Ironically, then, it was the violent and decisive suppression of these urban protests that made the unpopular reforms possible. The new reform package was a continuation of earlier attempts to reduce the impact of subsidies on state expenditures, which had risen again in response to late 1980s inflation. But, unlike in the early 1980s, this time the state attacked urban food prices instead of rural procurement prices. Urban grain prices were liberalized in 1991 (raising the urban price of grain by 35 percent) and 1992 (raising it by 25 percent), and by 1993 the official system for urban food rationing was ended. Rising agricultural prices likewise stimulated production, feeding into growing rural incomes and the expanding rural economy. Farm product prices, rural incomes, and rural purchasing power grew. The loosening of credit in late 1990, following a period of retrenchment after the inflation and protests of the late 1980s, began a period of rapid rural economic growth.
The booming rural economy soon took on independent, self-sustaining momentum, despite the state’s attempt to rein in an overheating national economy. Inflation was again on the rise by 1992, peaking in 1994 at around 25 percent as it had in the late 1980s. In mid-1993, as part of national financial reforms the state instituted a sharp contraction of bank credit, but the credit contraction did not have the desired effect on the rural economy. High inflation continued through 1996 largely because of self-reinforcing rural economic growth, and the freeing of urban food grain prices led to an informal liberalization of rural grain markets followed by rising farm product prices. In response, the state had to raise grain procurement prices in 1994 to maintain its market share. Rural household incomes rose despite the state’s credit crackdown, and rural consumer demand surged from 1994 through 1996. This demand fed rural industry. Rural self-financing continued to grow in the mid-1990s even as state financing contracted elsewhere.
Fattened by this demand, the TVE sector continued to grow and employ more rural labor throughout this period, further expanding rural incomes. Rural industrialization, in other words, was another key factor in accelerated, independent rural economic growth, and the early 1990s constituted the fastest single period of TVE expansion. By 1996, the sector was contributing nearly 40 percent of China’s gross industrial output, up from 10 percent in 1979, creating over five million new jobs each year. As with agriculture, TVE growth continued even after the institution of credit controls in 1993. Though many TVEs participated in the SOE-TVE nexus or ultimately fed goods into the SEZs, just as many either produced for local demand directly or took on the character of pyramid schemes, growing without any clear connection to real demand in the domestic or export market. The result of this unchecked growth was that the rural economy was increasingly seen as uncontrollable, and thereby another source of potential social instability.
Beginning in 1996, however, the self-reinforcing dynamic of the rural economy collapsed, leading to a rural crisis that came to be known in China as the “three rural problems” (三农问题). By destroying the basis of rural incomes, this crisis began the piecemeal destruction of rural, non-market subsistence that had defined the socialist-era countryside, resulting in a flood of out-migration. Those leaving the countryside would now join older generations of migrants and lower-class urbanites in China’s growing proletariat. Central to this shift was the downfall of collective (as opposed to privately owned) TVEs, taking place alongside changes in the national structure of taxation and government finance and a renewed effort by the state to impel grain production. The fiscal decentralization of the 1980s had benefited provincial governments, but central state revenues as a proportion of total government revenues fell by the early 1990s. This negatively affected the central state’s ability to shape the economy. As part of the nationwide financial reforms helmed by Zhu Rongji, the state’s reaction to this problem was to divide local and central finances, and to increase the center’s proportion of the total beginning in 1994. As with the banking reforms reviewed above, this was an intentional attempt to “modernize” the fiscal system by mimicking the federal system: Instead of the central state taking a negotiated proportion of taxes collected at the local level, as had been the practice, different fees and taxes were now designated as either local or central revenues. This hurt the rural economy, especially in regions that depended heavily on agriculture, as more revenues were allocated to the center in the process. Meanwhile these reforms caused the gap in revenues between richer and poorer provinces to widen even further. The most important factor, however, was the dramatic restructuring of rural industry.
