30 years of “socialist market economy”: China’s path to economic power

30 years ago, China enshrined the “socialist market economy” in the constitution and officially ended the planned economy. But the Communist Party has not withdrawn from the economy – on the contrary.

Market and socialism – what Chinese state television announced 30 years ago seems contradictory at first glance, but it has clearly promoted China’s rise to become the second largest economy in the world. Under the protective hand of the state and party leaders, private companies developed that are now among the world leaders: the technology and Internet groups Huawei, Tencent and Alibaba, for example. At the same time, the leadership has never relinquished control of the economy; among the 100 largest listed companies in China there are still many state-owned companies that also do business all over the world: the shipping company COSCO, the oil company Sinopec or the steel company Baosteel, for example.

Xi has tightened the reins

The “socialist market economy” appears unproblematic in colorful videos broadcast by the foreign state broadcaster CGTN. In fact, the signs pointed to economic opening for years. In practice, however, state-owned companies have a clear advantage: for example, when it comes to loans from state-owned banks or when state contracts are awarded. And at least since the inauguration of state and party leader Xi Jinping more than ten years ago, private companies have felt state control very clearly again.

Anyone who criticizes the leadership, like Alibaba founder Jack Ma in 2020, feels political pressure that also affects business – he had to cancel the IPO of the financial subsidiary Ant at short notice at the end of 2020. Especially against the private Internet companies, the leadership has taken action with ever new interventions – with dramatic consequences, says Jörg Wuttke, President of the European Chamber of Commerce in Beijing. “Especially after the terrible year 2021, in which companies like Jack Ma’s Alibaba suffered terribly, in which a trillion euros in market value was de facto destroyed: You can still see these marks today. We are a much more state-run economy than 20 years ago.”

The Communist Party has also expanded its influence in private companies themselves – through party cells that can influence management. At the same time, the state and party leaders are trying to continue to steer overall economic development centrally – through five-year plans that no longer specify grain or steel quotas as they used to, but still set the guidelines for economic policy. So the planned economy has not completely disappeared. With investments in infrastructure – roads, airports, railway lines – the leadership has also been trying to keep growth high for years. Here, too, the state-owned companies benefit again and again.

Symbolic gestures should give companies hope

In business circles, however, there is now – despite all the restrictions – cautious hope that a more business-friendly climate could prevail again under the new Premier Li Qiang. After all, as party secretary from Shanghai, he brought Tesla to China. The environment for private business will improve significantly, Li promised at his first press conference as premier in early March. The government will create a business climate that is based on the market and the legal situation. All companies would be treated equally; the prospects for the private sector are excellent.

In addition to such statements, it is symbolic gestures, as in the early 1990s, that inspire the hopes of private entrepreneurs. In 1992 – a year before the “socialist market economy” was enshrined in the constitution – it was the legendary journey through the south by economic reformer Deng Xiaoping that made it clear: China will continue to open up economically. He probably still mentioned socialism mainly to appease the conservative Marxists in the CP.

“Now action must follow”

This week it was a short video showing billionaire Jack Ma, who surprisingly reappeared in China after a long stay abroad and attended a school he founded in Hangzhou near Shanghai. Observers took this as a sign of relaxation for the private sector.

EU Chamber President Wuttke remains skeptical. We now have to “wait and see how the new prime minister finds his way around,” says Wuttke. “We’ve only noticed positive signals from him, but now action must follow. We’re still in the transition phase and don’t really know whether there’s going to be a stronger move towards the liberal market system or not? I have to say, I don’t believe in it.” Sure, Premier Li Qiang is considered pro-business, Wuttke adds. But Li is also a loyal servant of his master – and his name is still Xi Jinping.