The central state had begun to regard TVEs as an uncontrollable source of inflation, since insolvent TVEs, run as collectives, were increasingly financed by local state subsidies (especially after the restriction of other sources of credit), indebting local governments and spurring price increases. As early as 1993, Zhu Rongji had called to limit the sector’s growth “so that resources could be freed up for the expansion of the export sector.” At the same time, the center’s increased control over local revenues began to make the promotion of TVEs less attractive investments for local officials, since the central state took control of more of the tax revenues that they generated. When the initial credit controls failed, the state put further restrictions on lending to TVEs in particular, making the rural debt crisis even more severe and thereby justifying the central state’s aggressive move in 1996 to force many collective enterprises to close down or privatize. Though already operating on the market, privatization of collective enterprises entailed the transfer of ownership from the village or township collective (whose members were generally supposed to all receive dividends), to one or more individuals (usually existing managers but often non-local capitalists) who would in principle be more responsive to market forces and less restricted by nepotism, petty corruption and collective regulations, such as the requirement to employ local residents instead of cheaper migrants from elsewhere.
Since the central state had been failing to bring this source of inflation under control for so long, privatization was now seen to be the only alternative. But the ownership structure had already been trending in this direction for more than a decade: As discussed above, one reason for the official change of terminology from CBE to TVE in 1984 was to include the increasing variety of ownership structures, including rural enterprises owned by individual households and partnerships of multiple private or public investors. The Wenzhou Model of TVEs was defined by private ownership, but the 1981 study of Sichuan quoted above, for example, shows that private or quasi-private ownership of industrial enterprises was already becoming common throughout rural China, and another study showed private TVEs to be the fastest growing type by the end of the 1980s. This trend seems to have been mainly driven by market forces, with state policy initially discouraging private ownership, then in 1984 merely trying to regulate it through official recognition, and finally, by 1996, changing with the tide of marketization (and in response to the new problem of rural inflation) to adopt the opposite position: actually pressuring many of those collectives that had not already privatized or closed in response to market forces (many of which were surviving on massive debt to local financial institutions) to do so by state fiat. Such political closures coupled with competition from the independently growing private sector to create a general crisis for collective rural enterprises, and both the absolute number of TVEs and their employment fell in 1997. This coincided with the central state’s shift in national development strategy toward export-oriented, foreign-invested private enterprises in the coastal regions, which relied on migrant labor from the very rural areas whose sources of development over the previous two decades were now imploding.
The downturn in rural areas (especially those dependent on agriculture) was reinforced by a renewed state intervention into grain markets, depressing incomes in the countryside. Rural consumption growth was negative between 1997 and 1999, and the rural-urban income gap began to rise again. Rural-urban terms of trade deteriorated for both industry and agriculture. However, in the midst of SOE reforms (discussed below), the state was more worried about urban unrest than rural. Fearing the return of the urban protests of the late 1980s, the state attempted to push some of the burden of SOE reforms onto the rural population by again forcing peasants to grow cheap grain for urban workers. With a new policy of provincial grain responsibility instituted in 1995, grain supplies grew in 1996 and prices dropped, suppressing the agricultural component of rural household incomes. All of this naturally starved village and rural township governments of revenue, especially in agricultural regions that had recently lost their income from local TVEs. These governments became increasingly predatory on their peasant population, sparking a sharp increase in peasant protests against taxes and miscellaneous fees. Meanwhile, rural outmigration continued, especially among the young, building the ranks of the urban proletariat. Overall, the contradictions of the era were most clearly expressed in a new economic geography: Inland agricultural regions fell into recession, and the gap between rural and urban grew. In many coastal areas, in contrast, rural areas were increasingly intertwined with industrial and export markets. Urban reforms charged ahead while agriculture and the rural economy stagnated. While this led to a brief series of ameliorative rural reforms in the early 2000s, most notably the abolition of the agricultural tax in 2006, market reform of the rural sphere began to accelerate again around 2008, although it remained somewhat behind the pace of urban reforms.
Smashing the Iron Rice Bowl
The third and final component of Zhu’s financial reforms was aimed at the SOEs themselves. The ultimate goal was to make Chinese firms outside the light-industrial export sector both globally competitive and open to foreign investment (albeit restricted to a minority share of ownership). By listing the Big Four financial institutions and many of the major SOEs on global markets, the “internal” state-owned economy (体内制) could successfully attract large amounts of new capital and foreign reserves, helping to modernize production and decrease the risk of future deficits. The first IPOs for Chinese SOEs were held on the Hong Kong Stock Exchange as early as 1993, and “by the end of the decade, hundreds were listed companies on the Hong Kong, New York, London and Shanghai stock exchanges.” Between 1993 and 2010, $262 billion USD would be raised on international capital markets in this fashion—a number just below China’s entire GDP in 1985. Meanwhile, this process required the reinvention of amorphous, often extremely disaggregated planning units into something resembling modern corporations. The massive SOEs that emerged—and which today populate the Fortune 500—were the success stories, dreamed up by Chinese reformers like Zhu and made reality by American investment bankers over the course of the late 1990s and early 2000s. These new monopoly corporations were called jituan (集团) or “conglomerates,” functionally similar to Western monopolies, Japanese zaibatsu and Korean chaebol. But such successes were the product of a violent economic restructuring that would see poorly-performing SOEs closed down across China’s Northeastern Industrial Belt, generating a final wave of unrest that marked the completion of China’s capitalist transition.
The 1990s had seen the further erosion of the socialist era class system, with industrial production increasingly staffed by an increasingly proletarianized, largely migrant workforce. The hukou system, once a tool for fixing population to the land (and thereby securing the urban-rural divide), now proved useful as a way of stripping newly-arrived workers of any welfare rights in the sunbelt industrial zones. The system also gave a legal justification for deportation if unrest got out of hand. This is the classic example of a socialist-era institution being exapted into the capitalist accumulation regime, and the hukou, now used as a form of labor-management, would become integral to the rapid growth of the Chinese economy after the turn of the millennium. Structurally, it bears a strong resemblance to any number of labor management institutions (de jure and de facto) long used in capitalist countries, and has often been compared to apartheid or Jim Crow.
The hukou system’s continuing classification of migrant workers as “rural” residents also tended to make the process somewhat opaque in official statistics. Estimates of the total number of migrant workers range from between eight and forty million in 1989-1990 to between twelve and one hundred million in 2000. Some local governments (namely in Guangdong) performed their own local surveys and provided more coherent data, but the exact magnitude of nationwide migration in this period remains unclear. What is clear is that the migrant population underwent fairly rapid growth and, as the primary workforce used in the export zones and new, market-driven industries, this labor force composed greater and greater shares of the total industrial workforce. By the mid-2000s, migrant workers almost certainly numbered more than one hundred million, and this massive workforce accounted “for 57.5 percent of China’s industrial workforce and 37 percent of its service sector employees.” In the garment, textile and construction industries, in particular, these migrants comprised seventy to eighty percent of the total. They often constituted the majority of the population in many newly industrialized areas, and cities such as Shenzhen would soon find themselves with an urban population some seventy to eighty percent composed of “rural” residents, many registered in villages scattered across far-off provinces such as Sichuan. All in all, the proletarianization of the Chinese labor force stimulated what was probably the largest mass migration in human history.
A strong generational divide defined the new proletariat from the socialist-era working class. Migrant workers tended to be young, and the first two generations were predominantly female. Most had been born and raised almost entirely outside the socialist developmental regime, with language of “reform and opening” a constant feature of their upbringing. By contrast, the remnants of the socialist-era working class tended to be older and majority male, many having experienced the various ups and downs of the developmental regime while always holding a position of privilege relative to the tumult experienced by students, intellectuals, female workers and the peasantry. Younger SOE workers had effectively inherited their positions from their parents. The oldest had fought in the revolution or lived through it as children, giving them an almost sacrosanct status in the class hierarchy inherited from the socialist era. 
This special status helps to account for the long, drawn-out nature of privatization within the state sector in the course of the transition. The events of 1989 proved just how volatile urban unrest could be, and the state still relied on many of the patronage networks that connected it to key enterprises nationwide. These networks were composed, in part, of very real material benefits allotted to the enterprise, including both management and many of the workers, particularly those with seniority. Privatization could only occur if this population was itself divided, and even then only when driven by the stimulus of a massive regional economic crisis. The division of the political loyalties of SOE workers and management was achieved through the process of consolidation: enterprises used everything from political leverage to actual productivity numbers in order to win spots within the new, massive jituan SOEs created at the demand of international investment bankers, launching extremely profitable IPOs on global stock exchanges throughout the 1990s and 2000s.
But those who lost out on inclusion into the jituan were not immediately shut down. Instead, they continued to operate, and, despite the early IPOs, by 1996 the SOE sector as a whole reported a net deficit for the first time since its inauguration, with a drastic fall in the quantity of enterprise profits remitted to the central government. Overall, SOE profits plummeted from 15 percent of GDP in 1978 to below 2 percent in 1996-1997. The problem was evident, as the majority of SOEs still seemed incapable of running at a profit, and thereby tended to drag down value accumulation generally. But this problem alone was not enough reason to risk another wave of unrest like that experienced in 1989. Instead, justification would come in the form of the Asian Financial Crisis, which crashed almost all the major economies surrounding China, including the vast majority of its regional competitors in manufacturing. China emerged from the crisis unscathed by comparison, though the collapse of GITIC (see above), convinced the Party of the risks threatened by unregulated exposure to the global market.
When Zhu Rongji ascended to premier in 1998, he was immediately tasked with cleaning up the after-effects of the crisis. On the one hand, he used the opportunity to decisively shut down GITIC and finally put into place his plan for dealing with the bad loans accumulated in the previous decades—many now the result of SOE underperformance after the retrenchment in 1989. A series of asset-management companies were spun off from the major banks, and the banks themselves were thereby able to launch IPOs by the early 2000s, often selling minority shares to major Western financial institutions. On the other hand, Zhu used the crisis as a stimulus to finally launch a full privatization campaign on the underperforming SOEs, echoing the state’s privatization campaign on collective TVEs two years earlier. In part, this was undertaken in the hopes that the source of many of the bad loans within the financial system could be uprooted, preventing a future financial crisis. But the policy was also meant to accompany financial and fiscal reforms that would bring China more in line with international standards—necessary for WTO membership, an important prerequisite for the scaling-up of marketization. With other regional manufacturers still reeling from the crash, China had a brief window in which it could assert an almost unchallenged dominance within global manufacturing markets.
Domestically, the clearing-out of unprofitable SOEs was a tumultuous process. Throughout the early 1990s, the percentage of industrial workers employed in SOEs underwent only a slight decline, from 68 percent to around 65 percent by 1997. But beginning in 1998, the number began to plummet, falling to a mere 36.3 percent by 2003—this share now largely accounted for by employment in the restructured jituan monopolies, designed to accord with global standards. The demographics of the unemployed population also underwent a marked shift. While historically it was women workers and the younger population, at the bottom of the seniority system, who had experienced higher rates of unemployment, the wave of layoffs beginning in the 1990s hit the older permanent state sector workers the hardest. The magnitude of the restructuring was substantial: “In a matter of seven years, the laid-off population mushroomed to a staggering eighteen to twenty million in 2001, from less than seven million in 1993.” This accounted for some forty percent of the total SOE workforce, with the urban collectives (smaller, less privileged public enterprises, similar to their rural counterparts) shrinking even more. Overall, the process saw the total share of the workforce employed in manufacturing dip from some 14 percent to a trough of less than 11 percent. Though recovering slightly after 2001, the share has never again reached its previous peak, the restructuring of the SOEs serving to deindustrialize much of the Northeast, creating a massive rustbelt.
But unemployment in the old socialist industries did not simply mean loss of access to the wage. For younger SOE workers, unpaid wages tended to be the most important issue, since the implementation of contract systems and various other reforms had convinced many to not expect much in the way of continuing welfare benefits. Older workers, by contrast, had long lived off of the extra-wage compensation that came with membership (编制) in a large industrial enterprise. This included housing and healthcare allotted through the danwei system, and many could remember times when food, entertainment and a number of consumption subsidies would have been included in employment as well. Most importantly, retirement benefits were often funded through the enterprise, and restructuring threatened to not only deprive workers near retirement of their benefits, but also to strip many recently retired workers of their only source of income. Similarly, public infrastructure such as roads, housing and utility networks all began to decay as investment into SOEs declined.
Discontent was partially muted by the isolated, “cellular” character of the enterprises themselves, combined with buy-ins offered to many former workers, particularly in the form of real estate: By the early 2000s, “42 percent of households in which the household head is a worker ha[d] purchased their homes from their work organizations,” often paying extremely low prices, “about 40 percent of the market price,” to purchase their old danwei housing unit. In some locations, this would prove incredibly lucrative, as the families of former workers could ride the skyrocketing real estate prices that accompanied the next speculative bubble. But even in poorer provinces, many workers became landlords, and old factory managers and local cadres used the opportunity to allot themselves more housing of better quality prior to privatization, allowing them to dominate local real estate markets afterwards. But these buy-ins were only partial, and old hierarchies translated into a new era of corruption, ensuring that many unemployed workers were left in over-populated housing units, relying on savings and informal employment to survive. The immediate response to the restructuring was often direct protest: “In Liaoning province alone, between 2000 and 2002, more than 830,000 people were involved in 9,559 ‘mass incidents.’” Though concentrated in the Northeast, “nationwide, the Ministry of Public Security recorded 8,700 such incidents in 1993, rising to 11,000, 15,000, and 32,000 in 1995, 1997 and 1993 respectively.” By “2003, some 58,000 incidents were staged by three million people,” a number that included “farmers, workers, teachers and students,” but with its largest share being “1.66 million laid-off, retired and active workers, accounting for 46.9 percent of the total number of participants that year.” By 2004, the number had jumped to 74,000, and by 2005, 87,000, with the unrest in the countryside and the new coastal industries adding to continuing protests against deindustrialization in the Northeast.
Though often retaining the language of a “socialist” system, this period of restructuring was a wave of mass privatization. For the first time, the central state (in the Fifteenth Party Congress in 1997) allowed local officials to induce bankruptcy on unprofitable SOEs and proceed with sales and auctions, as well as the many mergers and acquisitions that had already been occurring in the process of SOE consolidation. Privatization also continued in the urban and rural collective sectors in these years, with smaller enterprises often bringing formal ownership into alignment with reality through a management buyout. The SOEs that remained were first corporatized according to the Company Law of 1994, which opened the door for hybrid forms of ownership, consolidation into the new jituan, and full privatization. The intent of the policy, phrased as “grasping the large, and letting the small go,” was simultaneously to devolve responsibility of the “small” firms to local governments, who were free to restructure them as they saw fit, and to hand control over the newly expanded jituan SOEs to the central state, which could control their introduction to the global market. The State Asset Supervision and Administration Commission (SASAC) was founded in 2003 to administer the central government’s ownership over these nonfinancial firms, and was followed by the establishment of several provincial and municipal SASACs to manage slightly smaller jituan. The jituan that remained under central control were mostly large-scale, capital intensive firms in “strategic” sectors such as oil, utilities, military industry and telecommunications.
The combined processes of SOE privatization, including mass bankruptcy and financial reform, allowed the debt-equity ratios of SOEs to decline and then stabilize by the mid-2000s, at least on paper. From a peak of 2.11 in 1994, SOE debt-equity ratios dropped to under 1.50 by 2004, well under the regional average over the previous decade. Some of this was accounted for by debt written off with the bankruptcy of underperforming SOEs, but a large share was also simply a shell game in which the non-performing loans were funneled into Zhu’s asset-management companies with the help of massive funds injected into the financial system by the state. These asset-management companies were themselves poorly structured, leaving the Big Four banks and the state itself still exposed to the bad loans when the bonds used to fund the asset-management firms matured after a decade. The bubble created in the 1980s and 1990s was therefore not decisively popped by the restructuring, though it was arguably deflated somewhat.
Instead, the ultimate effect of the process was the full proletarianization of the remaining socialist-era working class, concomitant with the destruction of the socialist countryside and the more piecemeal proletarianization of the peasantry. Combined with out-migration and marketization in rural areas, the vast majority of China’s workforce was now dependent directly or indirectly on the market, their fate thereby yoked to the dictates of value accumulation. Meanwhile, the economy itself grew ever more dependent on constant injections of large investment packages and waves of new speculation, alongside the quarantine of local collapses in real estate markets, in order to push the building crisis out a few more years—a process that tended to only inflate the bubble and to begin to diminish returns on investment. The bottom of the new class system was now fully composed. By the early 2000s, then, the transition to capitalism in China had reached completion.
In a way, the industrial evolution of China had also come full circle. This story began, after all, in occupied Manchuria, where the material community of capital had descended in the form of the Japanese occupation, the dust of industry specked red with blood. Seized in the course of the revolution, the northeast had become the beating heart of the developmental regime, imagined as a bulwark capable of staving off the encircling power of the global capitalist system. Now, almost a century after its inauguration, the great industrial heart of the revolution had been reduced to rust and the material community had returned, red dust rising in the river deltas and grey smog weaving through forests of construction cranes. Beyond and beneath the glittering coasts, the landscape could only be described as apocalyptic: fields and workshops abandoned as youth emptied out of the collapsing countryside, local government reduced to little more than a predatory machine helmed by officials fattened through barely-disguised theft; the vast factories of Manchuria hollowed of workers and machines, their skeletal forms looming over the landscape like the crumbling pillars of a fallen world; and in the red dust of those new cities, masses of people fleeing these collapsed histories huddled into crowded factories, living in the spaces squeezed between the glittering new skyscrapers that they themselves had built, moving constantly between jobs, between cities and between lives in the service of the inscrutable, inhuman logic of the material community of capital.
 Julia Kwong, “The 1986 Student Demonstrations in China: A Democratic Movement?” Asian Survey 28(9), 1988, pp. 970-985.
 May Fourth was a 1919 movement led by intellectuals that involved a cultural critique of Chinese politics. The CCP emerged out of the movement.
 On the development of Chinese neo-authoritarianism, see Joseph Fewsmith, China Since Tiananmen: The Politics of Transition, Cambridge University Press, 2001, pp. 86-93.
 Unless otherwise noted, information for this section derives from conversations with movement participants.
 Much of the information in this section on workers’ participation comes from Andrew G. Walder and Gong Xiaoxia, “Workers in the Tiananmen Protests: The Politics of the Beijing Workers’ Autonomous Federation,” The Australian Journal of Chinese Affairs 29, January 1, 1993. The rest is from conversations with participants.
 Jackie Sheehan, Chinese Workers: A New History, Routledge, 1998.
 Walder and Gong, p. 18.
 Quoted in ibid., p. 8.
 Ibid., p. 7.
 Quoted in ibid., p. 8.
 One illustration is the popular film American Dreams in China (中国合伙人), a dramatization of the founding of education company New Oriental. It begins with the founders as cheeky college students in the late 1980s, channeling the anti-authoritarianism of Red Guards, but now to challenge their teachers’ received wisdom about the evils of American society (“What do you know? You’ve never been to America!”). This pro-Western attitude paradoxically develops in a nationalist direction throughout the 1990s, as the protagonists seek to arm other upwardly mobile young men with the English language ability and self-confidence to achieve wealth and power on the global market while reshaping their own nation.
 The influence of these private capitalists played a role in subsequent decades, and we will explore this in more detail in the third part of our economic history. It is also discussed in our interview with Lao Xie, “A State Adequate to the Task.” In addition, a good case study of the phenomenon can be seen in Wukan village, with the role of private capitalists examined in detail here: Shannon Lee, “Looking back at Wukan: A Skirmish Over the Rules of Rule,” Wolf Smoke, July 14, 2017. <https://wolfsmoke.wordpress.com/2017/07/14/wukan/>
 This point was most famously made by Robert Brenner in what would become the “Brenner Debate.” See: Trevor Aston and C.H.E. Philpin (eds), The Brenner Debate: Agrarian Class Structure and Economic Development in Pre-Industrial Europe, Past and Present Publications, Cambridge University Press, 1985.
 For a summary of the debates on the Japanese case, which were formative for Japanese Marxism, see: Germaine Hoston, Marxism and the Crisis of Development in Prewar Japan, Princeton University Press, 1987.
 This is why we deny the narrative of a Dengist “betrayal” as the cause of the transition. Here, as elsewhere, the motions of history simply cannot be reduced to the decisions of “great men.”
 What follows draws heavily on the work of Joel Andreas, who has done some of the most extensive historical research into the exact process by which a capitalist class took shape in China following the collapse of the developmental regime. That said, we would argue that Andreas himself is comfortably within the camp of those who overemphasize the role of factional conflicts in the transition, portraying the reforms as a Dengist betrayal—and, by association, misreading the dynamics of the Cultural Revolution by overemphasizing Mao’s fidelity to the most radical factions in that conflict. See in particular: Joel Andreas, Rise of the Red Engineers: The Cultural Revolution and the Origins of China’s New Class, Stanford University Press, 2009.
 Andreas 2009, p.235
 ibid, p.234
 ibid, p.240
 ibid, p.246
 ibid, p.242
 Ibid, p.250
 This was still a staggered process, however, and it would not be until about 2010 that rural land markets and the transformation of agriculture began to take on a locally capitalist character. Nonetheless, such staggering does not mean that the transition was still underway. The many features of local life that retained a hint of the past after the early 2000s were now clearly remnants, often strongly generational: the elderly dominated in such villages, for instance, and the middle-aged residents were now retirees who had done their time as migrant workers. Even if land was not a commodity, the youth rarely knew how to farm it, and instead planned to migrate to the cities and work in factories, as their parents had. The parents and grandparents, meanwhile, increasingly lived off remittances, rather than subsistence farming, and the new generations of migrants became more and more reluctant to return.
 Naughton 1996, p.288
 Ibid, pp.298-303
 Ibid, p.289
 Ibid, p.303
 Naughton 2007, p.405, Figure 17.2
 Ibid, pp.404-405
 Ibid, p.397, Table 16.3
 Lin 1997, pp.171 and 174
 Naughton 2007, p.412, Figure 17.3
 Ibid, p.413
 Khondaker Mizanur Rahman, “Theorizing Japanese FDI to China,” Journal of Comparative International Management, Volume 9, Number 2, 2006. p.17
 See the National Bureau of Economic Research, “US Business Cycle Expansions and Contractions.” <http://www.nber.org/cycles/>
 See Brenner 2002, Chapter 9.
 For a detailed account of the Japanese crisis, including a systematic comparison to both the Great Depression and the Great Recession, see: Richard C. Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession, Wiley, 2009.
 Thomson 1997, p.7
 Rahman 2006, p.18
 Glassman 2004, pp.176-180, Figures 6.1 and 6.2
 Ibid, pp.184-187
 Of particular importance were the actions of Singaporean Prime Minister, Lee Kuan Yew, who led the region in re-investing into the Chinese mainland against the wishes of many Western countries, who were seeking stronger trade sanctions. Singapore and other regional powers identified both the potential for the regime’s stability, and the risk of deeper instability if isolation were again to be forced on the mainland.
 Naughton 1996, pp.275-276
 ibid, p.279
 From 1990 through 2005, exports as a share of GDP exceeded imports in all but one year (1993). The opposite was the case in the previous decade, when imports matched imports (in the first half of the decade) or exceeded them (in the latter half). See: Naughton 2007, p.378, Figure 16.1
 Naughton 1996, pp.280-283
 ibid, pp.284-286, Table 8.1
 Naughton 2007, pp. 430-433, Figure 18.2
 Carl E. Walter and Fraser J.T. Howie, Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise, John Wiley & Sons, 2012, p.35
 ibid, pp.34-37, Figure 2.3
 Naughton 1996, pp.304-306
 Naughton 2007, Chapter 18
 ibid, pp.454-458
 Walter and Howie 2012, pp.37-39
 Ibid, p.39
 See ibid, Chapter 3. For our purposes here, the process of financial reform is mentioned only briefly. We will return to the topic in Part 3 of this economic history, when describing the formation of the contemporary financial system and the building economic crisis.
 Albert Keidel, China’s Economic Fluctuations: Implications for Its Rural Economy, Carnegie Endowment for International Peace, 2007, pp. 55-57.
 Ibid., p. 55.
 Ibid., pp. 55-59.
 Ibid., pp. 88-89.
 Li Hongbin, and Scott Rozelle. “Privatizing rural China: Insider privatization, innovative con-tracts and the performance of township enterprises,” The China Quarterly 176, 2003, p. 981.
 Wang, Shaoguang and Hu Angang. Zhongguo guojia nengli baogao [A report on China’s state capacity], Hong Kong: Oxford University Press, 1994.
 Hung, Ho-fung. The China boom: Why China will not rule the world, Columbia, 2016, p. 71.
 Kung, James Kai-sing, and Yi-min Lin, “The decline of township-and-village enterprises in China’s economic transition,” World Development 35(4), 2007, pp. 569–584.
 Griffin and Griffin 1984 ,p. 216; Byrd and Lin 1990, p. 11.
 Li and Rozelle 2003, p. 981.
 Keidel 2007, p. 92 figure 4.11.
 Ibid., p. 90 figure 4.10.
 Alexander F. Day & Mindi Schneider, “The end of alternatives? Capitalist transformation, rural activism and the politics of possibility in China,” The Journal of Peasant Studies, 2017, p. 7; Food and Agriculture Organization, Poverty alleviation and food security in Asia: Lessons and challenges, 1999 <http://www.fao.org/docrep/004/ab981e/ab981e00.htm#Contents>; Jack Hou, and Xuemei Liu, “Grain policy: Rethinking an old issue for China,” International Journal of Applied Economics 7(1), 2010 pp. 1-20; Hou and Liu 2010; Keidel 2007, pp. 57 and 89.
 See “Gleaning the Welfare Fields: Rural Struggles in China since 1959,” Chuang, Issue 1, 2016. <https://chuangcn.org/journal/one/gleaning-the-welfare-fields/>
 Ibid, p.13
 This is in addition to the $943 billion from FDI over the same years, as well as $389 billion raised on domestic capital markets via the same means. See ibid, pp.11-15.
 It is common in the Western literature to simply continue referring to the jituan as “SOEs,” despite the fact that they resemble the variety of capitalist monopolies far more than socialist-era enterprises. We choose to refer to them as jituan, or jituan SOEs, in order to emphasize their similarity with their zaibatsu and chaebol predecessors. The details of their operation will be explored in Part 3 of our economic history.
 For an overview of some of these estimates, see: Zhong Zhao, “Migration, Labor Market Flexibility, and Wage Determination in China: A Review,” The Developing Economies, Volume 43, Number 2, December 2004. <http://econwpa.repec.org/eps/lab/papers/0507/0507009.pdf>
 Ching Kwan Lee, Against the Law: Labor Protests in China’s Rustbelt and Sunbelt, University of California Press, 2007, p.6
 Kam Wing Chan, “China, Internal Migration,” in Immanual Ness and Peter Bellwood, eds., Encyclopedia of Global Migration, Blackwell Publishing, 2013.
 Lee 2007, p.36
 Jeffrey Sachs and Wing Thye Woo, “The SOE Sector Under Reform,” in Garnaut and Huang 2001, p.285
 Naughton 2007, p.105
 For a detailed history of the process, see: Walter and Howie 2012
 Lee 2007, p.40, Table 2
 Ibid, p.73
 Naughton 2007, p.301
 See “No Way Forward, No Way Back: China in the Era of Riots,” Chuang, Issue 1, 2016, Figure 5, <https://chuangcn.org/journal/one/no-way-forward-no-way-back/>
 Lee, pp.70-73
 Ibid, p.126
 ibid, pp.128-139
 “Gleaning the Welfare Fields.”
 “No Way Forward, No Way Back.”
 All numbers and quotations taken from Lee 2007, p.5
 Naughton 2007, pp.105-106
 ibid, pp.301-304
 ibid, p.307, Table 13.4
 See: Walter and Howie 2012.